SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C. 20549

Form 10-K

(Mark One)[X]    
         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For
the fiscal year ended October 31, 2003.

OR

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

For the transition period from ________ to ________ .

Commission File Number
0-6050

Powell Industries, Inc.


(Exact name of
registrant as specified in its charter)

|Nevada (State or other jurisdiction of       
incorporation or organization)       8550 Mosley Drive, Houston, Texas      (Address of principal executive offices) | 88-0106100(I.R.S. Employer
Identification No.)77075-1180(Zip Code)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------

Registrants
telephone number, including area code: (713) 944-6900

Securities registered pursuant to section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of Act:

Common
Stock, par value $.01 per share

Indicate
by X 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.   X    Yes
      No

Indicate
by X 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.   [ X ]

Indicate
 by "X" whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    X    Yes
      No

The
aggregate market value of the voting stock held by non-affiliates of the registrant as of
the last business day of the most recently completed second fiscal quarter, April 30,
2003, was approximately $147,578,000.

The
number of shares of our Common Stock outstanding as of December 31, 2003 was 10,646,006 shares.

Documents Incorporated
By Reference

Portions
of the Proxy Statement for the 2004 annual meeting of stockholders to be filed not later
than 120 days after October 31, 2003 are incorporated by reference into Part III.



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POWELL INDUSTRIES, INC.

TABLE OF CONTENTS

|           |  | Page                                                                   
|---------- |  | -----------------------------------------------------------------------
|           |  |                                                                        
|           |  | Cautionary Statement Regarding Forward-Looking Statements; Risk Factors
|PART I    
|Item 1     |  | Business                                                               
|Item 2     |  | Properties                                                             
|Item 3     |  | Legal Proceedings                                                      
|Item 4     |  | Submission of Matters to a Vote of Security Holders                    
|PART II   
|Item 5     |  | Market for Registrant's Common Equity and Related Stockholder Matters  
|Item 6     |  | Selected Financial Data                                                
|Item 7     |  | Management's Discussion and Analysis of Financial Condition            
|           |  | and Results of Operations                                              
|Item 7A    |  | Quantitative and Qualitative Disclosures About Market Risk             
|Item 8     |  | Financial Statements and Supplementary Data                            
|Item 9     |  | Changes in and Disagreements with Accountants on Accounting            
|           |  | and Financial Disclosure                                               
|Item 9A    |  | Controls and Procedures                                                
|PART III  
|Item 10    |  | Directors and Executive Officers of the Registrant                     
|Item 11    |  | Executive Compensation                                                 
|Item 12    |  | Security Ownership of Certain Beneficial Owners and Management         
|Item 13    |  | Certain Relationships and Related Transactions                         
|Item 14    |  | Principal Accountant Fees and Services                                 
|PART IV   
|Item 15    |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K        
|Signatures |  |                                                                        

1

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CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS; 
RISK FACTORS

This
Annual Report on Form 10-K includes forward-looking statements based on the Companys
current expectations, which are subject to risks and uncertainties. Forward-looking
statements include information concerning future results of operations and financial
conditions. Statements that contain words such as believes,
expects, anticipates, intends, estimates,
continue, should, could, may,
plan, project, predict, will or similar
expressions are forward-looking statements. These forward-looking statements are subject
to risks and uncertainties, and many factors could affect the future financial results of
the Company. Factors that may have a material effect on our revenues, expenses and
operating results include adverse business or market conditions, the Companys
ability to secure and satisfy customers, the availability and cost of materials from
suppliers, adverse competitive developments and changes in customer requirements.
Accordingly, actual results may differ materially from those expressed or implied by the
forward-looking statements contained in this Report. Any forward-looking statements made
by or on our behalf are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.

The
forward-looking statements contained in this Annual Report are based on current assumptions
that the Company will continue to develop, market, manufacture and ship products and
provide services on a competitive and timely basis, that competitive conditions in the
Companys markets will not change in a materially adverse way, that the Company will
accurately identify and meet customer needs for products and services, that the Company
will be able to retain and hire key employees, that the Companys capabilities will
remain competitive, that risks related to shifts in customer demand are minimized and that
there will be no material adverse change in the operations or business of the Company.
Assumptions relating to these factors involve judgments that are based on incomplete
information and are subject to changes in many factors beyond the control of the Company
that can materially affect results.

Because
of these and other factors that affect our operating results, past financial performance
should not be considered an indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. The following risks
factors may also materially affect results and should be considered:

| | The
Company operates in an intensely competitive environment. Many of our competitors are
significantly larger and have substantially greater resources than we do. Some of our
competitors seek to employ competitive and management strategies similar to those of
Powell. As a result, our competitive standing may be expected to vary from time to time
and among different markets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys business is affected by general economic and industry conditions. Our
markets are cyclical in nature and subject to general trends in the economy. Our
profitability and cash flow availability could be adversely affected by any prolonged
economic downturn.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys international sales may fluctuate significantly as international political
and economic conditions change. International sales accounted for approximately 16% of our
revenues in fiscal 2003. As a result of our international sales and operations, we are
subject to the risk of fluctuation in currency exchange rates. International instability
from war or terrorism, and unforeseen political or economic problems in countries that we
export products to could adversely affect our business.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2

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| | Fluctuations
in the price and supply of the raw materials used to manufacture the Companys
products may reduce the Companys profits.Our raw material costs represented
approximately 48% of our revenues in fiscal 2003. We purchase a wide variety of raw
materials to manufacture our products including steel, aluminum, copper, and various
electrical components. Unanticipated increases in raw material requirements or price
increases could increase production costs and adversely affect profitability.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company may pursue future acquisitions that may adversely affect our financial position or
cause our earnings per share to decline. Our business strategy calls for growth and
diversification. Pursuing acquisition opportunities and attempting to integrate and manage
acquired businesses could require significant resources, including management time and
skill, and these efforts may detract from the management or operation of other businesses.
Acquired businesses may not perform as expected, thereby causing our actual operating
results to suffer.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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PART I

Item 1.       Business

Overview

We
develop, design, manufacture, and service equipment and systems for the management and
control of electrical energy and other critical processes. Headquartered in Houston, TX,
we serve the transportation, environmental, industrial, and utility industries.

Powell
Industries, Inc. (we, us, our, Powell, or
the Company) was incorporated in the state of Nevada in 1968 and is the
successor to a corporation founded by William E. Powell in 1947, which merged into the
Company in 1977. Our major subsidiaries, all of which are wholly-owned, include: Powell
Electrical Manufacturing Company; Powell Power Electronics Company, Inc.; Powell-ESCO
Company; Unibus, Inc.; Delta-Unibus Corporation; and Transdyn Controls, Inc.

Our
website address is www.powellind.com. We make available free of charge on or through our
website copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical
after we electronically file such material with the Securities and Exchange Commission.
Paper or electronic copies of such material may also be requested by contacting the
Company at our corporate offices.

Products and Segments

We
manage our business through operating subsidiaries, which are combined into two reportable
business segments: Electrical Power Products and Process Control Systems. Financial
information related to these business segments is included in Note M of the Notes to
Consolidated Financial Statements.

A
brief description of our products and business segments follows:

| | Electrical
Power Products. In our Electrical Power Products segment, we design, manufacture and
market electrical power management systems designed to monitor and control the flow of
electrical energy and to provide protection to motors, transformers and other electrically
powered equipment. Our principal products include Power Control Modules, Power Control
Rooms, Switchgear, Motor Control Centers and Bus Duct Systems. We design and manufacture
systems ranging from 480 volts to in excess of 36,000 volts to serve the transportation,
industrial, and utility industries.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Process
Control Systems.  Process control systems are customized management systems designed to
monitor and control a complex sequence of critical events. Our systems are an integration
of instrumentation, computer controls, communications equipment, and data management
systems. We design and build systems to serve the transportation, environmental,
industrial, utility, and governmental sectors.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Customers and Markets

Our
principal products are designed for use by and marketed to sophisticated users of large
amounts of electrical energy or complex processes. Our markets include oil and gas
producers, oil and gas pipelines, refineries, petrochemical plants, electrical power
generators, public and private utilities, mining, pulp and paper mills, transportation
systems, governmental agencies, and other large industrial customers.

4

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Electrical Power Products

In
this segment of our business, products and services are principally sold directly or
through agents to the end-user or to an EPC (engineering, procurement and construction)
firm on behalf of the end-user. We market our products and services to a wide variety of
customers, markets and geographic regions; as a result, we are not dependent on any one
customer or market for sales. Export revenues were $39.1 million, $26.2 million, and $19.1
million in fiscal years 2003, 2002 and 2001, respectively.

During
each of the past three fiscal years, we did not have any one customer that accounted for
more than 10% of our segment revenues. The loss of any specific customer would not have a
material adverse effect on our business; however, we could be adversely impacted by a
significant reduction in business volume from a key customer market.

Process Control Systems

In
this segment of our business, products and services are principally sold to the
transportation, environmental, industrial, utility, and governmental sectors. We may be
dependent on one specific contract or customer for a significant percentage of our
revenues due to the nature of large, long-term construction projects. During 2003, we
received a contract to design and build Intelligent Transportation Systems (ITS) for the
Port Authority of New York and New Jersey which accounted for 16% of segment revenues in
fiscal 2003. We anticipate revenues from this contract will constitute approximately 55%
of our segment revenues in 2004. In each of the past three fiscal years, we had revenues
with one or more customers that individually accounted for more than 10% of our segment
revenues. Revenues from these customers totaled $4.8 million, $2.9 million and $3.8
million in fiscal 2003, 2002 and 2001, respectively. The loss of any specific customer
could have a material adverse effect on segment revenues.

Export
revenues were $0.7 million, $1.8 million, and $2.3 million in fiscal years 2003, 2002 and
2001, respectively.

During
fiscal years 2003, 2002 and 2001, neither segment had any one export country that
accounted for more than 10% of segment revenues. For information on the geographic areas
in which our consolidated revenues were recorded in each of the past three years, see Note
I of the Notes to Consolidated Financial Statements.

Competition

We
operate in an intensely competitive environment. Many of our competitors are significantly
larger and have substantially greater resources than we do. However, we believe that we
are a significant competitor in each of our principal markets.

Our
products and systems are custom designed to meet the specifications of our customers. Each
order is designed and manufactured to the unique requirements of the installation. We
consider our engineering and manufacturing capabilities vital to the success of our
business, and believe our technical and project management strengths, together with our
responsiveness and flexibility to the needs of our customers, give us a competitive
advantage in our markets.

Ultimately,
our competitive position is dependent on the ability to provide quality products and
systems, on a timely basis, at a competitive price.

5

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Backlog

Orders
in our backlog at October 31, 2003, totaled $157.5 million, of which we anticipate that
approximately $139.2 million will be fulfilled during our fiscal year 2004. Orders
included in our backlog are represented by customer purchase orders and contracts, which
we believe to be firm. Under certain circumstances, penalties are included as a term of
order acceptance to minimize our risk of cancellation.

Electrical Power Products:

At
October 31, 2003 the Electrical Power Products segment backlog totaled $97.0 million
compared to $151.6 million at the end of the previous fiscal year. We anticipate that
approximately $93.6 million of our ending 2003 backlog will be fulfilled during our fiscal
year 2004. During 2003, we experienced some customer delays and cancellations which is
unusual for our business. Cancellations during the year totaled approximately $6 million.
During the previous two years, we did not experience a material amount of cancelled
orders.

Process Control Systems:

Orders
in our Process Control Systems backlog at October 31, 2003 totaled $60.5 million, of which
a contract received in 2003 to design and build Intelligent Transportation Systems (ITS)
for the Port Authority of New York and New Jersey represented $33.2 million. We anticipate
that approximately $45.6 million of the 2003 ending backlog will be fulfilled in fiscal
year 2004. At October 31, 2002, the backlog totaled $37.7 million. We have not experienced
a material amount of cancelled orders during the past three fiscal years.

Raw Materials and
Suppliers

The
principal raw materials used in our operations are generally readily available. We did not
experience significant or unusual problems in the purchase of key raw materials and
commodities in fiscal year 2003. While we are not dependent on any one supplier for a
material amount of our raw materials, we are highly dependent on our suppliers and
subcontractors in order to meet commitments to our customers.

We
maintain a qualification and performance surveillance process to control risk associated
with our components and electrical items that are procured on a sole-source basis. We
believe that sources of supply for raw materials and components are generally sufficient
and have no reason to believe a shortage of raw materials will cause any material adverse
impact during fiscal year 2004.

Employees

We
had 1,235 full-time employees at October 31, 2003, located throughout the United States.
Of the total number of employees, approximately 3% are represented by trade unions. We
believe that our relationship with our employees and trade unions is good.

Research and Development

Our
research activities are directed toward the discovery and development of new products and
processes as well as improvements in existing products and processes. Research and
development expenditures were $3.6 million, $3.4 million and $3.1 million in our fiscal
years 2003, 2002 and 2001, respectively.

6

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Item 2.       Properties

We
have over 10 locations consisting of manufacturing facilities, sales offices, and repair
centers. Our facilities are generally located in areas that are readily accessible to raw
materials and labor pools and are maintained in good condition. These facilities, together
with recent expansions, are expected to meet our needs for the foreseeable future.

