**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

| x | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|---|---------------------------------------------------------------------------------------------------------|

**For the quarterly periodended September 30, 2004**

**OR**

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

**For the transition periodfrom            to           **

**Commissionfile number  001-32164**

**INFRASOURCE SERVICES, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                    | ** ** | **03-0523754**       |
|---------------------------------|------------|----------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer     |
| incorporation or organization)  |       | Identification  No.) |

**100West Sixth Street, Suite 300, Media, PA**

(Address of principalexecutive offices)

**19063**

(Zip Code)

**(610) 480-8000**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yeso No x

At November 10, 2004,there were 39,167,157 shares of InfraSource Services, Inc. Common Stock,par value of $.001, outstanding.

 

----

 

**For the QuarterEnded September 30, 2004**

**FORM 10-Q**

**INFRASOURCESERVICES, INC. AND SUBSIDIARIES**

**Table of Contents**

|                                         | ** **                                                                                                                                                                                                                                                                                            | **Page #** |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| Part I—FINANCIAL  INFORMATION |                                                                                                                                                                                                                                                                                                  |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item 1.                                 | Financial  Statements (Unaudited)                                                                                                                                                                                                                                                                     |            |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
|                                    | Condensed  Consolidated Balance Sheets at  December 31, 2003 and September 30, 2004                                                                                                                                                                                                         | 2               |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
|                                    | Condensed  Consolidated Statements of Operations for the periods June 21, 2003 to  September 23, 2003 and January 1, 2003 to September 23, 2003  (predecessor entity—InfraSource Incorporated and Subsidiaries) and the three  and nine months ended September 30, 2004 | 3               |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
|                                    | Condensed  Consolidated Statements of Cash Flows for the period January 1, 2003 to  September 23, 2003 (predecessor entity—InfraSource Incorporated and  Subsidiaries) and the nine months ended September 30, 2004                                                               | 4-5             |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
|                                    | Notes to  Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                 | 6               |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item  2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                           | 24              |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item  3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                           | 46              |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item 4.                                 | Controls and Procedures                                                                                                                                                                                                                                                                               | 46              |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| PART II—OTHER  INFORMATION    |                                                                                                                                                                                                                                                                                                  |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item 1.                                 | Legal Proceedings                                                                                                                                                                                                                                                                                     | 47              |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item  2.                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                          | 47              |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item 3.                                 | Defaults Upon  Senior Securities                                                                                                                                                                                                                                                                      | 48              |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item  4.                                | Submission  of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                  | 48              |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item 5.                                 | Other Information                                                                                                                                                                                                                                                                                     | 48              |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| Item 6.                                 | Exhibits                                                                                                                                                                                                                                                                                              | 48              |
|                                    |                                                                                                                                                                                                                                                                                                  |            |
| SIGNATURES                              | 49                                                                                                                                                                                                                                                                                                    |

 

1

----

**PART I—FINANCIALINFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**INFRASOURCESERVICES, INC. AND SUBSIDIARIES**Condensed Consolidated BalanceSheets(Unaudited)(In thousands, except share data)
| ** **                                                                                                                              | ** ** | **December 31,  2003** | ** ** | **September 30,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ASSETS                                                                                                                                  |       |                        |       |                         |       |   |   |   |   |
| Current assets:                                                                                                                         |       |                        |       |                         |       |   |   |   |   |
| Cash and cash equivalents                                                                                                               |       |                        | $          | 12,176                       |       |   |   | $ | 6,697 |   |   |
| Contract receivables (less allowances for doubtful  accounts of $4,917 and $3,687, respectively)                                        |       |                        | 69,328     |                         |       |   | 98,397 |   |   |
| Contract receivables due from related parties                                                                                           |       |                        | 14,617     |                         |       |   | — |   |   |
| Costs and estimated earnings in excess of billings                                                                                      |       |                        | 33,919     |                         |       |   | 75,090 |   |   |
| Inventories                                                                                                                             |       |                        | 8,473      |                         |       |   | 10,329 |   |   |
| Deferred income taxes                                                                                                                   |       |                        | 685        |                         |       |   | 1,509 |   |   |
| Other current assets                                                                                                                    |       |                        | 4,310      |                         |       |   | 13,834 |   |   |
| Due from related parties, net                                                                                                           |       |                        | 10,907     |                         |       |   | — |   |   |
| Current assets—discontinued operations                                                                                             |       |                        | 6,339      |                         |       |   | 2,347 |   |   |
| Total current assets                                                                                                                    |       |                        | 160,754    |                         |       |   | 208,203 |   |   |
| Property and equipment (less accumulated depreciation  of $5,292 and $22,541, respectively)                                             |       |                        | 116,513    |                         |       |   | 142,508 |   |   |
| Property and  equipment—related parties                                                                                            |       |                        | 7,218      |                         |       |   | — |   |   |
| Goodwill                                                                                                                                |       |                        | 68,877     |                         |       |   | 134,432 |   |   |
| Intangible assets  (less accumulated amortization of $2,600 and $13,589, respectively)                                                  |       |                        | 5,400      |                         |       |   | 5,911 |   |   |
| Deferred charges  and other assets, net                                                                                                 |       |                        | 7,309      |                         |       |   | 9,813 |   |   |
| Deferred income  taxes                                                                                                                  |       |                        | 1,058      |                         |       |   | 1,154 |   |   |
| Noncurrent assets—discontinued  operations                                                                                         |       |                        | 448        |                         |       |   | 482 |   |   |
| Total assets                                                                                                                            |       |                        | $          | 367,577                      |       |   |   | $ | 502,503 |   |   |
| Current liabilities:                                                                                                                    |       |                        |       |                         |       |   |   |   |   |
| Current portion of long-term debt and capital lease  obligations                                                                        |       |                        | $          | 1,500                        |       |   |   | $ | 983 |   |   |
| Revolving credit facility borrowings                                                                                                    |       |                        | —     |                         |       |   | 4,000 |   |   |
| Accounts payable                                                                                                                        |       |                        | 12,970     |                         |       |   | 27,173 |   |   |
| Other current and accrued liabilities                                                                                                   |       |                        | 41,932     |                         |       |   | 46,450 |   |   |
| Accrued insurance reserves                                                                                                              |       |                        | 19,773     |                         |       |   | 23,652 |   |   |
| Billings in excess of costs and estimated earnings                                                                                      |       |                        | 8,019      |                         |       |   | 6,359 |   |   |
| Deferred revenues                                                                                                                       |       |                        | 3,393      |                         |       |   | 5,378 |   |   |
| Other liabilities—related parties                                                                                                  |       |                        | 7,218      |                         |       |   | — |   |   |
| Current liabilities—discontinued operations                                                                                        |       |                        | 1,043      |                         |       |   | 2,732 |   |   |
| Total current liabilities                                                                                                               |       |                        | 95,848     |                         |       |   | 116,727 |   |   |
| Long-term debt and capital lease obligations                                                                                            |       |                        | 162,086    |                         |       |   | 84,100 |   |   |
| Long-term debt—related  party                                                                                                      |       |                        | —     |                         |       |   | 1,000 |   |   |
| Deferred revenues                                                                                                                       |       |                        | 12,750     |                         |       |   | 16,778 |   |   |
| Other  long-term liabilities                                                                                                            |       |                        | 3,167      |                         |       |   | 6,989 |   |   |
| Non-current  liabilities—discontinued operations                                                                                   |       |                        | 877        |                         |       |   | 11 |   |   |
| Total liabilities                                                                                                                       |       |                        | 274,728    |                         |       |   | 225,605 |   |   |
| Commitments and contingencies                                                                                                           |       |                        |       |                         |       |   |   |   |   |
| Shareholders’ equity:                                                                                                              |       |                        |       |                         |       |   |   |   |   |
| Preferred stock, $.001 par value (authorized—12,000,000  shares; 0 shares issued and outstanding)                                  |       |                        | —     |                         |       |   | — |   |   |
| Common stock $.001 par value (authorized—120,000,000  shares; issued and outstanding—19,914,840 and 38,817,462, respectively) |       |                        | 20         |                         |       |   | 39 |   |   |
| Additional paid-in capital                                                                                                              |       |                        | 91,695     |                         |       |   | 271,640 |   |   |
| Deferred compensation                                                                                                                   |       |                        | (215       | )                            |       |   | (422 | ) |   |
| Retained earnings                                                                                                                       |       |                        | 1,335      |                         |       |   | 5,432 |   |   |
| Accumulated other comprehensive income                                                                                                  |       |                        | 14         |                         |       |   | 209 |   |   |
| Total shareholders’ equity                                                                                                         |       |                        | 92,849     |                         |       |   | 276,898 |   |   |
| Total liabilities and  shareholders’ equity                                                                                        |       |                        | $          | 367,577                      |       |   |   | $ | 502,503 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

2

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIESCondensed Consolidated Statementsof Operations (Unaudited)(In thousands, except per share data)**
| ** **                                                                                                                              | ** ** | **For the Period  June 21 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries) (Note 1)** | ** ** | ** ** | **Three Months  Ended  September 30, 2004** | ** ** | ** ** | **For the Period  January 1 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries) (Note 1)** | ** ** | ** ** | **Nine Months  Ended  September 30, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------------------------------------------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|
| Contract revenues                                                                                                                       |       |                                                                                                                                                                                   | $          | 112,481    |                                                  |       |       |                                                                                                                                                                                     | $          | 164,209    |                                                      |       |   |   | $ | 329,150 |   |   |   |   | $ | 456,622 |   |   |
| Contract revenues—related  parties                                                                                                 |       |                                                                                                                                                                                   | 22,599     |       |                                                  |       |       | —                                                                                                                                                                                   |       |       |                                                      |       | 53,477 |   |   |   |   | — |   |   |
| Total contract  revenues                                                                                                                |       |                                                                                                                                                                                   | 135,080    |       |                                                  |       |       | 164,209                                                                                                                                                                                  |       |       |                                                      |       | 382,627 |   |   |   |   | 456,622 |   |   |
| Cost of revenues                                                                                                                        |       |                                                                                                                                                                                   | 115,022    |       |                                                  |       |       | 138,235                                                                                                                                                                                  |       |       |                                                      |       | 330,322 |   |   |   |   | 381,173 |   |   |
| Gross profit                                                                                                                            |       |                                                                                                                                                                                   | 20,058     |       |                                                  |       |       | 25,974                                                                                                                                                                                   |       |       |                                                      |       | 52,305 |   |   |   |   | 75,449 |   |   |
| Selling, general  and administrative expenses                                                                                           |       |                                                                                                                                                                                   | 25,864     |       |                                                  |       |       | 16,197                                                                                                                                                                                   |       |       |                                                      |       | 50,062 |   |   |   |   | 47,747 |   |   |
| Merger related  costs                                                                                                                   |       |                                                                                                                                                                                   | 14,311     |       |                                                  |       |       | (334                                                                                                                                                                                     | )          |       |                                                      |       | 16,242 |   |   |   |   | (334 | ) |   |
| Provision  (recoveries) of uncollectible accounts                                                                                       |       |                                                                                                                                                                                   | 193        |       |                                                  |       |       | 104                                                                                                                                                                                      |       |       |                                                      |       | 236 |   |   |   |   | (367 | ) |   |
| Amortization of  intangible assets                                                                                                      |       |                                                                                                                                                                                   | —     |       |                                                  |       |       | 2,420                                                                                                                                                                                    |       |       |                                                      |       | — |   |   |   |   | 10,989 |   |   |
| Income (loss) from  operations                                                                                                          |       |                                                                                                                                                                                   | (20,310    | )          |                                                  |       |       | 7,587                                                                                                                                                                                    |       |       |                                                      |       | (14,235 | ) |   |   |   | 17,414 |   |   |
| Interest income                                                                                                                         |       |                                                                                                                                                                                   | 415        |       |                                                  |       |       | 228                                                                                                                                                                                      |       |       |                                                      |       | 1,376 |   |   |   |   | 350 |   |   |
| Interest expense  and amortization of debt discount                                                                                     |       |                                                                                                                                                                                   | (24        | )          |                                                  |       |       | (1,969                                                                                                                                                                                   | )          |       |                                                      |       | (27 | ) |   |   |   | (8,161 | ) |   |
| Loss on early extinguishment of debt                                                                                                    |       |                                                                                                                                                                                   | —     |       |                                                  |       |       | —                                                                                                                                                                                   |       |       |                                                      |       | — |   |   |   |   | (5,549 | ) |   |
| Other income  (expense), net                                                                                                            |       |                                                                                                                                                                                   | (3,426     | )          |                                                  |       |       | 955                                                                                                                                                                                      |       |       |                                                      |       | (3,556 | ) |   |   |   | 1,126 |   |   |
| Income (loss)  before income taxes                                                                                                      |       |                                                                                                                                                                                   | (23,345    | )          |                                                  |       |       | 6,801                                                                                                                                                                                    |       |       |                                                      |       | (16,442 | ) |   |   |   | 5,180 |   |   |
| Income tax expense  (benefit)                                                                                                           |       |                                                                                                                                                                                   | (7,886     | )          |                                                  |       |       | 2,760                                                                                                                                                                                    |       |       |                                                      |       | (5,240 | ) |   |   |   | 2,072 |   |   |
| Income (loss) from  continuing operations                                                                                               |       |                                                                                                                                                                                   | (15,459    | )          |                                                  |       |       | 4,041                                                                                                                                                                                    |       |       |                                                      |       | (11,202 | ) |   |   |   | 3,108 |   |   |
| Discontinued operations:                                                                                                                |       |                                                                                                                                                                                   |       |       |                                                  |       |       |                                                                                                                                                                                     |       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Income (loss) from  discontinued operations (net of income tax provision (benefit) of $(3,345),  $281, $(6,503) and $246, respectively) |       |                                                                                                                                                                                   | (6,769     | )          |                                                  |       |       | 418                                                                                                                                                                                      |       |       |                                                      |       | (12,316 | ) |   |   |   | 396 |   |   |
| Gain on  disposition of discontinued operation (net of income tax provision of $0,  $413, $0 and $413, respectively)                    |       |                                                                                                                                                                                   | —     |       |                                                  |       |       | 593                                                                                                                                                                                      |       |       |                                                      |       | — |   |   |   |   | 593 |   |   |
| Net income (loss)                                                                                                                       |       |                                                                                                                                                                                   | $          | (22,228    | )                                                     |       |       |                                                                                                                                                                                     | $          | 5,052      |                                                      |       |   |   | $ | (23,518 | ) |   |   |   | $ | 4,097 |   |   |
| Basic income (loss) per share:                                                                                                          |       |                                                                                                                                                                                   |       |       |                                                  |       |       |                                                                                                                                                                                     |       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations                                                                                               |       |                                                                                                                                                                                   | $          | (0.33      | )                                                     |       |       |                                                                                                                                                                                     | $          | 0.10       |                                                      |       |   |   | $ | (0.24 | ) |   |   |   | $ | 0.09 |   |   |
| Income (loss) from  discontinued operations                                                                                             |       |                                                                                                                                                                                   | (0.14      | )          |                                                  |       |       | 0.01                                                                                                                                                                                     |       |       |                                                      |       | (0.26 | ) |   |   |   | 0.01 |   |   |
| Gain on  disposition of discontinued operation                                                                                          |       |                                                                                                                                                                                   | —     |       |                                                  |       |       | 0.02                                                                                                                                                                                     |       |       |                                                      |       | — |   |   |   |   | 0.02 |   |   |
| Net income (loss)                                                                                                                       |       |                                                                                                                                                                                   | $          | (0.47      | )                                                     |       |       |                                                                                                                                                                                     | $          | 0.13       |                                                      |       |   |   | $ | (0.50 | ) |   |   |   | $ | 0.12 |   |   |
| Weighted average  basic common shares outstanding                                                                                       |       |                                                                                                                                                                                   | 47,037     |       |                                                  |       |       | 38,690                                                                                                                                                                                   |       |       |                                                      |       | 47,585 |   |   |   |   | 33,924 |   |   |
| Diluted income (loss) per share:                                                                                                        |       |                                                                                                                                                                                   |       |       |                                                  |       |       |                                                                                                                                                                                     |       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations                                                                                               |       |                                                                                                                                                                                   | $          | (0.33      | )                                                     |       |       |                                                                                                                                                                                     | $          | 0.10       |                                                      |       |   |   | $ | (0.24 | ) |   |   |   | $ | 0.09 |   |   |
| Income (loss) from  discontinued operations                                                                                             |       |                                                                                                                                                                                   | (0.14      | )          |                                                  |       |       | 0.01                                                                                                                                                                                     |       |       |                                                      |       | (0.26 | ) |   |   |   | 0.01 |   |   |
| Gain on  disposition of discontinued operation                                                                                          |       |                                                                                                                                                                                   | —     |       |                                                  |       |       | 0.02                                                                                                                                                                                     |       |       |                                                      |       | — |   |   |   |   | 0.02 |   |   |
| Net income (loss)                                                                                                                       |       |                                                                                                                                                                                   | $          | (0.47      | )                                                     |       |       |                                                                                                                                                                                     | $          | 0.13       |                                                      |       |   |   | $ | (0.50 | ) |   |   |   | $ | 0.12 |   |   |
| Weighted average diluted  common shares outstanding                                                                                     |       |                                                                                                                                                                                   | 47,037     |       |                                                  |       |       | 39,653                                                                                                                                                                                   |       |       |                                                      |       | 47,585 |   |   |   |   | 34,918 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