Our
principal manufacturing locations by segment as of October 31, 2003, are as follows:

|                           |               |       |                           
|-------------------------- | ------------- | ----- | --------------------------
|                           | Number        |       | Approximate Square Footage
|Location                   | of Facilities | Acres | Owned                     
|Electrical Power Products: |               |       |                           
|Houston, TX                | 2             | 68.2  | 430,600                   
|Greenville, TX             | 1             | 19.0  | 109,000                   
|North Canton, OH           | 1             | 8.0   | 72,000                    
|Elyria, OH                 | 1             | 8.6   | 64,000                    
|Northlake, IL              | 1             | 10.0  | 103,500                   
|Watsonville, CA            | 1             |       | ---                       
|Process Control Systems:   |               |       |                           
|Pleasanton, CA             | 1             |       | ---                       
|Duluth, GA                 | 1             |       | ---                       

We
own one idle facility located in Franklin Park, Illinois which consists of manufacturing
and office space. We anticipate that we will sell this property during the coming year. As
this property is held for sale, the $1.5 million book value is included in other current
assets at October 31, 2003. Prior to the construction of our new facility in Northlake,
Franklin Park was used to manufacture our isolated phase bus duct product line.

Item 3.       Legal Proceedings

We
are involved in various legal proceedings, claims, and other disputes arising in the
ordinary course of business which, in general, are subject to uncertainties and the
outcomes are not predictable. However, we do not believe that the ultimate conclusion of
these disputes will materially affect our financial position or results of operations.

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

We
did not submit any matter to a vote of our stockholders during the fourth quarter of
fiscal year 2003.

7

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PART II

Item 5.       Market for
Registrants Common Equity and Related Stockholder Matters

Price
Range of Common Stock

Our
common stock trades on the NASDAQ National Market under the symbol POWL. The
following table sets forth, for the periods indicated, the high and low sales prices per
share as reported on the NASDAQ National Market for our common stock.

| |                   |                | High  | Low  
| | ----------------- | -------------- | ----- | -----
| | Fiscal Year 2002: |                |      
| |                   | First Quarter  | 26.09 | 16.61
| |                   | Second Quarter | 24.49 | 18.84
| |                   | Third Quarter  | 25.80 | 17.00
| |                   | Fourth Quarter | 19.49 | 14.75
| | Fiscal Year 2003: |                |      
| |                   | First Quarter  | 20.72 | 13.65
| |                   | Second Quarter | 15.23 | 13.13
| |                   | Third Quarter  | 16.71 | 12.17
| |                   | Fourth Quarter | 20.61 | 14.62

As
of October 31, 2003, the last reported sales price of our common stock on the NASDAQ
National Market was $19.38 per share. As of December 31, 2003, there were 664 stockholders
of record of our common stock. All common stock held in broker accounts are included as one shareholder of record.

See
Part III, Item 12 for information regarding securities authorized for issuance under our
equity compensation plan.

Dividend Policy

To
date, we have not paid cash dividends on our common stock, and for the foreseeable future
we intend to retain earnings for the development of our business. Future decisions to pay
cash dividends will be at the discretion of the Board of Directors and will depend upon
our results of operations, financial condition and capital expenditure plans, along with
other relevant factors.

Item 6.      Selected
Financial Data

The
selected financial data shown below for the past five years was derived from our audited
financial statements. The historical results are not necessarily indicative of the
operating results to be expected in the future. The selected financial data should be read
in conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements and related
notes included elsewhere in this Annual Report on Form 10-K.

8

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|                                             |                                            
|-------------------------------------------- | -------------------------------------------
|                                             | Years Ended October 31,                    
|                                             |                                            
|                                             | Amounts in thousands, except per share data
|Statements of Operations:                    |                                            
|Revenues                                     |                                            
|Cost of goods sold                           |                                            
|                                             |                                            
|Gross profit                                 |                                            
|Selling, general and administrative expenses |                                            
|                                             |                                            
|Income before interest and income taxes      |                                            
|Income from continuing operations before     |                                            
|cumulative effect of change in accounting    |                                            
|principle                                    |                                            
|Cumulative effect of change in accounting    |                                            
|principle, net of income taxes               |                                            
|                                             |                                            
|Net income                                   |                                            
|                                             |                                            
|Diluted earnings per share                   |                                            

|                                              |                     
|--------------------------------------------- | --------------------
|                                              | As of October 31,   
|                                              |                     
|                                              | Amounts in thousands
|Balance Sheet Data:                           |                     
|Cash and cash equivalents                     |                     
|Property, plant and equipment, net            |                     
|Total assets                                  |                     
|Long-term debt and capital lease obligations, |                     
|including current maturities                  |                     
|Total stockholders' equity                    |                     
|Total liabilities and stockholders' equity    |                     

Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations

Market
conditions throughout fiscal 2003 were challenging. We experienced a significant reduction
in demand for our products. In our Electrical Power Products segment, market price levels
deteriorated early in the year as competition for available business volume intensified.
Despite weak market conditions, we successfully increased both revenues and earnings in our
Process Control Systems business segment. We also successfully expanded system
modification and replacement equipment activity in both business segments.

With
a depressed economy, we intensified our focus on working capital management. We achieved
record levels of cash flow from operating activities during 2003. As of year end, Powell
Industries held cash, cash equivalents and marketable securites of $42 million, an increase of $28 million
over fiscal 2002.

We
believe we are well positioned to take advantage of improving economic and market
conditions.

In
the course of operations, we are subject to certain risk factors, including but not
limited to competition and competitive pressures, sensitivity to general economic and
industry conditions, international political and economic risks, availability and price of
raw materials and execution of business strategy, as more fully described above in our
Cautionary Statement Regarding Forward-Looking Statements; Risk Factors. Any
forward-looking statements made by or on our behalf are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned
that such forward-looking statements involve risks and uncertainties in that actual
results may differ materially from those projected in the forward-looking statements.

9

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The
following discussion should be read in conjunction with the accompanying consolidated
financial statements and related notes.

Results of Operations

Year ended October 31, 2003 compared
with year ended October 31, 2002

Revenue and Gross Profit

Consolidated
revenues decreased 17% to $253.4 million in fiscal 2003 as compared to fiscal year 2002
revenues of $306.4 million. Domestic revenues decreased $64.8 million to $213.6 million in
2003 compared to 2002. Despite weaknesses in domestic markets, new investments in oil and
gas production facilities contributed to increased international revenues in fiscal 2003.
Revenues outside of the United States accounted for 16% of consolidated revenues in 2003
compared to 9% in 2002.

Electrical
Power Products

Our
Electrical Power Products segment recorded revenues in fiscal 2003 of $227.0 million
compared to $283.6 million in fiscal 2002. Revenues from public and private utilities fell
by 55% in fiscal 2003. In particular, there was a significant decline in new investments
in electrical power generation facilities. Utility revenues were $79 million in 2003
compared to a record $173 million in 2002. Our municipal customers faced a reduced tax
base with which to fund infrastructure projects in 2003. Municipal and transit projects
generated revenues of $23 million compared to $29 million in 2002. However, revenues from
industrial customers totaled $125 million in fiscal 2003, an increase of $44 million, or
54%, over 2002. This increase in revenue from industrial customers resulted primarily from
revenues related to the manufacture and delivery of power control modules for new oil and
gas production facilities. These long-term projects to construct new oil and gas
production facilities were initiated by our customers during 2001 and 2002.

Gross
profit, as a percentage of revenues was 18.8% in fiscal 2003, compared to 22.0% in fiscal
year 2002. Gross profit has been adversely impacted by lower production volumes and
competitive pricing pressures. Partially offsetting adverse market conditions were the
results of our efforts to reduced our costs of production by improving operating
efficiencies through the implementation of lean initiatives. In addition, we incurred an
impairment loss of $0.4 million to decrease the carrying value of machinery and equipment
to their estimated market value. This impairment loss resulted from our decision to
discontinue certain product lines. These product lines generated aggregate revenues of
less than $1.0 million in fiscal 2003.

Process
Control Systems

Revenues
in our Process Control Systems segment increased 16% to $26.4 million compared to $22.8
million in fiscal 2002. Our most significant award during 2003 was a contract to design
and build Intelligent Transportation Systems (ITS) for the Holland and Lincoln tunnels
from the Port Authority of New York and New Jersey valued at $37.4 million. Revenue
attributable to this project totaled $4.2 million during fiscal 2003. Gross profit, as a
percentage of revenues, was 24.0% in fiscal 2003, compared to 23.6% in fiscal year 2002.

For additional information related to
our business segments, see Note M of the Notes to Consolidated Financial Statements.

Operating Expenses

Selling,
general and administrative expenses increased to 13.9% of revenues in fiscal 2003 compared
to 12.7% of revenues in fiscal year 2002. Our commitment to continue to develop our
customer markets and products resulted in an increase in operating expenses relative to
our revenues. Research and development expenditures were $3.6 million in fiscal 2003
compared to $3.4 million in fiscal year 2002. Our research efforts are directed toward the
discovery and development of new products and processes as well as improvements in
existing products and processes.

10

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Interest Income and
Expense

We
incurred $403 thousand in interest expense on our term debt and outstanding industrial
development revenue bonds during fiscal 2003 compared to $508 thousand in 2002. As a
result of lower levels of debt and decreased interest rates, our interest expense has
declined.

Interest
income increased by $280 thousand to $578 thousand in 2003 compared to the same period of
the previous year. An increase in invested funds during 2003 has been partially offset by
the lower interest rate environment.

Provision for Income Taxes

Our
provision for income taxes reflects an effective tax rate on earnings before income taxes
of 44.9% in fiscal 2003 compared to 37.1% in fiscal 2002. Included in our provision is
$1.3 million for state taxes (net of federal tax benefit) of which $0.9 million reflects
revised estimates in state tax exposures related to prior years. Over the past several
years, our business has expanded and we are now conducting activities in more states. We
have accordingly increased our estimates for such state tax exposures. Going forward, we
anticipate our effective tax rate to range from 37.6% to 37.9%.

Cumulative Effect of
Change in Accounting Principle

As
a result of the adoption of Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, we recorded a goodwill
impairment loss of $510 thousand, net of $285 thousand taxes, as a cumulative effect of a
change in accounting principle during the first quarter of 2003. We recorded an impairment
charge of $380 thousand, net of $214 thousand taxes, to write off the full value of
goodwill in our Process Control Systems segment. In our Electrical Power Products segment,
we recorded an impairment charge of $130 thousand, net of $71 thousand taxes. The goodwill
impairment charge accounted for a loss of $0.04 per diluted share

Net Income

Net
income was $7.1 million, or $0.67 per diluted share, in fiscal year 2003 compared to $17.9
million, or $1.67 per diluted share in fiscal year 2002. The decrease in net income
primarily relates to lower business volume and decreased gross profits in fiscal 2003.
Additionally, net income was negatively impacted as a result of an impairment loss of $0.2
million, net of taxes, recorded to decrease the carrying value of machinery and equipment;
an increase in estimates for state tax exposures related to prior years of $0.9 million,
net of federal tax benefits; and the net effect of a change in accounting principle
related to goodwill accounted for $0.5 million. Each of these adjustments to net income
are discussed in the Notes to Consolidated Financial Statements.

Year ended October 31, 2002 compared
with year ended October 31, 2001

Revenue and Gross Profit

Revenues
increased 13% to a record $306.4 million in fiscal 2002 as compared to revenues in fiscal
year 2001 of $271.2 million. Our Electrical Power Products segment recorded revenues in
fiscal 2002 of $ 283.6 million compared to $244.8 million in fiscal 2001. During fiscal
2002 one aspect of our revenue growth was due to new worldwide investments in oil and gas
production facilities. Furthermore, demand for additional electrical power generation
capacities in the United States strengthened over the expansion realized in fiscal 2001.
Revenues in our Process Control Systems segment were $22.8 million compared to $26.4
million in fiscal 2001. For additional information related to our business segments, see
Note M of the Notes to Consolidated Financial Statements.

11

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International
revenues increased in fiscal 2002. Revenues outside of the United States accounted for 9%
of consolidated revenues in fiscal 2002 compared to 8% in fiscal 2001.

Gross
profit, as a percentage of revenues, improved to 22.1% in fiscal 2002, compared to 20.9%
in fiscal year 2001. Higher production volumes, improved operating efficiencies, along
with the quality of our backlog have all contributed to the improvement in gross profit.
We continued to implement lean manufacturing initiatives to reduce costs and respond to
the competitive markets that we serve.

Operating Expenses

Selling,
general and administrative expenses, including research and development expenditures, were
$39.0 million (12.7 % of revenues) in fiscal 2002 compared to $35.0 million (12.9% of
revenues) in fiscal year 2001. The increase in operating expenses was primarily due to the
growth in business volumes during the period.

Research
and development expenditures were $3.4 million in fiscal 2002 compared to $3.1 million in
fiscal year 2001. Our research efforts were directed toward the discovery and development
of new products and processes as well as improvements in existing products and processes.

Interest Income and
Expense

Net
interest expense decreased to $210 thousand in fiscal 2002 from $359 thousand in fiscal
2001 due to lower levels of debt. Interest expense was related to our revolving credit
facility and long-term debt. This expense was partially offset by interest income from
short-term investments.

Provision for Income Taxes

Our
provision for income taxes reflected an effective income tax rate on earnings before
income taxes of 37.1% in fiscal 2002 compared to 36.8% in fiscal 2001. The increase in our
effective tax rate was primarily a result of higher state taxes and was also partly
attributable to increases in non-deductible expenses.

Net Income

Net
income was $17.9 million, or $1.67 per diluted share, in fiscal year 2002 compared to
$13.5 million, or $1.28 per diluted share in fiscal year 2001. Growth in business volume
and increased gross profits resulted in earnings improvement in fiscal 2002.

12

---

Liquidity and Capital
Resources

We
have maintained a strong liquidity position. Working capital was $96.9 million at October
31, 2003 compared to $86.5 million at October 31, 2002. As of October 31, 2003, current
assets exceeded current liabilities by 3.2 times and our debt to capitalization ratio was
less than 0.1 to 1.