3

----

**INFRASOURCESERVICES, INC. AND SUBSIDIARIESCondensed Consolidated Statementsof Cash Flows(Unaudited)(In thousands)**
| ** **                                                                                                             | ** ** | **For the Period  January 1 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries)  (Note 1)** | ** ** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------------------------------------------------|------------|
| Cash flows from  operating activities:                                                                                 |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| Income (loss) from continuing operations                                                                               |       |                                                                                                                                                                                 | $          | (11,202    | )                                                     |       |   |   | $ | 3,108 |   |   |
| Adjustments to reconcile income (loss) from  continuing operations to cash provided by (used in) operating activities: |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| Depreciation                                                                                                           |       |                                                                                                                                                                                 | 20,917     |       |                                                  |       |   | 17,646 |   |   |
| Amortization of intangibles                                                                                            |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 10,989 |   |   |
| Deferred income taxes                                                                                                  |       |                                                                                                                                                                                 | (7,533     | )          |                                                  |       |   | (7,875 | ) |   |
| Gain on sale of discontinued operations                                                                                |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (1,006 | ) |   |
| Loss on early extinguishment of debt                                                                                   |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 5,549 |   |   |
| Other                                                                                                                  |       |                                                                                                                                                                                 | 381        |       |                                                  |       |   | (3,999 | ) |   |
| Changes in operating assets and liabilities, net of  effects of acquisitions:                                          |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| Contract receivables, net                                                                                              |       |                                                                                                                                                                                 | 15,281     |       |                                                  |       |   | (14,263 | ) |   |
| Contract receivables due from related parties, net                                                                     |       |                                                                                                                                                                                 | (2,068     | )          |                                                  |       |   | 14,617 |   |   |
| Costs and estimated earnings in excess of billings,  net                                                               |       |                                                                                                                                                                                 | (22,788    | )          |                                                  |       |   | (34,493 | ) |   |
| Inventories                                                                                                            |       |                                                                                                                                                                                 | (2,591     | )          |                                                  |       |   | (1,856 | ) |   |
| Due from affiliates                                                                                                    |       |                                                                                                                                                                                 | (9,552     | )          |                                                  |       |   | — |   |   |
| Other current assets                                                                                                   |       |                                                                                                                                                                                 | 1,520      |       |                                                  |       |   | 5,482 |   |   |
| Deferred charges and other assets                                                                                      |       |                                                                                                                                                                                 | (216       | )          |                                                  |       |   | 2,276 |   |   |
| Accounts payable                                                                                                       |       |                                                                                                                                                                                 | (3,793     | )          |                                                  |       |   | 3,464 |   |   |
| Accrued taxes due to related parties                                                                                   |       |                                                                                                                                                                                 | 3,847      |       |                                                  |       |   | — |   |   |
| Other current and accrued liabilities                                                                                  |       |                                                                                                                                                                                 | 13,230     |       |                                                  |       |   | (9,777 | ) |   |
| Accrued insurance reserves                                                                                             |       |                                                                                                                                                                                 | 8,026      |       |                                                  |       |   | 3,879 |   |   |
| Deferred revenue                                                                                                       |       |                                                                                                                                                                                 | 9,196      |       |                                                  |       |   | 3,555 |   |   |
| Other long term liabilities                                                                                            |       |                                                                                                                                                                                 | 5,179      |       |                                                  |       |   | 1,783 |   |   |
| Net cash flows provided by (used in) operating  activities from continuing operations                                  |       |                                                                                                                                                                                 | 17,834     |       |                                                  |       |   | (921 | ) |   |
| Net cash flows provided by (used in) operating  activities from discontinued operations                                |       |                                                                                                                                                                                 | (2,484     | )          |                                                  |       |   | 1,614 |   |   |
| Net cash flows provided by operating activities                                                                        |       |                                                                                                                                                                                 | 15,350     |       |                                                  |       |   | 693 |   |   |
| Cash flows from  investing activities:                                                                                 |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| Acquisitions of businesses, net of cash acquired                                                                       |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (49,571 | ) |   |
| Proceeds from sale of discontinued operations                                                                          |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 8,616 |   |   |
| Proceeds from sales of equipment                                                                                       |       |                                                                                                                                                                                 | 3,833      |       |                                                  |       |   | 3,299 |   |   |
| Additions to property, plant and equipment                                                                             |       |                                                                                                                                                                                 | (16,374    | )          |                                                  |       |   | (17,485 | ) |   |
| Net cash flows used in investing activities from  continuing operations                                                |       |                                                                                                                                                                                 | (12,541    | )          |                                                  |       |   | (55,141 | ) |   |
| Net cash flows provided by (used in) investing  activities from discontinued operations                                |       |                                                                                                                                                                                 | 4,995      |       |                                                  |       |   | (451 | ) |   |
| Net cash flows used in investing activities                                                                            |       |                                                                                                                                                                                 | (7,546     | )          |                                                  |       |   | (55,592 | ) |   |
| Cash flows from  financing activities:                                                                                 |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| Increase in revolving credit facility borrowings                                                                       |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 4,000 |   |   |
| Repayments of long-term debt and capital lease  obligations                                                            |       |                                                                                                                                                                                 | (236       | )          |                                                  |       |   | (84,766 | ) |   |
| Purchase of treasury stock                                                                                             |       |                                                                                                                                                                                 | (6,998     | )          |                                                  |       |   | — |   |   |
| Redemption of redeemable stock                                                                                         |       |                                                                                                                                                                                 | (2,954     | )          |                                                  |       |   | — |   |   |
| Proceeds from sale of common stock                                                                                     |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 130,343 |   |   |
| Net cash flows (used in) provided by financing  activities from continuing operations                                  |       |                                                                                                                                                                                 | (10,188    | )          |                                                  |       |   | 49,577 |   |   |
| Net cash flows used in financing activities from  discontinued operations                                              |       |                                                                                                                                                                                 | (936       | )          |                                                  |       |   | — |   |   |
| Net cash flows (used in) provided by financing  activities                                                             |       |                                                                                                                                                                                 | (11,124    | )          |                                                  |       |   | 49,577 |   |   |
| Cash and cash  equivalents:                                                                                            |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| Net decrease in cash and cash equivalents                                                                              |       |                                                                                                                                                                                 | (3,320     | )          |                                                  |       |   | (5,322 | ) |   |
| Cash and cash equivalents transferred to discontinued  operations                                                      |       |                                                                                                                                                                                 | (1,575     | )          |                                                  |       |   | (157 | ) |   |
| Cash and cash equivalents—beginning of period                                                                     |       |                                                                                                                                                                                 | 20,784     |       |                                                  |       |   | 12,176 |   |   |
| Cash and cash  equivalents—end of period                                                                          |       |                                                                                                                                                                                 | $          | 15,889     |                                                  |       |   |   | $ | 6,697 |   |   |

 

4

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows (Continued)(Unaudited)(In thousands)**
| ** **                                                                                                    | ** ** | **For the Period  January 1 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries)  (Note 1)** | ** ** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------------------------------------------------|------------|
| **Supplemental Disclosure of  Non-Cash Investing and Financing Activities:**                                  |       |                                                                                                                                                                                 | ** ** |       |                                                  |       |   | ** ** |   |   |
| Contribution receivable from Parent                                                                           |       |                                                                                                                                                                                 | $          | 2,954      |                                                  |       |   |   | $ | — |   |   |
| Issuance of preferred stock                                                                                   |       |                                                                                                                                                                                 | 4,100      |       |                                                  |       |   | — |   |   |
| Distribution of net assets of Non-Acquired Group to  Parent                                                   |       |                                                                                                                                                                                 | 97,199     |       |                                                  |       |   | — |   |   |
| Distribution of property and equipment owed to  related party                                                 |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 7,218 |   |   |
| Loss on early extinguishment of the note payable to  Exelon                                                   |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 5,549 |   |   |
| We acquired all of  the voting interests of Maslonka for $77,571 in January, 2004                             |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| In conjunction with this  acquisition, assets acquired and liabilities assumed were as follows:               |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| Fair value of assets acquired                                                                                 |       |                                                                                                                                                                                 | $          | —     |                                                  |       |   |   | $ | 41,093 |   |   |
| Goodwill                                                                                                      |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 59,644 |   |   |
| Liability to sellers for taxes and cash holdback                                                              |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (1,704 | ) |   |
| Liabilities assumed                                                                                           |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (23,166 | ) |   |
| Equity issued to sellers                                                                                      |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (50,671 | ) |   |
| Cash paid for acquisition, net of cash acquired                                                               |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (25,196 | ) |   |
| We acquired  substantially all of the assets of Utili-trax  for $5,168 in August, 2004                        |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| In conjunction with this  acquisition, assets acquired and liabilities assumed were as follows:               |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| Fair value of assets acquired                                                                                 |       |                                                                                                                                                                                 | $          | —     |                                                  |       |   |   | $ | 3,073 |   |   |
| Goodwill                                                                                                      |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 2,319 |   |   |
| Receivable from seller for management agreements                                                              |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 290 |   |   |
| Liabilities assumed                                                                                           |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (224 | ) |   |
| Cash paid for acquisition, net of cash acquired                                                               |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (5,458 | ) |   |
| We acquired  substantially all of the assets of certain EnStructure companies for $21,208  in September, 2004 |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| In conjunction with this  acquisition, assets acquired and liabilities assumed were as follows:               |       |                                                                                                                                                                                 |       |       |                                                  |       |   |   |   |   |
| Fair value of assets acquired                                                                                 |       |                                                                                                                                                                                 | $          | —     |                                                  |       |   |   | $ | 22,431 |   |   |
| Receivable from seller for management agreements                                                              |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | 535 |   |   |
| Liability to sellers for cash holdback                                                                        |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (2,000 | ) |   |
| Liabilities assumed                                                                                           |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (1,223 | ) |   |
| Cash paid for  acquisition, net of cash acquired                                                              |       |                                                                                                                                                                                 | —     |       |                                                  |       |   | (19,743 | ) |   |

 

See accompanying notes to condensed consolidated financial statements.

5

----

**INFRASOURCE SERVICES, INC. AND SUBSIDARIESNotes to Condensed Consolidated Financial Statements (Unaudited)**

**1. Organization and Basis of Presentation**

InfraSource Services, Inc. (“InfraSource”),formerly known as Dearborn Holdings Corporation, was organized on May 30,2003 as a Delaware Corporation. In June 2003, OCM/GFI Power OpportunitiesFund, L.P. and OCM Principal Opportunities Fund, L.P. (collectively, the “PrincipalStockholders”), both Delaware limited partnerships, each acquired fifty sharesof the common stock of InfraSource at a nominal purchase price. On September 24,2003, pursuant to an Agreement and Plan of Merger dated June 17, 2003 (the“Merger”), InfraSource acquired InfraSource Incorporated and certain of itswholly owned subsidiaries (collectively, the “InfraSource Group” or “thePredecessor”). Immediately prior to the Merger, certain other subsidiaries ofInfraSource Incorporated not acquired by InfraSource in the Merger (the “Non-AcquiredGroup”) were distributed to InfraSource Incorporated’s parent, ExelonEnterprises Company LLC, a wholly owned subsidiary of Exelon Corporation (“Exelon”).InfraSource and its wholly owned subsidiaries are referred to herein as “theCompany,” “we,” “us,” or “our,” except where it is clear from the context thatsuch items mean only InfraSource. For a more detailed description of theMerger, see Note 2 to these financial statements. On May 12, 2004, wecompleted our initial public offering (“IPO”) of 8,500,000 shares of commonstock (see Note 7).