At
October 31, 2003, we had cash, cash equivalents and marketable securities of $42.3 million, compared to
$14.4 million at October 31, 2002. Long-term debt, including current maturities, totaled
$7.4 million at October 31, 2003 compared to $12.0 million at October 31, 2002. In
addition to our long-term debt, we maintain a revolving credit agreement which at year end
provided for a credit facility of $15 million through February 2006. As of October 31,
2003, there were no borrowings under this line of credit. For further information
regarding our debt, see Note F of the Notes to Consolidated Financial Statements.

Operating Activities

Net
cash provided by operating activities was $36.5 million for fiscal 2003. A net reduction
in operating assets and liabilities provided $22.3 million with the remainder of the
increase related to net earnings adjusted for depreciation, amortization and other
non-cash expenses. During fiscal 2002, operating activities provided net cash of $31.7
million of which $8.7 million resulted from a reduction in operating assets and
liabilities.

Investing Activities

Investments
in property, plant and equipment during fiscal 2003 totaled $4.5 million compared to $13.9
million in fiscal 2002. The majority of these expenditures were used to complete a project
initiated during 2002 to increase our manufacturing capacity available for the manufacture
of electrical power control modules. These modules are provided to the oil and gas
industry for use on offshore platforms.

During
2003, we purchased $5.8 million of investment-grade corporate bonds. The maturity dates of
these bonds vary from five to nine years.

Financing Activities

Financing
activities used $3.7 million in fiscal 2003. Approximately $4.8 million was used for
repayments on our long-term debt. Other financing activities were limited to the exercise
of stock options. During fiscal 2002, net cash used by financing activities was $10.0
million, primarily from payments on long-term debt.

Contractual Obligations

At
October 31, 2003 and 2002, our long-term contractual obligations were limited to debt and
leases. The tables below detail our commitments by type of obligation and the period that
the payment will become due (in thousands).

13

---

|                                                |                           |                          |                           
|----------------------------------------------- | ------------------------- | ------------------------ | --------------------------
|                                                |                           |                          |                           
|As
of October 31, 2003  payments due by period: | Long-term debtObligations | Capital LeaseObligations | Operating LeaseObligations
|Less than 1 year                                |                           |                          | $                         
|1 to 3 years                                    |                           |                          |                           
|3 to 5 years                                    |                           |                          |                           
|More than 5 years                               |                           |                          |                           
|                                                |                           |                          |                           
|Total long-term contractual obligations         |                           |                          | $                         
|                                                |                           |                          |                           

|                                                |                           |                          |                           
|----------------------------------------------- | ------------------------- | ------------------------ | --------------------------
|                                                |                           |                          |                           
|As of
October 31, 2002  payments due by period: | Long-term debtObligations | Capital LeaseObligations | Operating LeaseObligations
|Less than 1 year                                |                           |                          | $                         
|1 to 3 years                                    |                           |                          |                           
|3 to 5 years                                    |                           |                          |                           
|More than 5 years                               |                           |                          |                           
|                                                |                           |                          |                           
|Total long-term contractual obligations         |                           |                          | $                         
|                                                |                           |                          |                           

Outlook for Fiscal 2004

We
expect a continued weakness and depressed price levels in the Electrical Power Product
markets we serve, and anticipate a decline in consolidated revenues of 7% to 13% in fiscal
2004. We expect full year revenues to range between $220 million and $235 million.
Earnings from continuing operations are expected to range between $0.48 and $0.63 per
diluted share.

We
anticipate that our cash position will continue to grow during the first three quarters of
2004. Fourth quarter working capital needs are anticipated to increase with growing levels
of business activity. We will continue to invest in our manufacturing capabilities and
expect capital expenditures during fiscal year 2004 to range between $5.0 million and $8.0
million. We believe that working capital, borrowing capabilities, and funds generated from
operations should be sufficient to finance anticipated operational activities, capital
improvements, debt repayment and possible future acquisitions for the foreseeable future.

Effects of Inflation and
Recession

During
each of the past three years, we have not experienced a significant effect of inflation on
our operations. We continue to evaluate the potential impact inflation could have on our
business and future operations and attempt to minimize inflationary impacts by including
escalation clauses in our long-term contracts. Recent economic and industry reports
indicate that the current conditions should remain relatively unchanged for the
foreseeable future. We do not anticipate a significant impact on operations in 2004 due to
inflation.

During
2003, we experienced a significant deterioration in business volume due to the effect of
the U.S. economy on the customers we serve. New investments in infrastructure projects
were curtailed by both our utility and industrial customers. Our municipal customers faced
a reduced tax base with which to fund infrastructure projects in 2003. We anticipate these
conditions will persist into 2004.

Critical Accounting
Policies and Estimates

The
preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates and
judgments with respect to the selection and application of accounting policies that affect
the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of
contingent assets and liabilities. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates.

14

---

We
believe the following critical accounting policies have the greatest impact on the
preparation of our consolidated financial statements.

Revenue Recognition

Our
revenues are generated from the manufacture and delivery of custom-manufactured products.
We recognize revenues under both the completed contract method and the
percentage-of-completion method depending upon the duration and the scope of the project.
At the onset of each project, the size and duration of the contract is reviewed to
determine the appropriate revenue recognition method based upon company policy. Due to the
nature of the projects in the Process Control Systems segment, all revenues are recorded
using percentage-of-completion. However, projects in the Electrical Power Products segment
vary widely; thus, both the completed contract and percentage-of-completion methods are
used.

Under
the completed contract method, revenues are recognized upon the transfer of title, which
is generally at the time of shipment or delivery depending upon the terms of the contract,
when all significant contractual obligations have been satisfied, the price is fixed or
determinable, and collectibility is reasonably assured. We use shipping documents and
customer acceptance, when applicable, to verify the transfer of title to the customer. We
assess whether the price is fixed or determinable based on the payment terms associated
with the transaction and whether the sales price is subject to refund or adjustment.
Collectibility is assessed based on the creditworthiness of the customer based on credit
verification and the customers payment history.

Under
the percentage-of-completion method, revenues are recognized as work is performed based
upon the ratio of labor dollars or hours incurred to date to total estimated labor dollars
or hours to measure the stage of completion. The sales and gross profit recognized in each
period are adjusted prospectively for any revisions in the total estimated contract costs,
total estimated labor hours to complete the project, or total contract value. Whenever
revisions of estimated contract costs and contract values indicate that the contract costs
will exceed estimated revenues, thus creating a loss, a provision for the total estimated
loss is recorded in that period. Due to the number of estimates used in the
percentage-of-completion calculations, conditions such as changes in job performance, job
conditions, estimated contract costs and profitability may result in revisions to original
assumptions, thus causing actual results to differ from original estimates.

Valuation Accounts

The
preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make certain judgments and estimates
regarding uncertainties. Our most significant accounting uncertainty for which a valuation
account is set up is in the area of accounts receivable collectibility.

An
allowance for doubtful accounts has been established to provide for estimated losses on
our accounts receivable. This estimated allowance is based on historical experience of
uncollected accounts, the level of past due accounts, the overall level of outstanding
accounts receivable, information about specific customers with respect to their inability
to make payments and expectations of future conditions that could impact the
collectibility of accounts receivable. We continually assess our allowance for doubtful
accounts and may increase or decrease our periodic provision as additional information
regarding collectibility becomes available.

15

---

Impairment of Long-Lived
Assets

We
evaluate the recoverability of the carrying amount of long-lived assets whenever events or
changes in circumstances indicate that the carrying value of an asset may not be fully
recoverable. For long-lived assets to be held and used, the evaluation is based on
impairment indicators such as the nature of the assets, the future economic benefit of the
assets, any historical or future profitability measurements and other external market
conditions or factors that may be present. If such impairment indicators are present or
other factors exist that indicate that the carrying amount of the asset may not be
recoverable, we determine whether impairment has occurred through the use of an
undiscounted cash flows analysis of the asset at the lowest level for which identifiable
cash flows exist, or quoted market prices. If an asset is considered to be impaired, a
loss is recognized for the amount by which the carrying amount of the asset exceeds its
fair value. For assets held for sale or disposal, the fair value of the asset is measured
using quoted market prices or an estimation of net realizable value. Assets are classified
as held for sale when there is a plan for disposal and those assets meet the held for sale
criteria of SFAS No. 144. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.

Accruals for Contingent
Liabilities

We
account for contingencies in accordance with SFAS No. 5, Accounting for
Contingencies. SFAS No. 5 requires that we record an estimated loss from a loss
contingency when information available prior to the issuance of our financial statements
indicates that it is probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements and the amount of the loss can be
reasonably estimated. The amounts we record for insurance claims, warranties, legal and
other contingent liabilities require judgments regarding the amount of expenses that will
ultimately be incurred. We use past experience and history, as well as other specific
circumstances surrounding these claims in evaluating the amount of liability that should
be recorded. Actual results could differ from our estimates.

New Accounting Standards

In
June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. Under SFAS No. 146, companies are required to recognize costs
associated with restructurings, discontinued operations, plant closings or other exit or
disposal activities in the period in which the liability is incurred rather than at the
date of commitment to the plan. We adopted SFAS No. 146 on January 1, 2003 and there has
been no impact on our consolidated financial position, results of operations or cash
flows.

In
November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair value of the obligation
assumed under the guarantee. FIN 45 also requires additional disclosures about guarantees
in the interim and annual financial statements. The provisions of FIN 45 related to
initial recognition and measurement of guarantee agreements were effective for any
guarantees issued or modified after December 31, 2002. The adoption of these recognition
and measurement provisions did not have an impact on our consolidated financial position
or results of operations. In accordance with the disclosure provisions of FIN 45, we have
included in Note D of the Notes to Consolidated Financial Statements a reconciliation of
the changes in our product warranty liability for the years ended October 31, 2003 and
2002. We provide for estimated warranty costs at the time of sale based upon historical
experience rates. Our products contain warranties for parts and service for the earlier of
18 months from the date of shipment or 12 months from the date of initial operations.

16

---

In
November 2002, the FASB Emerging Issues Task Force (EITF) reached a consensus
opinion of EITF 00-21, Revenue Arrangements with Multiple Deliverables. EITF
00-21 addresses the proper accounting treatment for goods or services, or both, that are
to be delivered separately in a bundled sales arrangement. The guidance in this issue is
effective for revenue arrangements entered into in fiscal periods beginning after June 15,
2003. We adopted EITF 00-21 on August 1, 2003 and it did not have an impact on our
consolidated financial position, results of operations or cash flows.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123. This
statement provides alternative methods of transition for a voluntary change in the method
of accounting for stock-based employee compensation to the fair value method. The
statement also amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation. Under SFAS No. 148, annual and interim financial
statements are required to have prominent disclosures about the method of accounting for
stock-based employee compensation and the effect of the method used on reported results.
This statement was effective for fiscal years ending after December 15, 2002. This
statement did not have an impact on our consolidated financial statements as we have
adopted only the disclosure provisions of SFAS No. 123. The additional disclosure
requirements are included in Note K of these Notes to Consolidated Financial Statements.

In
January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, (FIN 46). FIN 46 addresses the consolidation
requirements of companies that have variable interest entities. This Interpretation
requires the consolidation of any variable interest entities in which a company has a
controlling financial interest and requires disclosure of those that are not consolidated
but in which the company has a significant variable interest. The requirements of FIN 46
will be effective for our first quarter 2004. We do not expect this Interpretation to have
a material impact on our financial position, results of operations or cash flows.

In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149, which amends and clarifies
existing accounting pronouncements, addresses financial accounting and reporting for
derivative or other hybrid instruments to require similar accounting treatment for
contracts with comparable characteristics. This statement was effective for contracts
entered into or modified after June 30, 2003 and for hedging activities designated after
June 30, 2003. This statement did not have an impact on our consolidated financial
position, results of operations or cash flows.

In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. This statement establishes
standards for classifying and measuring as liabilities certain financial instruments that
have characteristics of both liabilities and equity. It requires that an issuer classify a
financial instrument within its scope as a liability, or asset as appropriate, to
represent obligations of the issuer. Many of the instruments covered by this statement
have previously been classified as equity. SFAS No. 150 was effective for all financial
instruments created or modified after May 31, 2003, and to other instruments as of
September 1, 2003. This statement did not have an impact on our consolidated financial
position, results of operations or cash flows.

Item 7A.      Quantitative and
Qualitative Disclosures About Market Risk

We
are exposed to certain market risks arising from transactions we have entered into in the
normal course of business. These risks primarily relate to fluctuations in interest rates,
foreign exchange rates and commodity prices.

We
manage our exposure to changes in interest rates by optimizing the use of variable rate
debt. A 1.0% increase in interest rates would result in an annual increase in interest
expense of less than $75 thousand. In addition to variable rate debt, we also invest in
marketable debt securities that are carried at fair value on the consolidated balance
sheet, with unrealized gains and losses reported in other comprehensive income. Changes in
interest rates will affect the fair value of the marketable securities as reported.
However, we believe that changes in interest rates will not have a material near-term
impact on our future earnings or cash flows. During each of the past three years, we have
not experienced a significant effect on our business due to changes in interest rates.

17

---

We
manage our exposure to changes in foreign exchange rates primarily through arranging
compensation in U.S. dollars. Risks associated with changes in commodity prices are
primarily managed through utilizing contracts with suppliers. Risks related to foreign
exchange rates and commodity prices are monitored and actions could be taken to hedge
these risks in the future. We believe that fluctuations in foreign exchange rates and
commodity prices will not have a material near-term effect on our future earnings and cash
flows. During each of the past three years, we have not experienced a significant effect
on our business due to fluctuations in foreign exchange rates or commodity prices.