We operate in onereportable segment as a specialty contractor serving the utility transmissionand distribution infrastructure in the United States. Our broad range ofservices include the design, engineering, procurement, construction, testing,maintenance, and leasing of utility infrastructure. Our customers primarilyinclude electric power utilities, natural gas utilities, government entitiesand heavy industrial companies, such as petrochemical, processing and refiningbusinesses. Each of these services is provided by our various subsidiaries, allof which have been aggregated into one reportable segment due to their similareconomic characteristics, customer bases, products and production anddistribution methods. We operate in multiple service territories throughout theUnited States and do not have significant assets or operations outside of theUnited States.

The accompanyingunaudited condensed consolidated financial statements reflect our financialposition as of September 30, 2004 and December 31, 2003; our resultsof operations for the three and nine months ended September 30, 2004; andour cash flows for the nine months ended September 30, 2004. They alsoinclude the results of operations of the Predecessor for the periods June 21,2003 to September 23, 2003 and January 1, 2003 to September 23,2003, and the Predecessor’s cash flows for the period January 1, 2003 to September 23,2003. We had no operating activity prior to acquiring the InfraSource Group inthe Merger. Subsidiaries of the Predecessor not acquired in the Merger arereflected as discontinued operations in the accompanying financial statementsof the Predecessor. During 2003, in order to meet the reporting deadlines ofExelon, each of the Predecessor’s first three fiscal quarters ended on March 21,June 20, and September 23, respectively. Beginning in 2004, each ofour quarters ended or will end on the last day of March, June, September andDecember. Accordingly, as a result of the change in quarter end, the ninemonths ended September 30, 2004 contains seven additional days as comparedto the prior-year period January 1, 2003 to September 23, 2003. Theadditional seven days would not have had a material effect on the Predecessor’s2003 nine-month period results. We have not adjusted the Predecessor nine-monthperiod results to reflect the effect of the additional seven days because it isimpracticable to do so.

The accompanying condensed consolidated financial statements areunaudited and have been prepared in accordance with the rules andregulations of the U.S. Securities and Exchange Commission 

6

----

**INFRASOURCE SERVICES, INC. AND SUBSIDARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

(“SEC”). These financial statements includeall adjustments that we consider necessary for a fair presentation of financialposition, results of operations and cash flows for the interim periodspresented. Such adjustments consisted only of normal recurring items. The December 31,2003 condensed consolidated balance sheet data were derived from auditedfinancial statements, but do not include all disclosures required by accountingprinciples generally accepted in the United States of America. The results forinterim periods are not necessarily indicative of results to be expected for afull year or future interim periods. These financial statements should be readin conjunction with our financial statements and related notes included in ourProspectus filed pursuant to Rule 424(b)(1) (SEC File Number333-112375) and contained in the related registration statement declaredeffective on May 6, 2004 (the “IPO Prospectus”)*.*

Certain amounts in theaccompanying statements have been reclassified for comparative purposes.

**2. Merger and Acquisitions**

***Merger:****  *On September 24, 2003, weacquired the InfraSource Group pursuant to an Agreement and Plan of Mergerdated June 17, 2003. In connection with the Merger, we acquired all of thevoting interests of InfraSource Incorporated for a total purchase priceconsideration of $228.6 million. Pursuant to the Merger, we entered into a newterm loan and revolving credit facility providing for a term loan of $140.0million and a revolving credit facility of up to $40.0 million, withavailability for letters of credit of $25.0 million. In addition, we issued along-term subordinated note payable to Exelon, the former majority owner ofInfraSource Incorporated, for $29.0 million. The proceeds of the term loans andthe subordinated note, together with the issuance of 19,912,664 shares of ourcommon stock for cash of $91.5 million, were used to finance the redemption ofall the then-outstandingshares of InfraSource Incorporated common stock and to fund certain expensesrelated to the Merger. The value assigned to the common stock resulted from thenegotiated transaction for the purchase of the InfraSource Group.

In accordance with the terms of the Merger, thepurchase price was subject to adjustment based upon the determination ofadjusted working capital as of September 23, 2003. We finalized theworking capital adjustment, as well as various other purchase pricecontingencies, in the third quarter of 2004, resulting in a payment to us fromExelon of approximately $7.7 million, including interest of approximately $0.2million. We had previously included an expected amount due from Exelon of $10.5million in our purchase price calculation; therefore in the thirdquarter when we received the settlement payment, we adjusted the receivable andincreased goodwill by $3.0 million. During the third quarter of 2004, we alsofinalized certain allocation estimates and purchase price contingencies,including the valuation of certain specialty equipment acquired, which resulted in certain purchase priceallocation adjustments. The aggregate effect of these purchase price allocationadjustments was a decrease to goodwill of approximately $2.2 million. Inaccordance with the terms of the Merger, we may be entitled to additionalcontingency payments from Exelon. Any such payments would result in futureadjustments to goodwill, which could be material. Intangible assets related tocontracted volumes of work have been valued at $8.0 million. Both the goodwilland the intangible assets are deductible for tax purposes over 15 years.

As of September 30, 2004, goodwill related to theMerger is $72.5 million.  In addition tothe Merger related purchase accounting adjustments, goodwill also increased in thethird quarter of 2004 by $2.3 million for additional contingent purchase price consideration tothe former owners of Blair Park 

7

----

**INFRASOURCE SERVICES, INC. AND SUBSIDARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

Services, Inc. andSunesys, Inc. (collectively “Blair Park”). Blair Park was acquired by thePredecessor in 2001. As of September 30, 2004, the aggregate liability of$5.0 million for contingent purchase price considerationto the former owners of Blair Park is accrued in otherlong-term liabilities on the condensed consolidated balance sheet. Furthermodifications to the earn out calculation will result in additional adjustmentsto goodwill, which could be material. Final settlement of the contingency isrequired in 2006.

As a result of the Merger, we incurred $8.1 million inrelated expenses on a pretax basis, including $6.3 million of debt issuancecosts, which will be amortized over the lives of the respective debtinstruments, and $1.8 million in professional fees and filing costs. For theperiod January 1 through September 23, 2003, the InfraSource Groupincurred $16.2 million of expenses related to the Merger, including $10.5million of employee retention, severance and incentive costs, and $5.7 millionof advisory fees, legal, accounting and other professional costs. The amount ofMerger expenses in the Predecessor periods June 21, 2003 to September 23,2003 and January 1, 2003 to September 23, 2003 were $14.3 million and$16.2 million, respectively.

During the third quarter of 2004, we recorded a net credit to merger relatedexpense of $0.3 million for retention bonusesaccrued at the closing of the Merger which have been determined to benefitfuture periods. Expenses related to theseretention bonuses and charged to merger related costs are expected to be $0.1million for the fourth quarter of 2004 and in each of the first three quarters of 2005.

Also in connection with the Merger, we entered into avolume agreement with Exelon, pursuant to which we are assured a continuinglevel of business from Exelon through 2006, at approximately the same levels asin 2003.

**Acquisitionof Maslonka:****  **On January 27,2004, we acquired all of the voting interests of Maslonka & Associates(“Maslonka”), a complementary infrastructure services business, for totalpurchase price consideration of $77.6 million, which included the issuance of4,330,820 shares of our common stock. The final allocation of the purchaseprice is subject to a working capital adjustment and settlement of holdbackadjustments to the purchase price in accordance with the terms of theacquisition agreement. We expect the working capital adjustment to be finalized during the firstquarter of 2005 and expect the holdback amounts,less any amounts retained by us, will be released to the sellers in 2005 and2006. Any adjustments resulting from the working capital adjustment and holdback adjustments couldresult in an adjustment to goodwill, which amounts could be material. The valueof the shares issued to Maslonka stockholders was determined to beapproximately $50.7 million. Under the terms of the holdback provisions, we withheld $6.6 million incash payable at closing and 957,549 shares of common stock. Of the cashholdback amount, $5.5 million is contingent upon Maslonka’s achievement ofcertain performance targets as well as satisfaction of any indemnificationobligations owed to us, which may be set-off against all other portions of theholdback. The results of Maslonka are included in our consolidated resultsbeginning January 27, 2004.

Additionally,**at the time ofthe acquisition, Maslonka had an outstanding letter of credit collateralizedwith a $5.0 million time deposit account provided by the Maslonka stockholders,which we acquired in the acquisition. As required pursuant to the acquisitionagreement, we reimbursed the Maslonka stockholders for the $5.0 million in thethird quarter of 2004. After giving effect to the holdback and thereimbursement of the time deposit account, the amount paid at closing was $26.7million in cash and 3,373,271 shares of our common stock. We financed the cashportion of the Maslonka acquisition with cash on hand and the 

8

----

**INFRASOURCE SERVICES, INC. AND SUBSIDARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

issuance of 5,931,950shares of our common stock to the Principal Stockholders and certain members ofour management for cash of $27.5 million (see Note 7).

Thepreliminary aggregate purchase price for the Maslonka acquisition is as follows:
| ** **                                                 | ** ** | **(in thousands)** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|
| Cash paid to  sellers, net of cash acquired                |       |                    | $          | 14,187 |   |   |
| Transaction costs                                          |       |                    | 695        |   |   |
| Repayment of debt  and capital leases                      |       |                    | 10,314     |   |   |
| Equity issued to  sellers                                  |       |                    | 50,671     |   |   |
| Liability to  sellers for prior income taxes paid          |       |                    | 604        |   |   |
| Liability to  sellers for cash holdback for purchase price |       |                    | 1,100      |   |   |
| Total purchase  price consideration                        |       |                    | $          | 77,571 |   |   |

 

Thepreliminary purchase price has been initially allocated to the assets acquiredand liabilities assumed as follows:
| ** **                                          | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| Contract  receivables                               |       |                    | $          | 6,172 |   |   |
| Costs and  estimated earnings in excess of billings |       |                    | 6,437      |   |   |
| Deferred tax  asset                                 |       |                    | 1,542      |   |   |
| Other current  assets                               |       |                    | 562        |   |   |
| Property,  plant & equipment               |       |                    | 9,561      |   |   |
| Goodwill                                            |       |                    | 59,644     |   |   |
| Intangible assets                                   |       |                    | 11,500     |   |   |
| Other non-current  assets                           |       |                    | 5,319      |   |   |
| Accounts payable  and accrued expenses              |       |                    | (15,559    | ) |   |
| Long-term debt                                      |       |                    | (1,000     | ) |   |
| Deferred tax  liability                             |       |                    | (6,607     | ) |   |
| Total net assets  acquired                          |       |                    | $          | 77,571 |   |   |

 

Intangible assets consisting of construction backloghave been valued at $11.5 million and will be amortized over the life of therelated contracts which range from one to two years. The amortization of theseintangible assets as well as the goodwill currently estimated at $59.6 millionwill not be deductible for tax purposes.

**Acquisitionof Utili-Trax:****  **On August 18,2004, we acquired substantially all of the assets and assumed certainliabilities of Utili-Trax Contracting Partnerships, LLC (“Utili-Trax”), which provides underground and overheadconstruction services for electric cooperatives and municipal utilitiesthroughout the upper Midwest, for a total purchase price considerationof $5.2 million in cash, including transaction costs. The final allocation ofthe purchase price is subject to a working capital adjustment and valuations ofcertain property and equipment and intangible assets which we expect tofinalize during the fourth quarter of 2004. Anyadjustments resulting from the working capitaladjustment couldresult in an adjustment to goodwill which could be material. Theresults of Utili-Trax are included in our consolidated results beginning August 18,2004.

9

----

**INFRASOURCE SERVICES, INC. AND SUBSIDARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

Thepreliminary purchase price has been initially allocated to the assets acquiredand liabilities assumed based on their estimated fair value:
| ** **                             | ** ** | **(in thousands)** | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| Contract  receivables                  |       |                    | $          | 469 |   |   |
| Work in process                        |       |                    | 457        |   |   |
| Other current  assets                  |       |                    | 88         |   |   |
| Property,  plant & equipment  |       |                    | 2,059      |   |   |
| Goodwill                               |       |                    | 2,319      |   |   |
| Accounts payable  and accrued expenses |       |                    | (224       | ) |   |
| Total net assets  acquired             |       |                    | $          | 5,168 |   |   |

 

**Acquisitionof EnStructure:****  **On September 3,2004, we acquired substantially all of the assets and assumed certainliabilities of EnStructure Corporation’s (“EnStructure”) operating companies:Sub-Surface Construction Company, Flint Construction Company and Iowa PipelineAssociates, for total purchase price consideration of $21.2 million in cash,including transaction costs and $2.0 million of cash withheld pursuant toholdback provisions. EnStructure, the construction services business of SEMCOEnergy, Inc., providesconstruction services within the utilities, oil and gas markets throughout theMidwestern, Southern and Southeastern regions of the United States.  The final allocation of the purchaseprice is subject to a working capital adjustment, final settlement of theholdback adjustments to the purchase price in accordance with the terms of theacquisition agreement and valuations of certain property and equipment and intangible assets which we expect to finalizeduring the fourth quarter of 2004. Any adjustments resultingfrom the working capital adjustments and holdback adjustments could result inan adjustment to purchase accounting, which amounts could be material. Theresults of EnStructure are included in our consolidated results beginning September 3,2004

Thefair value of the EnStructure net assets exceeded the preliminary purchaseprice. Therefore, as described in Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations”, wedecreased the eligible assets by the excess amount. The allocation of thepreliminary purchase price to the assets acquired and liabilities assumed is asfollows:
| ** **                      | ** ** | **(in thousands)** | ** ** |
|---------------------------------|------------|-------------------------|------------|
| Contract  receivables           |       |                    | $          | 7,798 |   |   |
| Work in process                 |       |                    | 1,445      |   |   |
| Other current  assets           |       |                    | 301        |   |   |
| Machinery &  equipment |       |                    | 12,887     |   |   |
| Other current  liabilities      |       |                    | (1,223     | ) |   |
| Total net assets  acquired      |       |                    | $          | 21,208 |   |   |

 