18

---

Item 8.       Financial
Statements and Supplementary Data

|                                                                    |     
|------------------------------------------------------------------- | ----
|Index to Consolidated Financial Statements                          | Page
|Financial Statements:                                              
|Independent Auditors' Report                                        | 20  
|Copy of Report of Independent Public Accountants                    | 21  
|Consolidated Balance Sheets as of October 31, 2003 and 2002         | 22  
|Consolidated Statements of Operations for the years ended          
|October 31, 2003, 2002 and 2001                                     | 23  
|Consolidated Statements of Stockholders' Equity for the years ended
|October 31, 2003, 2002 and 2001                                     | 24  
|Consolidated Statements of Cash Flows for the years ended          
|October 31, 2003, 2002 and 2001                                     | 25  
|Notes to Consolidated Financial Statements                          | 26  

19

---

INDEPENDENT
AUDITORS REPORT

To the Board of Directors and
Stockholders of Powell Industries, Inc.:

We
have audited the accompanying consolidated balance sheets of Powell Industries, Inc. and
subsidiaries (the Company) as of October 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders equity, and cash flows for each
of the two years in the period ended October 31, 2003. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of the Company for the year ended October 31, 2001 were
audited by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated November 29, 2001.

We
conducted our audits in accordance with auditing standards generally accepted in the
United States of America. 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, such 2003 and 2002 consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of October 31,
2003 and 2002, and the consolidated results of its operations and its cash flows for each
of the two years in the period ended October 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

As discussed above,
the financial statements of the Company for the year ended October 31, 2001 were audited by
other auditors who have ceased operations.  As described in Note M, the Company changed the composition of its
reportable segments during the year ended October 31, 2003, and the amounts in the financial statements relating
to reportable segments for the year ended October 31, 2001 have been restated to conform to the revised
composition of reportable segments.  We audited the adjustments that were applied to restate the disclosures for
reportable segments reflected in the financial statements for the year ended October 31, 2001.  Our procedures
included (i) agreeing the previously reported segment revenues, operating income and assets to the previously
issued financial statements and related notes, (ii) combining the previously reported segment revenues, operating
income and assets of the switchgear and related equipment and bus duct segments, the sum of which represents the
restated reportable segment amounts and (iii) testing the mathematical accuracy of the combination of the
previously reported segment amounts resulting in the restated reportable segment amounts.  In our opinion, such
adjustments are appropriate and have been properly applied.

As discussed in Note H,
 these consolidated financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company on November 1, 2002.  Our procedures with respect to the
earnings per share amounts reported in the consolidated statement of operations for 2001 included (i) agreeing
the previously reported net income to the previously issued financial statements, (ii) agreeing the amounts of
the adjustments to recorded net income representing amortization expense (including any related tax effects)
recognized in 2001 related to goodwill to the Companys underlying records obtained from management, and (iii)
testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income and the
related earnings per share amounts.

With respect to the
preceding two paragraphs, we were not engaged to audit, review, or apply any procedures to
the financial statements of the Company for the year ended October 31, 2001 other than with respect to such
adjustments and, accordingly, we do not express an opinion or any other form of assurance on the financial
statements for the year ended October 31, 2001 taken as a whole.

DELOITTE & TOUCHE LLP

Houston, TexasDecember 19, 2003

20

---

REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS

To the Board of Directors and
Stockholders of Powell Industries, Inc.:

We
have audited the accompanying consolidated balance sheets of Powell Industries, Inc. (a
Nevada corporation) and subsidiaries as of October 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders equity and cash flows for the
three years in the period ended October 31, 2001. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Powell Industries, Inc. and
subsidiaries as of October 31, 2001 and 2000, and the consolidated results of operations
and their cash flows for each of the three years in the period ended October 31, 2001, in
conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Houston, TexasNovember 29, 2001

This is a copy of the audit report
previously issued by Arthur Andersen LLP in connection with our filing on Form 10-K for
the year ended October 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K.

21

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
CONSOLIDATED BALANCE
SHEETS 
(In thousands, except
share and per share data)

|                                                             | October 31,
|------------------------------------------------------------ | -----------
|
|
|Current Assets:                                              |            
|Cash and cash equivalents                                    |            
|Marketable securities                                        |            
|Accounts receivable, less allowance for doubtful accounts of |            
|$1,283 and $1,209, respectively                              |            
|Costs and estimated earnings in excess of billings           |            
|Inventories                                                  |            
|Income taxes receivable                                      |            
|Prepaid expenses and other current assets                    |            
|                                                             |            
|Total Current Assets                                         |            
|Property, plant and equipment, net                           |            
|Other assets                                                 |            
|                                                             |            
|Total Assets                                                 |            
|                                                             |            

LIABILITIES AND STOCKHOLDERS' EQUITY

|                                                                          |  | 
|------------------------------------------------------------------------- |  | 
|Current Liabilities:                                                      |  | 
|Current maturities of long-term debt and capital lease obligations        |  | 
|Income taxes payable                                                      |  | 
|Accounts payable                                                          |  | 
|Accrued salaries, bonuses and commissions                                 |  | 
|Billings in excess of costs and estimated earnings                        |  | 
|Accrued product warranty                                                  |  | 
|Other accrued expenses                                                    |  | 
|                                                                          |  | 
|Total Current Liabilities                                                 |  | 
|Long-term debt and capital lease obligations, net of current maturities   |  | 
|Deferred compensation expense                                             |  | 
|Other liabilities                                                         |  | 
|                                                                          |  | 
|Total Liabilities                                                         |  | 
|Commitments and contingencies                                             |  | 
|Stockholders' Equity:                                                     |  | 
|Preferred stock, par value $.01; 5,000,000 shares authorized; none issued |  | 
|Common stock, par value $.01; 30,000,000 shares authorized;               |  | 
|10,994,000 and 10,979,000 shares issued, respectively; 10,641,000         |  | 
|and 10,595,000 shares outstanding, respectively                           |  | 
|Additional paid-in capital                                                |  | 
|Retained earnings                                                         |  | 
|Treasury stock, 352,000 shares and 384,000 shares respectively, at cost   |  | 
|Accumulated  other comprehensive (loss):  fair value of interest rate     |  | 
|swap and marketable securities                                            |  | 
|Deferred compensation                                                     |  | 
|                                                                          |  | 
|Total Stockholders' Equity                                                |  | 
|                                                                          |  | 
|Total Liabilities and Stockholders' Equity                                |  | 
|                                                                          |  | 

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

22

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF
OPERATIONS 
(In thousands, except
per share data)

|                                                                        | Years Ended October 31,
|----------------------------------------------------------------------- | -----------------------
|                                                                        |                        
|Revenues                                                                |                        
|Cost of goods sold                                                      |                        
|                                                                        |                        
|Gross profit                                                            |                        
|Selling, general and administrative expenses                            |                        
|                                                                        |                        
|Income before interest and income taxes                                 |                        
|Interest expense                                                        |                        
|Interest income                                                         |                        
|                                                                        |                        
|Income from continuing operations before income taxes and cumulative    |                        
|effect of change in accounting principle                                |                        
|Income tax provision                                                    |                        
|                                                                        |                        
|Income from continuing operations before cumulative effect of change in |                        
|accounting principle                                                    |                        
|Cumulative effect of change in accounting principle, net of tax         |                        
|                                                                        |                        
|Net income                                                              |                        
|                                                                        |                        
|Earnings per common share:                                              |                        
|Basic:                                                                  |                        
|Earnings from continuing operations                                     |                        
|Cumulative effect of change in accounting principle                     |                        
|                                                                        |                        
|Net earnings                                                            |                        
|                                                                        |                        
|Diluted:                                                                |                        
|Earnings from continuing operations                                     |                        
|Cumulative effect of change in accounting principle                     |                        
|                                                                        |                        
|Net earnings                                                            |                        
|                                                                        |                        
|Weighted average shares:                                                |                        
|Basic                                                                   |                        
|                                                                        |                        
|Diluted                                                                 |                        
|                                                                        |                        

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

23

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY 
(In thousands)

|                                 | Other
Compre-
hensive
Income
(Loss) | Common Stock
Shares | Common Stock
Amount | Additional
Paid-In
Capital | Retained
Earnings | Treasury
Stock | Accumulated
Other
Compre-
hensive
Income
(Loss) | Deferred
Compen-
sation | Total
|-------------------------------- | ----------------------------------- | ------------------- | ------------------- | -------------------------- | ----------------- | -------------- | ----------------------------------------------- | ----------------------- | -----
|Balance, November 1, 2000        |                                     |                     |                     |                            |                   |                | 10,821                                          |                         | $    
|Net income                       |                                     |                     |                     | 13,542                     |                   |                |                                                 |                         |      
|Amortization of deferred         |                                     |                    
|compensation-ESOP                |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Change in value of interest rate |                                     |                    
|swap, net of $82 income taxes    |                                     |                     |                     | (140                       | )                 |                |                                                 |                         |      
|Exercise of stock options        |                                     |                     |                     |                            |                   |                | 143                                             |                         |      
|Income tax benefit from stock    |                                     |                    
|options exercised                |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Purchases of Treasury Stock      |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|                                 |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Comprehensive Income             |                                     |                     | $                   | 13,402                     |                  
|                                 |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Balance, October 31, 2001        |                                     |                     |                     |                            |                   |                | 10,964                                          |                         |      
|Net income                       |                                     |                     |                     | 17,905                     |                   |                |                                                 |                         |      
|Amortization of deferred         |                                     |                    
|compensation-ESOP                |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Change in value of interest rate |                                     |                    
|swap, net of $33 income taxes    |                                     |                     |                     | 53                         |                   |                |                                                 |                         |      
|Exercise of stock options        |                                     |                     |                     |                            |                   |                | 15                                              |                         |      
|Income tax benefit from stock    |                                     |                    
|options exercised                |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|                                 |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Comprehensive Income             |                                     |                     | $                   | 17,958                     |                  
|                                 |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Balance, October 31, 2002        |                                     |                     |                     |                            |                   |                | 10,979                                          |                         |      
|Net income                       |                                     |                     |                     | 7,118                      |                   |                |                                                 |                         |      
|Amortization of deferred         |                                     |                    
|compensation-ESOP                |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Change in value of interest rate |                                     |                    
|swap, net of $49 income taxes    |                                     |                     |                     | 87                         |                   |                |                                                 |                         |      
|Change in value of marketable    |                                     |                    
|securities, net of $64 income    |                                     |                     |                     | (118                       | )                 |                |                                                 |                         |      
|taxes                            |                                     |                    
|Exercise of stock options        |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Income tax benefit from stock    |                                     |                    
|options exercised                |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Issuance of stock                |                                     |                     |                     |                            |                   |                | 15                                              |                         |      
|                                 |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Comprehensive Income             |                                     |                     | $                   | 7,087                      |                  
|                                 |                                     |                     |                     |                            |                   |                |                                                 |                         |      
|Balance, October 31, 2003        |                                     |                     |                     | 10,994                     |                   | $              | 110                                             |                         | $    
|                                 |                                     |                     |                     |                            |                   |                |                                                 |                         |      

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

24

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF
CASH FLOWS 
(In thousands)

|                                                                    | Years Ended October 31,
|------------------------------------------------------------------- | -----------------------
|                                                                    |                        
|Operating Activities:                                               |                        
|Net income                                                          |                        
|Adjustments to reconcile net income to net cash provided by         |                        
|operating activities:                                               |                        
|Cumulative effect of change in accounting principle, net of tax     |                        
|Depreciation and amortization                                       |                        
|Loss on sale of assets                                              |                        
|Loss on impairment of assets                                        |                        
|Deferred income tax provision                                       |                        
|Changes in operating assets and liabilities:                        |                        
|Accounts receivable, net                                            |                        
|Costs and estimated earnings in excess of billings                  |                        
|Inventories                                                         |                        
|Prepaid expenses and other current assets                           |                        
|Other assets                                                        |                        
|Accounts payable and income taxes payable                           |                        
|Accrued liabilities                                                 |                        
|Billings in excess of costs and estimated earnings                  |                        
|Deferred compensation expense                                       |                        
|Other liabilities                                                   |                        
|                                                                    |                        
|Net cash provided by (used in) operating activities                 |                        
|                                                                    |                        
|Investing Activities:                                               |                        
|Purchases of property, plant and equipment                          |                        
|Purchases of marketable securities                                  |                        
|                                                                    |                        
|Net cash used in investing activities                               |                        
|                                                                    |                        
|Financing Activities:                                               |                        
|Borrowings on revolving line of credit                              |                        
|Repayments on revolving line of credit                              |                        
|Borrowing on long-term debt and capital lease obligations           |                        
|Repayments of long-term debt and capital lease obligations          |                        
|Payments to reacquire common stock                                  |                        
|Proceeds from issuance of stock                                     |                        
|Proceeds from exercise of stock options                             |                        
|                                                                    |                        
|Net cash provided by (used in) financing activities                 |                        
|                                                                    |                        
|Net increase in cash and cash equivalents                           |                        
|Cash and cash equivalents at beginning of year                      |                        
|                                                                    |                        
|Cash and cash equivalents at end of year                            |                        
|                                                                    |                        
|Supplemental disclosures of cash flow information:                  |                        
|Cash paid during the period for:                                    |                        
|Interest                                                            |                        
|                                                                    |                        
|Taxes                                                               |                        
|                                                                    |                        
|Non-cash investing and financing activities:                        |                        
|Change in fair value of interest rate swap, net of $49, $33 and $82 |                        
|income taxes, respectively                                          |                        
|                                                                    |                        
|Change in fair value of marketable securities, net of $64 income    |                        
|taxes                                                               |                        
|                                                                    |                        

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

25

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

A.       Business and
Organization

We
develop, design, manufacture, and service equipment and systems for the management and
control of electrical energy and other critical processes. Headquartered in Houston, TX,
we serve the transportation, environmental, industrial, and utility industries.