10

----

**INFRASOURCE SERVICES, INC. AND SUBSIDARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Pro Forma FinancialInformation:****  **Thefollowing table provides pro forma unaudited consolidated statements ofoperations data for the Predecessor periods June 21, 2003 to September 23,2003 and January 1, 2003 September 23, 2003 as if the Merger and theacquisitions of Maslonka, Utili-Trax and EnStructure had occurred as of January 1,2003. It also provides proforma unaudited consolidated statement of operations data for the three andnine months ended September 30, 2004 as if the acquisitions of Maslonka,Utili-Trax and EnStructure had occurred as of January 1, 2004:
| ** **                                                    | ** ** | **For the Period**         | ** ** | ** ** | ** **                        | ** ** | **For the Period**         | ** ** | ** ** | ** **                        | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|------------|-----------------------------------|------------|--------------------------------------|------------|------------|-----------------------------------|------------|
| ** **                                                    | ** ** | **June 21 to**             | ** ** | ** ** | ** **                        | ** ** | **January 1 to**           | ** ** | ** ** | ** **                        | ** ** |
| ** **                                                    | ** ** | **September 23, 2003**     | ** ** | ** ** | ** **                        | ** ** | **September 23, 2003**     | ** ** | ** ** | ** **                        | ** ** |
| ** **                                                    | ** ** | **(Predecessor entity -**  | ** ** | ** ** | ** **                        | ** ** | **(Predecessor entity -**  | ** ** | ** ** | ** **                        | ** ** |
| ** **                                                    | ** ** | **InfraSource**                      | ** ** | ** ** | **Three Months**             | ** ** | **InfraSource**                      | ** ** | ** ** | **Nine Months**              | ** ** |
| ** **                                                    | ** ** | **Incorporated and**            | ** ** | ** ** | **Ended September 30,** | ** ** | **Incorporated and**            | ** ** | ** ** | **Ended September 30,** | ** ** |
| ** **                                                    | ** ** | **Subsidiaries) (Note 1)** | ** ** | ** ** | **2004**                          | ** ** | **Subsidiaries) (Note 1)** | ** ** | ** ** | **2004**                          | ** ** |
| ** **                                                    | ** ** | **(in thousands)**              | ** ** | ** ** | **(in thousands)**           | ** ** | **(in thousands)**              | ** ** | ** ** | **(in thousands)**           | ** ** |
| Contract revenues                                             |       |                                 | $          | 171,017    |                              |       |                                 |       | 178,803    |                              |       |   | $ | 464,636 |   |   |   |   | 515,855 |   |   |
| Net income (loss)                                             |       |                                 | (28,670    | )          |                              |       |                                 | 1,071      |       |                              |       | (38,078 | ) |   |   |   | (29,604 | ) |   |
| Weighted average basic and diluted common shares  outstanding |       |                                 | 47,037     |       |                              |       |                                 | 38,690     |       |                              |       | 47,585 |   |   |   |   | 34,974 |   |   |
| Weighted average  diluted common shares outstanding           |       |                                 | 47,037     |       |                              |       |                                 | 39,653     |       |                              |       | 47,585 |   |   |   |   | 34,974 |   |   |
| Basic net income (loss) per share                             |       |                                 | $          | (0.61      | )                                 |       |                                 |       | $          | 0.03                              |       |   |   | $ | (0.80 | ) |   |   |   | $ | (0.85 | ) |   |
| Diluted net income  (loss) per share                          |       |                                 | (0.61      | )          |                              |       |                                 | 0.03       |       |                              |       | (0.80 | ) |   |   |   | (0.85 | ) |   |
|                                                               |            |                                      |            |            |                                   |            |                                      |            |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Predecessor’s historical results of operations forthe periods June 21, 2003 to September 23, 2003 and January 1,2003 to September 23, 2003 have been adjusted to reflect the pro formaeffects of the Merger. The principal adjustments include (1) the effectson depreciation expense (which is included in cost of revenues and selling,general and administrative expenses) resulting from changes in lives and bookbasis of certain fixed assets; (2) additional amortization of intangiblesresulting from the Merger; and (3) related income tax effects of thepreviously mentioned adjustments. Pro forma results of operations for allperiods presented above have been adjusted to reflect Maslonka, Utili-Trax andEnStructure historical operating results prior to their acquisitions, aftergiving effect to adjustments directly attributable to the transactions that areexpected to have a continuing effect. Such adjustments include (1) amortizationof intangible assets acquired and recorded in accordance with the provisionsof  SFAS No. 141, “BusinessCombinations,” and related income tax effects; (2) the effects ofdepreciation expense resulting from changesin lives and book basis of certain fixed assets; (3) the elimination ofinterest expense resulting from the repayment of Maslonka debt and additionalinterest expense associated with a note issued to the seller and related incometax effects; and (4) the issuance of our common stock to the sellers inthe Maslonka acquisition and to the Principal Stockholders and certain members of our management tofinance a portion of the purchase price.

11

----

**INFRASOURCE SERVICES, INC. AND SUBSIDARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

The pro forma results for the nine-month period ended September 30,2004 include a charge of $31.3 million for deferredcompensation expense, which was recorded inMaslonka’s historical results of operations, and $1.5 millionfor transaction related expenses related to the acquisition of Maslonka. Thepro-forma results for the predecessor periods June 21, 2003to September 23, 2003 and January 1, 2003 to September 23, 2003include Merger related expenses of $14.3 million and $16.2 million,respectively.

The above pro formainformation is not necessarily indicative of the results of operations thatwould have occurred had the 2003 and 2004 acquisitions been made as of January 1,2003 and 2004, or of results that may occur in thefuture.

**3. Discontinued Operations**

Subsidiaries of thePredecessor not acquired in the Merger are reflected as discontinued operationsin the accompanying Predecessor’s statements of operations and cash flows.

During 2003,subsequent to the Merger, we committed to a plan to sell substantially all ofthe assets of OSP Consultants, Inc. and subsidiaries (“OSP”). On September 21,2004, we completed the sale of substantially all of the assets of RJE Telecom, Inc.(“RJE”), a wholly owned subsidiary of OSP, for cash proceeds of $8.4 million,net of transaction costs. Additional proceeds of approximately $0.9 million areexpected in the fourth quarter of 2004 based on a working capital adjustmentpursuant to the agreement. The sale of the RJE assets resulted in a gain of$0.6 million (net of $0.4 million tax), which is includedin gain on disposal of discontinued operations in our condensed consolidatedstatement of operations. The RJE sale completed our commitment to sellsubstantially all of the assets of OSP.

In addition, in thethird quarter of 2004, we committed to a plan to sell substantially all of theassets of Utility Locate & Mapping Services, Inc., (“ULMS”).  In accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” the financial position,results of operations and cash flows of OSP and ULMS are reflected asdiscontinued operations in our accompanying financial statements for the threeand nine month periods ended September 30, 2004. For the Predecessorperiods June 21, 2003 to September 23, 2003 and January 1,2003 to September 23, 2003, OSP is included in continuing operations.  ULMS was held for sale by the Predecessor for theperiod January 1, 2003 to September 23, 2003; therefore ULMS’s financial position, results of operations andcash flows are included in discontinued operations in thePredecessor’s financial statements.  We acquired ULMS from Exelon in December2003.