Powell
Industries, Inc. (we, us, our, Powell, or
the Company) was incorporated in the state of Nevada in 1968 and is the
successor to a corporation founded by William E. Powell in 1947, which merged into the
Company in 1977. Our major subsidiaries, all of which are wholly-owned, include: Powell
Electrical Manufacturing Company; Powell Power Electronics Company, Inc.; Powell-ESCO
Company; Unibus, Inc.; Delta-Unibus Corporation; and Transdyn Controls, Inc.

B.       Summary of Significant
Accounting Policies

Principles
of Consolidation

| | The
consolidated financial statements include the accounts of Powell Industries, Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Use
of Estimates

| | The
preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the periods reported. The amounts we record for
insurance claims, warranties, legal and other contingent liabilities require judgments
regarding the amount of expenses that will ultimately be incurred. We use past experience
and history, as well as other specific circumstances surrounding these claims in
evaluating the amount of liability that should be recorded. Actual results could differ
from our estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash
and Cash Equivalents

| | Cash
and cash equivalents include cash on hand, deposits with banks and highly liquid
investments with original maturities of three months or less.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

Marketable
Securities

| | Marketable
securities consist of investment-grade corporate bonds that are classified as
available-for-sale. These investments are carried at fair value, with unrealized gains and
losses, net of related tax effects, included in other comprehensive income.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2003, we purchased $5.8 million of corporate bonds with maturity dates that vary from 5 to
9 years as of October 31, 2003. The fair value of these assets on that date was $5.5
million, as shown on the consolidated balance sheet.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Accounts
Receivable and Market Risk

| | Accounts
receivable are stated net of allowances for doubtful accounts. The estimated allowance is
based on historical experience of uncollected accounts, the level of past due accounts,
the overall level of outstanding accounts receivable, information about specific customers
with respect to their inability to make payments and expectations of future conditions
that could impact the collectibility of accounts receivable. We continually assess our
allowance for doubtful accounts and may increase or decrease our periodic provision as
additional information regarding collectibility becomes available. Our domestic
receivables are generally not collateralized. However, we utilize letters of credit to
secure payment on sales outside of the U.S. and Canada. At October 31, 2003 and 2002,
accounts receivable included retention amounts of $6.2 million and $7.8 million,
respectively. Retention amounts are in accordance with applicable provisions of
engineering and construction contracts and become due upon completion of contractual
requirements. Approximately $1.3 million of the retained amount at October 31, 2003 is
expected to be collected subsequent to October 31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Costs
and Estimated Earnings in Excess of Billings

| | Costs
and estimated earnings in excess of billings arise when revenues are recorded on a
percentage-of-completion basis but cannot be invoiced under the terms of the contract.
Such amounts are invoiced upon completion of contractual milestones.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Costs
and estimated earnings in excess of billings also include certain costs associated with
unapproved change orders. These costs are included when change order approval is probable.
Amounts are carried at the lower of cost or net realizable value. No profit is recognized
on costs incurred until change order approval is obtained. The amounts recorded involve
the use of judgments and estimates; thus, actual recoverable amounts could differ from
original assumptions.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Assets
and liabilities related to costs and estimated earnings in excess of billings as well as
billings in excess of costs and estimated earnings have been classified as current and
non-current under the operating cycle concept whereby all contract-related items are
regarded as current regardless of whether cash will be received or paid within a 12-month
period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Inventories

| | Inventories
are stated at the lower of cost or market using first-in, first-out (FIFO) or weighted
average methods and include the cost of material, labor and manufacturing overhead. We use
estimates in determining the level of reserves required to state inventory at the lower of
cost or market. Our estimates are based on market activity levels, production
requirements, the physical condition of products and technological innovation. Changes in
any of these factors may result in adjustments to the carrying value of inventory.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Property,
Plant and Equipment

| | Property,
plant and equipment are stated at cost and are depreciated using the straight-line method
over the estimated useful lives of the assets. Expenditures for repairs and maintenance
are charged to expense when incurred. Expenditures for major renewals and improvements
which extend the useful lives of existing equipment are capitalized and depreciated. Upon
retirement or disposition of property, plant and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or loss is
recognized in the consolidated statement of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Impairment
of Long-Lived Assets

| | We
evaluate the recoverability of the carrying amount of long-lived assets whenever events or
changes in circumstances indicate that the carrying value of an asset may not be fully
recoverable. For long-lived assets to be held and used, the evaluation is based on
impairment indicators such as the nature of the assets, the future economic benefit of the
assets, any historical or future profitability measurements and other external market
conditions or factors that may be present. If such impairment indicators are present or
other factors exist that indicate that the carrying amount of the asset may not be
recoverable, we determine whether impairment has occurred through the use of an
undiscounted cash flows analysis of the asset at the lowest level for which identifiable
cash flows exist, or quoted market prices. If an asset is considered to be impaired, a
loss is recognized for the amount by which the carrying amount of the asset exceeds its
fair value. For assets held for sale or disposal, the fair value of the asset is measured
using quoted market prices or an estimation of net realizable value. Assets are classified
as held for sale when there is a plan for disposal and those assets meet the held for sale
criteria of SFAS No. 144. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended October 31, 2003, we recorded an impairment loss of $382 thousand in our
Electrical Power Products segment to decrease the carrying value of machinery and
equipment to their estimated market value. During 2003, we decided to discontinue certain
product lines which generated revenues of less than $1.0 million in fiscal 2003. As a
result of this decision, we evaluated the estimated fair value of these assets by
obtaining used equipment sales prices for similar assets. Based on our evaluation, we
determined the assets were impaired and accordingly recorded the loss. This loss is shown
as a component of cost of goods sold in our consolidated statement of operations. The $76
thousand estimated fair value of the assets is classified as held for sale at October 31,
2003 and included in other current assets on the consolidated balance sheet. No other
impairment adjustments were made during the periods presented.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Intangible
Assets

| | We
adopted SFAS No. 142, Goodwill and Other Intangible Assets, on November 1,
2002. This statement requires that goodwill and other intangible assets with indefinite
useful lives are no longer amortized but instead requires a test for impairment to be
performed annually, or immediately if conditions indicate that impairment could exist.
Intangible assets with definite useful lives will continue to be amortized over their
estimated useful lives. Upon completion we performed the impairment test, and as a result
of this test, we recorded an impairment of $510 thousand,
net of $285 thousand taxes, to write off the impaired goodwill amounts as a cumulative
effect of a change in accounting principle. For additional information regarding our
intangible assets and the goodwill impairment, see Note H.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income
Taxes

| | We
account for income taxes using SFAS No. 109 Accounting for Income Taxes. Under
SFAS No. 109, deferred income tax assets and liabilities are computed based on the
difference between the financial statement and income tax bases of assets and liabilities
using enacted tax rates. Under this standard, the effect on deferred income taxes of a
change in tax rates is recognized in income in the period that the tax rate changes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Revenue Recognition

| | Our revenues are generated from the manufacture and
delivery of custom-manufactured products.  We recognize
revenues under both the completed contract method and the percentage-of-completion method depending
upon the duration and the scope of the project. At the onset of each project, the size and
duration of the contract is reviewed to determine the appropriate revenue recognition
method based upon company policy. Due to the nature of the projects in the Process Control
Systems segment, all revenues are recorded using percentage-of-completion. However,
projects in the Electrical Power Products segment vary widely; thus, both the completed
contract and percentage-of-completion methods are used.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the completed contract method, revenues are recognized upon the transfer of title, which
is generally at the time of shipment or delivery depending upon the terms of the contract,
when all significant contractual obligations have been satisfied, the price is fixed or
determinable, and collectibility is reasonably assured. We use shipping documents and
customer acceptance, when applicable, to verify the transfer of title to the customer. We
assess whether the price is fixed or determinable based on the payment terms associated
with the transaction and whether the sales price is subject to refund or adjustment.
Collectibility is assessed based on the creditworthiness of the customer based on credit
verification and the customers payment history.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the percentage-of-completion method, revenues are recognized as work is performed based
upon the ratio of labor dollars or hours incurred to date to total estimated labor dollars
or hours to measure the stage of completion. The sales and gross profit recognized in each
period are adjusted prospectively for any revisions in the total estimated contract costs,
total estimated labor hours to complete the project, or total contract value. Whenever
revisions of estimated contract costs and contract values indicate that the contract costs
will exceed estimated revenues, thus creating a loss, a provision for the total estimated
loss is recorded in that period. Due to the number of estimates used in the
percentage-of-completion calculations, conditions such as changes in job performance, job
conditions, estimated contract costs and profitability may result in revisions to original
assumptions, thus causing actual results to differ from original estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Warranties

| | We
provide for estimated warranty costs at the time of sale based upon historical rates
applicable to individual product lines. In addition, specific provisions are made when the
costs of such warranties are expected to exceed accruals. Our standard terms and
conditions of sale includes a warranty for parts and service for the earlier of 18 months
from the date of shipment or 12 months from the date of initial operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research
and Development Expense

| | Research
and development costs are charged to expense as incurred. These costs are included as a
component of selling, general and administrative expenses on the consolidated statements
of operations. Such amounts were $3.6 million, $3.4 million, and $3.1 million in fiscal
years 2003, 2002 and 2001, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

New
Accounting Standards

| | In
June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. Under SFAS No. 146, companies are required to recognize costs
associated with restructurings, discontinued operations, plant closings or other exit or
disposal activities in the period in which the liability is incurred rather than at the
date of commitment to the plan. We adopted SFAS No. 146 on January 1, 2003 and there has
been no impact on our consolidated financial position, results of operations or cash
flows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair value of the obligation
assumed under the guarantee. FIN 45 also requires additional disclosures about guarantees
in the interim and annual financial statements. The provisions of FIN 45 related to
initial recognition and measurement of guarantee agreements were effective for any
guarantees issued or modified after December 31, 2002. The adoption of these recognition
and measurement provisions did not have an impact on our consolidated financial position
or results of operations. In accordance with the disclosure provisions of FIN 45, we have
included in Note D a reconciliation of the changes in our product warranty liability for
the years ended October 31, 2003 and 2002. We provide for estimated warranty costs at the
time of sale based upon historical experience rates. Our products contain warranties for
parts and service for the earlier of 18 months from the date of shipment or 12 months from
the date of initial operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2002, the FASB Emerging Issues Task Force (EITF) reached a consensus
opinion of EITF 00-21, Revenue Arrangements with Multiple Deliverables. EITF
00-21 addresses the proper accounting treatment for goods or services, or both, that are
to be delivered separately in a bundled sales arrangement. The guidance in this issue is
effective for revenue arrangements entered into in fiscal periods beginning after June 15,
2003. We adopted EITF 00-21 on August 1, 2003 and it did not have an impact on our
consolidated financial position, results of operations or cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123. This
statement provides alternative methods of transition for a voluntary change in the method
of accounting for stock-based employee compensation to the fair value method. The
statement also amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation. Under SFAS No. 148, annual and interim financial
statements are required to have prominent disclosures about the method of accounting for
stock-based employee compensation and the effect of the method used on reported results.
This statement was effective for fiscal years ending after December 15, 2002. This
statement did not have an impact on our consolidated financial statements as we have
adopted only the disclosure provisions of SFAS No. 123. The additional disclosure
requirements are included in Note K of these Notes to Consolidated Financial Statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 addresses the consolidation
requirements of companies that have variable interest entities. This Interpretation
requires the consolidation of any variable interest entities in which a company has a
controlling financial interest and requires disclosure of those that are not consolidated
but in which the company has a significant variable interest. The requirements of FIN 46
will be effective for our first quarter 2004. We do not expect this Interpretation to have
a material impact on our financial position, results of operations or cash flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149, which amends and clarifies
existing accounting pronouncements, addresses financial accounting and reporting for
derivative or other hybrid instruments to require similar accounting treatment for
contracts with comparable characteristics. This statement was effective for contracts
entered into or modified after June 30, 2003 and for hedging activities designated after
June 30, 2003. This statement did not have an impact on our consolidated financial
position, results of operations or cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. This statement establishes
standards for classifying and measuring as liabilities certain financial instruments that
have characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument within its scope as a liability,
or asset as appropriate, to represent obligations of the issuer. Many of the instruments
covered by this statement have previously been classified as equity. SFAS No. 150 was
effective for all financial instruments created or modified after May 31, 2003, and to
other instruments as of September 1, 2003. This statement did not have an impact on our
consolidated financial position, results of operations or cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C.       Earnings per Share

The
following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share data):

|                                                                     | Years Ended October 31,
|-------------------------------------------------------------------- | -----------------------
|                                                                     |                        
|Numerator:                                                           |                        
|Income from continuing operations available to common stockholders   |                        
|Cumulative effect of change in accounting principle, net of tax      |                        
|                                                                     |                        
|Net income available to common stockholders                          |                        
|                                                                     |                        
|Denominator:                                                         |                        
|Denominator for basic earnings per share-weighted average shares     |                        
|Dilutive effect of stock options                                     |                        
|                                                                     |                        
|Denominator for diluted earnings per share-adjusted weighted average |                        
|shares with assumed conversions                                      |                        
|                                                                     |                        
|Basic earnings per share:                                            |                        
|Earnings from continuing operations                                  |                        
|Cumulative effect of change in accounting principle                  |                        
|                                                                     |                        
|Net earnings                                                         |                        
|                                                                     |                        
|Diluted earnings per share:                                          |                        
|Earnings from continuing operations                                  |                        
|Cumulative effect of change in accounting principle                  |                        
|                                                                     |                        
|Net earnings                                                         |                        
|                                                                     |                        

| | For
the years ended October 31, 2003, 2002 and 2001 options to purchase a total of 380
thousand, 26 thousand and zero shares, respectively, were excluded from the computation of
diluted earnings per share because the options exercise prices were greater than the
average market price of our common stock.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

D.       Detail of Certain
Balance Sheet Accounts

Activity in our allowance for doubtful accounts receivable consists of the following (in thousands):

|                                                                     |             |        
|-------------------------------------------------------------------- | ----------- | -------
|                                                                     | October 31,
|                                                                     |             |        
|                                                                     |             | 2003   
|Balance at beginning of period                                       |             | $ 1,209
|Adjustments to the reserve                                           |             | 277    
|Deductions for uncollectible accounts written off, net of recoveries |             | (203   
|                                                                     |             |        
|Balance at end of period                                             |             | $ 1,283
|                                                                     |             |        

Activity in our accrued product warranty account consists of the following (in thousands):

|                                |             |        
|------------------------------- | ----------- | -------
|                                | October 31,
|                                |             |        
|                                |             | 2003   
|Balance at beginning of period  |             | $ 2,123
|Adjustments to the reserve      |             | 1,749  
|Deductions for warranty charges |             | (1,943 
|                                |             |        
|Balance at end of period        |             | $ 1,929
|                                |             |        

The
components of inventories are summarized below (in thousands):

|                                       |             |        
|-------------------------------------- | ----------- | -------
|                                       | October 31,
|                                       |             |        
|                                       |             | 2003   
|Raw materials, parts and subassemblies |             | $12,122
|Work-in-progress                       |             | 5,938  
|                                       |             |        
|Total inventories                      |             | $18,060
|                                       |             |        

The components of costs and estimated earnings in excess of billings (in thousands):

|                                                         |             |           
|-------------------------------------------------------- | ----------- | ----------
|                                                         | October 31,
|                                                         |             |           
|                                                         |             | 2003      
|Costs and estimated earnings                             |             | $ 136,744 
|Progress billings                                        |             | (104,570  
|                                                         |             |           
|Total costs and estimated earnings in excess of billings |             | $   32,174
|                                                         |             |           

The components of billings in excess of costs and estimated earnings (in thousands):

|                                                         |             |           
|-------------------------------------------------------- | ----------- | ----------
|                                                         | October 31,
|                                                         |             |           
|                                                         |             | 2003      
|Progress billings                                        |             | $ 209,898 
|Costs and estimated earnings                             |             | (196,682  
|                                                         |             |           
|Total billings in excess of costs and estimated earnings |             | $   13,216
|                                                         |             |           

Property,
plant and equipment are summarized below (in thousands):

|                                         |             |           |  
|---------------------------------------- | ----------- | --------- | -
|                                         | October 31, | Range of  |  
|                                         |             |           |  
|                                         |             | 2003      |  
|Land                                     |             | $   5,075 |  
|Buildings and improvements               |             | 36,881    |  
|Machinery and equipment                  |             | 33,392    |  
|Furniture and fixtures                   |             | 2,964     |  
|Construction in progress                 |             | 7,128     |  
|                                         |             |           |  
|                                         |             | 85,440    |  
|Less-accumulated depreciation            |             | (41,442   | )
|                                         |             |           |  
|Total property, plant and equipment, net |             | $ 43,998  |  
|                                         |             |           |  

32

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | Included
in property and equipment are assets under capital lease of $177 thousand and $204
thousand at October 31, 2003 and 2002, with related accumulated depreciation of $74
thousand and $56 thousand, respectively. Depreciation expense, including the depreciation
of capital leases, was $5.0 million, $4.7 million, and $4.2 million for fiscal years 2003,
2002 and 2001, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E.       Employee Benefit Plans

| | We
have a defined employee contribution 401(k) plan for substantially all of our employees.
We match 50% of employee contributions up to an employee contribution of six percent of
each employees salary. We recognized expenses of $1.4 million, $1.4 million and $1.2
million in fiscal years 2003, 2002 and 2001, respectively, under this plan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have established an employee stock ownership plan (ESOP) for the benefit of
substantially all full-time employees other than employees covered by a collective
bargaining agreement to which the ESOP has not been extended by any agreement or action of
ours. The ESOP initially purchased 793,525 shares of the Companys common stock from
a major stockholder. At October 31, 2003 and 2002 there were 634,629 and 651,755 shares in
the trust with 358,712 and 330,975 shares allocated to participants, respectively. The
funding for this plan was provided through a loan from the Company of $4.5 million. This
loan will be repaid by the ESOP over a twenty-year period with equal payments of $424
thousand per year including interest at 7 percent. We recorded deferred compensation as a
contra-equity account for the amount loaned to the ESOP in the accompanying consolidated
balance sheets. We are required to make annual contributions to the ESOP to enable it to
repay its loan to us. The deferred compensation account is amortized as compensation
expense over twenty years as employees earn their shares for services rendered. The loan
agreement also provides for prepayment of the loan if we elect to make any additional
contributions. The compensation expense for fiscal years 2003, 2002 and 2001 was $277
thousand, $252 thousand, and $247 thousand, respectively. The receivable from the ESOP is
recorded as a reduction from stockholders equity and the allocated and unallocated
shares of the ESOP are treated as outstanding common stock in the computation of earnings
per share. As of October 31, 2003, the remaining ESOP receivable was $1.8 million.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 1985 and February 1987, we entered into Executive Benefit Agreements with several
key officers and employees. Three participants remain in this deferred compensation plan,
which provides for payments in accordance with a predetermined plan upon retirement or
death. We recognize the cost of this plan over the projected years of service of the
participant. We have insured the lives of these key employees to assist in the funding of
the deferred compensation liability.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 1992, we established a plan to extend to retirees health benefits which are
available to active employees under our existing health plans. Participants became
eligible for retiree health care benefits when they retired from active service at age 55
with a minimum of ten years of service. Generally, the health plans paid a stated
percentage of medical and dental expenses reduced for any deductible and co-payment. These
plans are unfunded. Medical coverage may be continued by the retired employee up to age 65
at the average cost to the Company of active employees. At the age of 65, when the
employee became eligible for Medicare, the benefits provided by the Company were to be
reduced by the amount provided by Medicare and the cost to the retired employee would be
reduced to 50 percent of the average cost to the Company of active employees.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

33

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | In
1994, we modified our postretirement benefits to provide retiree health care benefits to
only current retirees and active employees who were eligible to retire by December 31,
1999. Participants eligible for such benefits were required to pay between 20 percent and
100 percent of our average cost of benefits based on years of service. In addition,
benefits would end upon the employees attainment of age 65. The effect of these
modifications significantly reduced our postretirement benefit cost and accumulated
benefit obligation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
plan was amended effective January 1, 2000 to provide coverage for employees, age 55 or
more but less than 65, who retire on or after January 1, 2000 with at least 10 years of
service. The retiree is required to pay the full retiree cost less the amount paid by the
Company, which is a percentage of the year 2000 cost. Effective as of the November 1, 2002
valuation date, retirees are required to pay the COBRA rate, instead of the full retiree
cost, less the Companys subsidy. Based on the current assumptions relating to our
workforce and their probable retirement, this change in plan may result in an increased
benefit obligation of $1.1 million as shown below.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the components of net periodic benefit expense, funded
status, the change in funded status, and the change in accumulated benefit obligation of
the postretirement benefit plans (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                    |  | October 31, |  
|------------------------------------------------------------------- |  | ----------- | -
|                                                                    |  | 2003        |  
|Components of net periodic postretirement benefit expense (income): | 
|Service cost                                                        |  | $      92   |  
|Interest cost                                                       |  | 106         |  
|Prior service cost                                                  |  | 121         |  
|Net (gain) loss recognized                                          |  | (3          | )
|                                                                    |  |             |  
|Net periodic postretirement benefit expense (income)                |  | $    316    |  
|                                                                    |  |             |  
|Funded Status:                                                      | 
|Retirees                                                            |  | $    166    |  
|Fully eligible active participants                                  |  | 659         |  
|Other actual participants                                           |  | 898         |  
|                                                                    |  |             |  
|Accumulated postretirement benefit obligation                       |  | 1,723       |  
|Less unrecognized balances:                                         | 
|Prior service cost                                                  |  | 1,066       |  
|Net actuarial (gain) loss                                           |  | (149        | )
|                                                                    |  |             |  
|Net amount recognized                                               |  | $    806    |  
|                                                                    |  |             |  
|Changes in accumulated postretirement benefit obligation:           | 
|Balance at beginning of year                                        |  | $    602    |  
|Service cost                                                        |  | 92          |  
|Interest cost                                                       |  | 106         |  
|Loss due to plan change                                             |  | 1,058       |  
|Actuarial (gain) loss                                               |  | (95         | )
|Benefits paid                                                       |  | (40         | )
|                                                                    |  |             |  
|Balance at end of year                                              |  | $ 1,723     |  
|                                                                    |  |             |  
|Fair value of plan assets                                           |  | --          |  
|                                                                    |  |             |  
|Weighted average assumptions:                                       | 
|Discount rate                                                       |  | 6.0%        |  
|Expected return on plan assets                                      |  | N/A         |  
|Rate of compensation increase                                       |  | N/A         |  

34

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | The assumed
health care cost trend measuring the accumulated postretirement benefit obligation was 9% in fiscal
year 2003.  This trend is expected to grade down to 5% for years 2007 and later.  In fiscal year 2002, the
assumed health care cost trend measuring the accumulated postretirement benefit obligation was 6%.  If the health
care trend rate assumptions were increased or decreased by 1% as of October 31, 2003, the effect of this change
on the accumulated postretirement benefit obligation would be approximately $100 thousand.  The effect on the
aggregate service and interest cost components of the net periodic postretirement benefit cost from a 1% increase
or decrease would be less than $15 thousand.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F.       Long-Term Debt

Long-term
debt consists of the following (in thousands):

|                                                                |             |        
|--------------------------------------------------------------- | ----------- | -------
|                                                                | October 31,
|                                                                |             | 2003   
|Industrial development revenue bonds, maturing in October 2021, |            
|with annual sinking fund payments of $400 thousand              |             | $ 7,200
|Term note payable to bank                                       |             | --     
|Capital lease obligations                                       |             | 64     
|Other borrowings                                                |             | 95     
|                                                                |             |        
|Subtotal long-term debt and capital lease obligations           |             | 7,359  
|Less current portion                                            |             | (468   
|                                                                |             |        
|Total long-term debt and capital lease obligations              |             | $ 6,891
|                                                                |             |        

| | In
September 1998, we entered into a $10 million term loan with a domestic bank. This loan
had a maturity of five years with nineteen equal quarterly payments of $357 thousand. At
the same time, we entered into an interest rate swap agreement in order to manage our
interest rate exposure. This agreement was accounted for on the accrual basis. Income and
expense resulting from this agreement were recorded in the same category as interest
expense accruals on the related term loan. Amounts to be paid or received under the
interest rate swap agreement were recognized as an adjustment to interest expense in the
periods in which they occurred. The agreement required that we pay the counterparty at the
fixed swap rate of 5.2% per annum and required the counterparty to pay us interest at the
90 day LIBOR rate. In September 2003, we paid the remaining principal balance of $4.3
million on our term loan and settled the associated interest rate swap agreement with a
final payment of $34 thousand.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
borrowed $8 million in October 2001 through a loan agreement funded with proceeds from
tax-exempt industrial development revenue bonds (Bonds). These Bonds were
issued by the Illinois Development Finance Authority and were used for the completion of
our Northlake, IL facility. A reimbursement agreement between the Company and a major
domestic bank required an issuance by the bank of an irrevocable direct-pay letter of
credit to the Bonds trustee to guarantee payment of the Bonds principal and
interest when due. The letter of credit terminates on October 25, 2006, and is subject to
both early termination and extension provisions customary to such agreements. The Bonds
mature in 2021 but the reimbursement agreement requires the Company to provide for
redemption of one twentieth of the par value of the Bonds beginning on October 25, 2002,
and each subsequent anniversary. A sinking fund is used for the redemption of the Bonds.
As of October 31, 2003, the remaining balance was $7.2 million. The Bonds bear interest at
a floating rate determined weekly by the Bonds remarketing agent, which was the
underwriter for the Bonds and is an affiliate of the bank. This interest rate was 1.2% per
annum on October 31, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | We
have a $15 million revolving line of credit agreement with a major domestic bank which was
amended in October 2003 to extend the maturity date to February 2006. The revolving line
of credit allows us to elect an interest rate on amounts borrowed of (1) the banks
prime rate, which was 4% at October 31, 2003, less .5% (on the first $5 million) and the
banks prime rate on additional borrowings, or (2) the LIBOR rate, which was 1.2% at
October 31, 2003, plus an additional percentage of .75% to 1.25% based on our performance.
A fee of .20% to .25% is charged on the unused balance of the line. The agreement contains
customary affirmative and negative covenants and requirements to maintain a minimum level
of tangible net worth and profitability. As of October 31, 2003, we were in compliance
with all debt covenants. The amount available under this agreement is reduced by $0.8
million for our outstanding letters of credit. The direct pay letter of credit
guaranteeing payment on our industrial development revenue bonds does not affect the
available credit under this agreement. There were no borrowings under this line of credit
as of year-end.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Some
machinery and equipment used in our manufacturing facilities were financed through capital
lease agreements. These capital lease agreements are collateralized by the leased
property. The capital lease obligation is at a fixed interest rate of 3%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The annual
maturities of long-term debt are as follows (in thousands):
| | ----------------------------------------------------------------------

|                                |                          |              | 
|------------------------------- | ------------------------ | ------------ | 
|Year EndingOctober 31,          | Long-TermDebt Maturities | CapitalLease | 
|2004                            |                          | 418          | 
|2005                            |                          | 419          | 
|2006                            |                          | 458          | 
|2007                            |                          | 400          | 
|2008                            |                          | 400          | 
|Thereafter                      |                          | 5,200        | 
|                                |                          |              | 
|Total long-term debt maturities |                          | $7,295       | 
|                                |                          |              | 

See
Footnote L for discussion of the fair market value of the debt instruments.

G.       Income Taxes

The
 net deferred income tax asset (liability) is comprised of the following (in thousands):

|                                                     |             |        
|---------------------------------------------------- | ----------- | -------
|                                                     | October 31,
|                                                     |             | 2003   
|Current deferred income taxes:                       |            
|Gross assets                                         |             | $ 3,459
|Gross liabilities                                    |             | (4,080 
|                                                     |             |        
|Net current deferred income tax liability            |             | (621   
|                                                     |             |        
|Noncurrent deferred income taxes:                    |            
|Gross assets                                         |             | 1,115  
|Gross liabilities                                    |             | (1,122 
|                                                     |             |        
|Net noncurrent deferred income tax asset (liability) |             | (7     
|                                                     |             |        
|Net deferred income tax asset (liability)            |             | $  (628
|                                                     |             |        

The
above current and noncurrent deferred income tax liabilities are included in other accrued
expenses and other liabilities, respectively, on the consolidated balance sheet.

36

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | The
tax effect of temporary differences between GAAP accounting and federal income tax
accounting creating deferred income tax assets and liabilities are as follows (in
thousands):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          |             |         
|----------------------------------------- | ----------- | --------
|                                          | October 31,
|                                          |             | 2003    
|Allowance for doubtful accounts           |             | $    499
|Reserve for accrued employee benefits     |             | 757     
|Warranty reserves                         |             | 725     
|Uncompleted long-term contracts           |             | (4,080  
|Depreciation and amortization             |             | (1,046  
|Deferred compensation                     |             | 605     
|Postretirement benefits liability         |             | 299     
|Accrued legal expenses                    |             | 188     
|Uniform capitalization and inventory      |             | 1,289   
|Other                                     |             | 136     
|                                          |             |         
|Net deferred income tax asset/(liability) |             | $  (628 
|                                          |             |         

| | The components of the income tax provision consist of the following (in thousands):
| | -----------------------------------------------------------------------------------

|                           |                         |        | 
|-------------------------- | ----------------------- | ------ | 
|                           | Years Ended October 31,
|                           |                         | 2003   | 
|Current:                   |                        
|Federal                    |                         | $3,527 | 
|State                      |                         | 1,970  | 
|Deferred:                  |                        
|Federal                    |                         | 719    | 
|                           |                         |        | 
|Total income tax provision |                         | 6,216  | 
|                           |                         |        | 

| | A
reconciliation of the statutory U.S. income tax rate and the effective income tax rate, as
computed on earnings before income tax provision in each of the three years presented in
the Consolidated Statements of Operations is as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           |                         |      | 
|------------------------------------------ | ----------------------- | ---- | 
|                                           | Years Ended October 31,
|                                           |                         | 2003 | 
|Statutory rate                             |                         | 34%  | 
|State income taxes, net of federal benefit |                         | 10   | 
|Other                                      |                         | 1    | 
|                                           |                         |      | 
|Effective rate                             |                         | 45%  | 
|                                           |                         |      | 

| | Our
provision for income taxes reflects an effective tax rate on earnings before income taxes
of 45% in fiscal 2003 compared to 37% in fiscal 2002. Included in our provision is $2.0
million for state taxes of which $1.4 million reflects revised estimates in state tax
exposures related to prior years. Over the past several years, our business has expanded
and we are now conducting activities in more states. We have accordingly increased our
estimates for such state tax exposures.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

H.       Goodwill and Other
Intangible Assets

| | Effective
November 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible
Assets. Under the new rules, goodwill and other intangible assets with indefinite
useful lives are no longer subject to amortization. As a result, we discontinued the
amortization of goodwill beginning November 1, 2002, and the fiscal year 2003 results were
favorably impacted by this reduction in amortization expense by $90 thousand, net of $53
thousand taxes, or $0.01 per diluted share. The statement requires a test for impairment
to be performed annually, or immediately if conditions indicate that impairment could
exist. Intangible assets with definite useful lives will continue to be amortized over
their estimated useful lives.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
estimated the fair value of our reporting units using a present value method that
discounted estimated future cash flows. The cash flow estimates incorporated assumptions
on future cash flow growth, terminal values and discount rates. Because the fair value of
some reporting units was below their carrying value, application of SFAS No. 142 required
us to complete the second step of the goodwill impairment test and compare the implied
fair value of each reporting units goodwill with the carrying value. As a result of
completing the impairment test, we recorded an impairment charge of $510 thousand, net of
$285 thousand taxes, to write-off the impaired goodwill amounts as a cumulative effect of
a change in accounting principle in the first quarter of 2003. We recorded an impairment
charge of $380 thousand, net of $214 thousand taxes, to write off the full value of
goodwill in our Process Control Systems segment. In our Electrical Power Products segment,
we recorded an impairment charge of $130 thousand, net of $71 thousand taxes. No
additional impairment was identified as a result of performing our annual impairment test
for 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following pro forma information is presented to reflect the net income and net earnings
per share to exclude amortization of goodwill for the years ended October 31, 2002 and
2001, as if SFAS No. 142 had been adopted as of the beginning of fiscal year 2001 (in
thousands, except per share data):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                |                        
|--------------------------------------------------------------- | -----------------------
|                                                                | Years Ended October 31,
|                                                                |                        
|Income from continuing operations before cumulative effect of   |                        
|change in accounting principle                                  |                        
|Cumulative effect of change in accounting principle             |                        
|                                                                |                        
|Reported net income                                             |                        
|Addback:  Amortization of goodwill, net of $53 and $53 thousand |                        
|taxes, respectively                                             |                        
|                                                                |                        
|Adjusted net income                                             |                        
|                                                                |                        
|Basic earnings per share:                                       |                        
|Net earnings per share - as reported                            |                        
|Amortization of goodwill                                        |                        
|                                                                |                        
|Adjusted net earnings per share                                 |                        
|                                                                |                        
|Diluted earnings per share:                                     |                        
|Net earnings per share - as reported                            |                        
|Amortization of goodwill                                        |                        
|                                                                |                        
|Adjusted net earnings per share                                 |                        
|                                                                |                        

38

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | A summary of goodwill and other intangible assets follows (in thousands):
| | -------------------------------------------------------------------------

|                                           |                  |                  |  |             
|------------------------------------------ | ---------------- | ---------------- |  | ------------
|                                           | October 31, 2003 | October 31, 2002
|                                           |                  |                 
|                                           |                  | Historical       |  | Accumulated 
|                                           |                  | Cost             |  | Amortization
|Goodwill                                   |                  | $304             |  | $181        
|Intangible assets subject to amortization: |                 
|Deferred loan costs                        |                  | 233              |  | 23          
|Patents and Trademarks                     |                  | 837              |  | 505         

| | The
above intangible assets are included in other assets on the consolidated balance sheet.
Amortization expense related to intangible assets subject to amortization for the year
ended October 31, 2003 was $72 thousand. Estimated amortization expense for each of the
subsequent five fiscal years is expected to be approximately $80 thousand.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

I.       Significant Sales Data

| | No
single customer or export country accounted for more than 10 percent of consolidated
revenues in fiscal years 2003, 2002 or 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------

|                                                  |                         |           | 
|------------------------------------------------- | ----------------------- | --------- | 
|Export sales are as follows (in thousands):       | Years Ended October 31,
|                                                  |                         | 2003      | 
|Europe (including former Soviet Union)            |                         | $     843 | 
|Far East                                          |                         | 13,120    | 
|Middle East and Africa                            |                         | $  5,255  | 
|North, Central and South America (excluding U.S.) |                         | 20,581    | 
|                                                  |                         |           | 
|Total export sales                                |                         | 39,799    | 
|                                                  |                         |           | 

J.       Commitments and Contingencies

Leases

| | We lease  certain  offices,  facilities  and  equipment  under  operating  leases  expiring at various dates through 2009. At
         October 31,  2003,  the minimum  annual  rental  commitments  under  leases  having terms in excess of one year are as follows (in
         thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | 
|----------------------- | 
|                        | 
|Years Ending            | 
|October 31,             | 
|2004                    | 
|2005                    | 
|2006                    | 
|2007                    | 
|2008                    | 
|Thereafter              | 
|                        | 
|Total lease commitments | 
|                        | 

| | Lease
expense for all operating leases was $1.5 million, $1.5 million and $1.6 million for
fiscal years 2003, 2002 and 2001, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------

39

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Letters
of Credit and Bonds

| | We
are contingently liable for secured and unsecured letters of credit of $8.1 million as of
October 31, 2003. We also had performance bonds totaling approximately $160.6 million that
were outstanding at October 31, 2003. Performance bonds are used to guarantee contract
performance to our customers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Litigation

| | We
are a party to disputes arising in the ordinary course of business. We do not believe that
the ultimate outcome of these disputes will materially affect the financial position or
future results of our operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other
Contingencies

| | The
Company is a partner in a joint venture (the Joint Venture),which provided
process control systems to the Central Artery/Tunnel Project (the Project) in
Boston, Massachusetts, under a contract with the Massachusetts Turnpike Authority (the
MTA). The Joint Venture has submitted claims against the MTA seeking
additional reimbursement for work done by the Joint Venture on the project. In a separate
matter, the Joint Venture received notice dated May 9, 2002 (the Notice) from
the MTA that a follow-on contractor has asserted a claim against the MTA in connection
with work done or to be done by the follow-on contractor on the project. One component of
the Project involved the Joint Venture performing specific work that the MTA then bid for
the follow-on contractor to complete. The follow-on contractors claim, in part,
includes unsubstantiated allegations that work performed by the Joint Venture was
insufficient and defective, thus possibly contributing to the follow-on contractors
claims for damages against the MTA. In the Notice of the potential claim, the MTA advised
the Joint Venture that if it is required to pay the follow-on contractor additional
amounts and such payment is the result of defective work by the Joint Venture, the MTA
will seek indemnification from the Joint Venture for such additional amounts.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Joint Venture has no reason to believe the systems it delivered under contract to the MTA
were defective and accordingly it intends to vigorously defend any such allegations. The
ultimate disposition of the Joint Ventures claim against the MTA and the MTAs
potential claim for indemnification based on the follow-on contractors claims are
not presently determinable. Although an unfavorable outcome to the follow-on
contractors claim could have a material adverse effect on the Companys
financial condition and results of operations, the Company believes that an unfavorable
outcome with respect to these matters, under the circumstances and on the basis of the
information now available, is unlikely.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

K.       Stock-Based
Compensation

| | We
provide an employee stock option plan in which 2.1 million shares of our common stock
would be made available through an incentive program for certain employees. The awards
available under the plan include both stock options and stock grants, and are subject to
certain conditions and restrictions as determined by the Compensation Committee of the
Board of Directors. There were no stock grants during fiscal years 2003, 2002 and 2001.
Stock options granted to the employees are non-qualified and are granted at an exercise
price equal to the fair market value of the common stock on the date of grant. Generally,
options granted have terms of seven years from the date of grant and will vest in
increments of 20 percent per year over a five year period. The plan provides for
additional stock to be awarded equal to 20 percent of all options which are exercised and
then held for a period of five years. There were 170,512 shares available to be granted
under this plan as of October 31, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

---

POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | In
2002, Stockholders approved the Non-Employee Director Stock Option Plan for the benefit of
members of the Board of Directors of the Company who, at the time of their service, are
not employees of the Company or any of its affiliates. Annually, each eligible Director
who is continuing to serve as a Director, will receive a grant of an option to purchase
2,000 shares of our Common Stock. The total number of shares of our common stock available
under this plan was 47,117 as of October 31, 2003. Stock options granted to the Directors
are non-qualified and are granted at an exercise price equal to the fair market value of
the common stock at the date of grant. Generally, options granted have expiration terms of
seven years from the date of grant and will vest in full one year from the grant date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock
option activity (number of shares) for the Company during fiscal years 2003, 2002 and 2001
was as follows:
| | ----------------------------------------------------------------------------------------------------------------

|                                                            |  |         |  
|----------------------------------------------------------- |  | ------- | -
|                                                            |  | 2003    |  
|Outstanding, beginning of year                              |  | 720,173 |  
|Granted:                                                    | 
|Stock options $17.85 per share                              |  | --      |  
|Stock options ranging from $13.06 to $27.10 per share       |  | --      |  
|Stock options $15.10 per share                              |  | 320,700 |  
|Exercised:                                                  | 
|Stock options $6.25 share                                   |  | --      |  
|Stock options $15.81 per share                              |  | (21,700 | )
|Stock options $8.50 per share                               |  | (28,610 | )
|Stock options $8.44 per share                               |  | --      |  
|Stock options $17.85 per share                              |  | (3,200  | )
|Forfeited:                                                  | 
|Stock options $6.25 share                                   |  | --      |  
|Stock options $15.81 per share                              |  | (600    | )
|Stock options $8.50 per share                               |  | --      |  
|Stock options $17.85 per share                              |  | --      |  
|                                                            |  |         |  
|Outstanding, ranging from $6.25 to $27.10 per share, at the | 
|end of year                                                 |  | 986,763 |  
|                                                            |  |         |  

| | The following table summarizes information about stock options outstanding as of October 31, 2003:
| | --------------------------------------------------------------------------------------------------

|                        |                               |                                            |                                |                               |                               
|----------------------- | ----------------------------- | ------------------------------------------ | ------------------------------ | ----------------------------- | ------------------------------
|Outstanding             | Exercisable                  
|                        |                              
|Range ofExercise Prices | Number Outstandingat 10/31/03 | Weighted Average
RemainingContractual Life | Weighted
AverageExercise Price | Number
Exercisable at10/31/03 | Weighted Average
ExercisePrice
|$     15.81             |                               |                                            | 91,210                         |                               | 0.7                           
|8.50                    |                               |                                            | 185,970                        |                               | 2.9                           
|8.44                    |                               |                                            | 10,000                         |                               | 3.6                           
|17.85                   |                               |                                            | 352,000                        |                               | 4.5                           
|13.06-27                | .10                           |                                            | 26,883                         |                               | 5.3                           
|15.10                   |                               |                                            | 320,700                        |                               | 6.7                           
|                        |                               |                                            |                                |                               |                               
|$8.44-27                | .10                           |                                            | 986,763                        |                               | 4.6                           
|                        |                               |                                            |                                |                               |                               

| | The
weighted average fair value of options granted was $7.16, $10.83, and $9.13 per option for
the fiscal years ended October 31, 2003, 2002, and 2001, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

41

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POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | In
accordance with the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, we have elected to account for our stock-based employee compensation
plans under the intrinsic value method established by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Under APB No. 25, no compensation expense is recorded when the exercise price of the
employee stock option is greater than or equal to the market price of the common stock on
the grant date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
compensation expense for our stock option plans had been determined based on the fair
value at the grant date for awards consistent with the provisions of SFAS No. 123, our net
income and earnings per share would have been as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                       |                         |                 |  |                
|------------------------------------------------------ | ----------------------- | --------------- |  | ---------------
|                                                       | Years Ended October 31,
|                                                       |                         | 2003            |  | 2002           
|Net income, as reported                                |                         | $        7,118  |  | $      17,905  
|Less:  Total stock-based employee compensation expense |                        
|determined under fair value based method for all       |                        
|awards, net of related tax effects                     |                         | (745)           |  | (834)          
|                                                       |                         |                 |  |                
|Pro forma net income                                   |                         | $        6,373  |  | $      17,071  
|                                                       |                         |                 |  |                
|Basic earnings per share:                              |                        
|As reported                                            |                         | $          0.67 |  | $          1.70
|Pro forma                                              |                         | $          0.60 |  | $          1.62
|Diluted earnings per share:                            |                        
|As reported                                            |                         | $          0.67 |  | $          1.67
|Pro forma                                              |                         | $          0.60 |  | $          1.60

| | The
effects of applying SFAS No. 123 in the pro forma disclosure above may not be indicative
of future amounts as additional awards in future years are anticipated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
| | --------------------------------------------------------------------------------------------------------------------------------------------------

|                                |  |         | 
|------------------------------- |  | ------- | 
|                                |  | 2003    | 
|Expected life of options        |  | 7 years | 
|Risk-free interest rate         |  | 3.98%   | 
|Expected dividend yield         |  | 0.00%   | 
|Expected stock price volatility |  | 38.51%  | 

L.       Fair Value of
Financial Instruments

| | Our
financial instruments include short-term investments, marketable securities and debt
obligations. The book value of short-term investments is considered to be representative
of fair value because of the short maturity of these instruments. The carrying value of
our debt approximates fair value as interest rates are indexed to LIBOR or the banks
prime rate. We believe the Company could obtain equivalent rates from other lending
institutions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

M.       Business Segments

| | We
manage our business through operating subsidiaries, which are combined into two reportable
business segments: Electrical Power Products and Process Control Systems. Electrical Power
Products includes equipment and systems for the distribution and control of electrical
energy. Process Control Systems consists principally of instrumentation, computer
controls, communications and data management systems.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

42

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POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

| | Our
Electrical Power Products segment serves the electrical utility and various industrial
markets with equipment and systems. Electrical Power Products was previously reported as
two separate segments: Switchgear and Bus Duct. Because these segments share basic
characteristics, including common raw materials, engineering techniques and manufacturing
processes, and operate in the same competitive environment with substantially similar
general economic and industrial conditions, we determined that reporting the business
activities of Switchgear and Bus Duct products as one segment  Electrical Power
Products  more accurately reflects our business operations. Historically, we
reported our Electrical Power Products segment as two segments principally as a reflection
of our organizational structure. The years ended October 31, 2002 and 2001 have been
revised to conform to the new segment structure.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tables below reflect certain information relating to our operations by segment. All
revenues represent sales from unaffiliated customers. The accounting policies of the
segments are the same as those described in the summary of significant accounting
policies. For purposes of this presentation, all general corporate expenses have been
allocated among operating segments based primarily on revenues. The corporate assets are
mainly cash and cash equivalents and marketable securities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Detailed information regarding our business segments is shown below (in thousands):
| | -----------------------------------------------------------------------------------

|                          |                         |          | 
|------------------------- | ----------------------- | -------- | 
|                          | Years Ended October 31,
|                          |                         | 2003     | 
|Revenues:                 |                        
|Electrical Power Products |                         | $227,012 | 
|Process Control Systems   |                         | 26,369   | 
|                          |                         |          | 
|Total                     |                         | $253,381 | 
|                          |                         |          | 

| | Income from continuing operations before income taxes
  and cumulative effect of change in
accounting   principle:
| | ------------------------------------------------------------------------------------------------------------------

|                          |  |           | 
|------------------------- |  | --------- | 
|Electrical Power Products |  | $  12,491 | 
|Process Control Systems   |  | 1,353     | 
|                          |  |           | 
|Total                     |  | $  13,844 | 
|                          |  |           | 
|Assets:                   | 
|Electrical Power Products |  | $127,721  | 
|Process Control Systems   |  | 14,269    | 
|Corporate                 |  | 48,350    | 
|                          |  |           | 
|Total                     |  | $190,340  | 
|                          |  |           | 

43

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POWELL INDUSTRIES, INC.
AND SUBSIDIARIES 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

N.       Quarterly Results of
Operations (unaudited)

| | The
table below sets forth the unaudited consolidated operating results by fiscal quarter for
the years ended October 31, 2003 and 2002 (in thousands, except per share data):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          |               |  |   |        | 
|----------------------------------------- | ------------- |  | - | ------ | 
|                                          | 2003 Quarters
|                                          |              
|                                          |               |  |   | First  | 
|Revenues                                  |               |  | $ | 71,580 | 
|Gross profit                              |               |  |   | 14,232 | 
|Income from continuing operations before  |               | 
|cumulative effect of change in accounting |               | 
|principle                                 |               |  |   | 3,034  | 
|Net income                                |               |  |   | 2,524  | 
|Basic earnings per share:                 |               | 
|Earnings from continuing operations       |               |  |   | 0.29   | 
|Net earnings                              |               |  |   | 0.24   | 
|Diluted earnings per share:               |               | 
|Earnings from continuing operations       |               |  |   | 0.28   | 
|Net earnings                              |               |  |   | 0.24   | 

|                           |               |  |   |        | 
|-------------------------- | ------------- |  | - | ------ | 
|                           | 2002 Quarters
|                           |              
|                           |               |  |   | First  | 
|Revenues                   |               |  | $ | 76,487 | 
|Gross profit               |               |  |   | 15,591 | 
|Net income                 |               |  |   | 3,734  | 
|Basic earnings per share   |               |  |   | 0.36   | 
|Diluted earnings per share |               |  |   | 0.35   | 

| | The
sum of the individual earnings per share amounts may not agree with year-to-date earnings
per share as each periods computation is based on the weighted average number of
shares outstanding during the period.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44

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Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

| | None
| | ----

Item 9A.     Controls and
Procedures

| | Management,
with the participation of our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report. Based on such
evaluation, our CEO and CFO have each concluded that as of the end of such period, our
disclosure controls and procedures were effective to ensure that information required to
be disclosed by us in reports that we file or submit under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms and that such
information is accumulated and communicated to our management, including the CEO and CFO,
as appropriate, to allow timely decisions regarding required disclosures.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
also maintain a system of internal accounting controls that are designed to provide
reasonable assurance that our books and records accurately reflect our transactions and
that our policies and procedures are followed. There have not been any changes in our
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fourth quarter
of our 2003 fiscal year that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PART III

Items 10, 11, 12, 13, and 14.
Directors and Executive Officers of the Registrant; Executive Compensation; Security
Ownership of Certain Beneficial Owners and Management; Certain Relationships and Related
Transactions; and Principal Accountant Fees and Services

The
information required by these items is incorporated in this Annual Report by reference to
our definitive proxy statement pursuant to Regulation 14A, to be filed with the Securities
and Exchange Commission not later than 120 days after the close of our fiscal year ended
October 31, 2003, under the headings set forth above.

PART IV

Item 15.       Exhibits, Financial
Statement Schedules, and Reports on Form 8-K

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The following exhibits are filed as part of this Annual Report on Form 10-K, or are incorporated herein by reference.  Where
  an exhibit is incorporated herein, an asterisk (*) precedes the exhibit number.
 1.       Financial Statements.  Reference is made to the Index to Consolidated Financial Statements at Item 8 of this report.
 2.       All schedules are omitted because they are not applicable or the required information is shown in the financial
         statements or the notes to the financial statements.

45

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|                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
           *
           *
           *
           *
           * | 3.       Exhibits
 3.1 -            Articles of Incorporation and Certificates of Amendment of Powell Industries, Inc. dated July 20, 1987 and March
               13, 1992 (filed as Exhibit 3 to our Form 10-K for the fiscal year ended October 31, 1982, Form 10-Q for the
               quarter ended July 31, 1987, and Form 10-Q for the quarter ended April 30, 1992, respectively, and incorporated
                herein by reference).
 3.2 -            By-laws of Powell Industries, Inc. (filed as Exhibit 3.2 to our Form 10-Q for the quarter ended April 30, 1995 and
                incorporated herein by reference).
10.1 -            Powell Industries, Inc., Incentive Compensation Plan
10.2 -            Description of Supplemental Executive Benefit Plan (filed as Exhibit 10 to our Form 10-K for the fiscal year ended
                October 31, 1984, and incorporated herein by reference).
10.3 -            1992 Powell Industries, Inc. Stock Option Plan (filed as Exhibit 4.2 to our registration statement on Form S-8
                dated July 26, 1994 (File No. 33-81998) and incorporated herein by reference).
10.4 -            Amendment to 1992 Powell Industries, Inc. Stock Option Plan (filed as Exhibit 10.8 to our Form 10-Q for the
                quarter ended April 30, 1996 and incorporated herein by reference).
10.5 -            Amendment to 1992 Powell Industries, Inc. Stock Option Plan (the cover of the 1992 Powell Industries, Inc. Stock
                Option Plan has been noted to reflect the increase in the number of shares authorized for issuance under the Plan
                from 1,500,000 to 2,100,000, which increase was approved by the stockholders of the Company at the 2001 Annual
                Meeting of Stockholders).
10.6 -            Powell Industries, Inc. Directors' Fees Program (filed as Exhibit 10.7 to our Form 10-K for the fiscal year ended
                October 31, 1992, and incorporated herein by reference).
10.7 -            Powell Industries, Inc. Executive Severance Protection Plan (filed as Exhibit 10.7 to our Form 10-K for the fiscal
                year ended October 31, 2002, and incorporated herein by reference).
10.8 -            Powell Industries, Inc. Non-Employee Directors Stock Option Plan (filed as Exhibit 10.9 to our Form 10-K for the
                fiscal year ended October 31, 2002, and incorporated herein by reference).
10.9 -            Powell Industries, Inc. Deferred Compensation Plan (filed as Exhibit 10.9 to our Form 10-K for the fiscal year
                ended October 31, 2002, and incorporated herein by reference).
10.10 -      Amended Loan Agreement dated October 31, 2003, between Powell Industries, Inc. and Bank of America, N.A.
21.1 -            Subsidiaries of Powell Industries, Inc.
31.1 -            Certification of Thomas W. Powell pursuant to Rule 13a-14(a)/15d-14(a).
31.2 -            Certification of Don R. Madison pursuant to Rule 13a-14(a)/15d-14(a).
32.1 -            Certification of Thomas W. Powell Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
                of the Sarbanes-Oxley Act of 2002.

46

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|                            |                                                                                                                                                                                                                                                                                          
|--------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*
            
         (b) | 32.2 -            Certification of Don R. Madison Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
                the Sarbanes-Oxley Act of 2002.
       Reports on Form 8-K.
  Form 8-K filed on August 29, 2003
  Form 8-K filed on December 15, 2003

47

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SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, there unto duly authorized.

| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | POWELL INDUSTRIES, INC.By    /s/   THOMAS W. POWELL
      Thomas W. Powell
      President and Chief Executive Officer
      (Principal Executive)By    /s/   DON R. MADISON
      Don R. Madison
      Vice President and Chief Financial Officer
      (Principal Financial and Accounting Officer)

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the date indicated:

|                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Signature    /s/  THOMAS W. POWELL      
          Thomas W. Powell/s/  JOSEPH L. BECHERER    
          Joseph L. Becherer/s/  EUGENE L. BUTLER     
          Eugene L. Butler/s/  JAMES F. CLARK        
          James F. Clark/s/  STEPHEN W. SEALE, JR. 
          Stephen W. Seale, Jr./s/  ROBERT C. TRANCHON    
          Robert C. Tranchon/s/  RONALD J. WOLNY       
          Ronald J. Wolny | Title
Chairman of the Board
           Director
           Director
           Director
           Director
           Director
           Director

Date: December 31, 2003

48

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