12

----

**INFRASOURCE SERVICES, INC. AND SUBSIDARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

The following table presents balance sheet and statement of operationsinformation for the previously mentioned discontinued operations:

Balancesheet information:
| ** **                              | ** ** | **December 31,**   | ** ** | **September 30,** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2003**                | ** ** | **2004**               | ** ** |
| ** **                              | ** ** | **(in thousands)** | ** ** |
| Contract  receivables, net              |       |                    | $          | 4,234                  |       |   |   | $ | 1,695 |   |   |
| Property and  equipment, net            |       |                    | 407        |                   |       |   | 479 |   |   |
| Other, net                              |       |                    | 2,146      |                   |       |   | 655 |   |   |
| Total assets                            |       |                    | $          | 6,787                  |       |   |   | $ | 2,829 |   |   |
| Current portion of long-term debt       |       |                    | $          | 545                    |       |   |   | $ | — |   |   |
| Accounts payable  and other liabilities |       |                    | 498        |                   |       |   | 2,732 |   |   |
| Long-term debt,  net of current portion |       |                    | 877        |                   |       |   | — |   |   |
| Deferred income  taxes—long term   |       |                    | —     |                   |       |   | 11 |   |   |
| Total liabilities                       |       |                    | 1,920      |                   |       |   | 2,743 |   |   |
| Net assets (liabilities)                |       |                    | $          | 4,867                  |       |   |   | $ | 86 |   |   |

 

Statementof operations:
| ** **            | ** ** | **For the Period**         | ** ** | ** ** | ** **                        | ** ** | **For the Period**         | ** ** | ** ** | ** **                        | ** ** |
|-----------------------|------------|--------------------------------------|------------|------------|-----------------------------------|------------|--------------------------------------|------------|------------|-----------------------------------|------------|
| ** **            | ** ** | **June 21 to**             | ** ** | ** ** | ** **                        | ** ** | **January 1 to**           | ** ** | ** ** | ** **                        | ** ** |
| ** **            | ** ** | **September 23, 2003**     | ** ** | ** ** | ** **                        | ** ** | **September 23, 2003**     | ** ** | ** ** | ** **                        | ** ** |
| ** **            | ** ** | **(Predecessor entity -**  | ** ** | ** ** | ** **                        | ** ** | **(Predecessor entity -**  | ** ** | ** ** | ** **                        | ** ** |
| ** **            | ** ** | **InfraSource**                      | ** ** | ** ** | **Three Months**             | ** ** | **InfraSource**                      | ** ** | ** ** | **Nine Months**              | ** ** |
| ** **            | ** ** | **Incorporated and**            | ** ** | ** ** | **Ended September 30,** | ** ** | **Incorporated and**            | ** ** | ** ** | **Ended September 30,** | ** ** |
| ** **            | ** ** | **Subsidiaries) (Note 1)** | ** ** | ** ** | **2004**                          | ** ** | **Subsidiaries) (Note 1)** | ** ** | ** ** | **2004**                          | ** ** |
| ** **            | ** ** | **(in thousands)**              | ** ** | ** ** | **(in thousands)**           | ** ** | **(in thousands)**              | ** ** | ** ** | **(in thousands)**           | ** ** |
| Contract revenues     |       |                                 | $          | 35,816     |                              |       |                                 |       | $          | 12,117                            |       |   |   | $ | 141,792 |   |   |   |   | $ | 28,882 |   |   |
| Pre-tax income (loss) |       |                                 | $          | (10,114    | )                                 |       |                                 |       | 699        |                              |       |   | $ | (18,819 | ) |   |   |   | 642 |   |   |

 

**4. Costs and estimated earnings in excess of billings**

Included in costs andestimated earnings in excess of billings are costs related to claims ofapproximately $3.3 million and $0 at September 30, 2004 and December 31,2003, respectively.   The claim amountsare primarily related to a delay in the anticipated start date of one of ourelectric transmission contracts. Costs incurred that are attributable to claimsare included in the total estimated revenue when realization is probable andamounts are estimable. Profit from claims is recorded in the period suchamounts are agreed to with the customer.

13

----

**INFRASOURCE SERVICES, INC. AND SUBSIDARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**5. Goodwill and IntangibleAssets**

Our goodwill and intangible assets arecomprised of:
| ** **               | ** ** | **December 31,**   | ** ** | **September 30,** | ** ** |
|--------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **               | ** ** | **2003**                | ** ** | **2004**               | ** ** |
| ** **               | ** ** | **(in thousands)** | ** ** |
| Goodwill                 |       |                    | $          | 68,877                 |       |   |   | $ | 134,432 |   |   |
| Intangible assets:       |       |                    |       |                   |       |   |   |   |   |
| Construction backlog     |       |                    | $          | 5,500                  |       |   |   | $ | 17,000 |   |   |
| Accumulated amortization |       |                    | (2,100     | )                      |       |   | (12,585 | ) |   |
|                     |       |                    | 3,400      |                   |       |   | 4,415 |   |   |
| Volume agreement         |       |                    | 2,500      |                   |       |   | 2,500 |   |   |
| Accumulated amortization |       |                    | (500       | )                      |       |   | (1,004 | ) |   |
|                     |       |                    | 2,000      |                   |       |   | 1,496 |   |   |
| Intangible  assets, net  |       |                    | $          | 5,400                  |       |   |   | $ | 5,911 |   |   |

 

The increase in intangible assets as of September 30, 2004reflects the purchaseprice allocation of the Maslonka acquisition. Amortization expense of ourintangible assets was $2.4 million and $11.0 million during the three and ninemonths ended September 30, 2004, respectively. There was no amortizationexpense recorded in the Predecessor’s results of operations. Our expectedaggregate amortization expense of intangible assets for the next five fiscalyears is as follows: 2004—$13.1million, inclusive of amounts recorded for the nine months ended September 30,2004; 2005—$3.4million; 2006—$0.5million; 2007—$0;and 2008—$0.

Inaccordance with SFAS No. 142, “Goodwill and Intangible Assets,” goodwillis subject to an assessment for impairment using a two-step fair value-basedtest, the first step of which will be performed at least annually, or morefrequently if events or circumstances exist which indicate that goodwill may beimpaired. The first step compares the fair value of a reporting unit to itscarrying amount, including goodwill. If the carrying amount of the reportingunit exceeds its fair value, the second step is then performed. The second stepcompares the carrying amount of the reporting unit’s goodwill to the fair valueof the goodwill. If the fair value of the goodwill is less than the carryingamount, an impairment loss would be recorded as a reduction to goodwill and acorresponding charge to operating expense. No provisions for goodwillimpairments were recorded during the three or nine months ended September 30,2004 or the Predecessor periods June 21, 2003 to September 23, 2003and January 1, 2003 to September 23, 2003.

**6. Debt**

On September 24, 2003, we entered into a seniorcredit facility consisting of a $140.0 million term loan, which matures in2010, and a $40.0 million revolving credit facility, which matures in 2009. On January 22,2004, we amended our senior credit facility to permit the acquisition ofMaslonka and to obtain additional liquidity and operating flexibility,including expanding our capacity for making capital expenditures. As a resultof the amendment, the commitment of the banks under the revolving creditfacility was increased by $10.0 million to $50.0 million, and the amountavailable for letters of credit was increased by $10.0 million to $35.0million.

14

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

Concurrent with the IPO, in order to provide foradditional borrowing flexibility and to reduce our  borrowing rates to reflect our improvedfinancial position, we entered into an amended and restated credit agreementto, among other things, provide for a revolving credit facility in the originalamount of $40.0 million that could be increased to $85.0 million and to providea term loan facility in the initial amount of $85.3 million, which representedthe amount of term loans outstanding under the former senior credit facility at May 12,2004 after giving effect to the mandatory prepayment of $50.2 million of suchloans  in conjunction with the IPO (seeNote 7). As of July 31, 2004, the revolving credit facility had beenincreased to the full $85.0 million. A portion of the revolving credit facilitynot in excess of 80% of the amount thereof may be used for the issuance ofletters of credit. Term loans and revolving loans under the amended andrestated credit agreement initially bear interest, at our option, at the bank’sprime interest rate plus a spread of 2.00% or LIBOR plus a spread of 3.00%. Beginningin 2005, such interest rate spreads will be dependent upon our ConsolidatedLeverage Ratio, as defined in the amended and restated credit agreement, andrange from 1.50% to 3.50% for revolving loans and 1.75% to 3.00% for term loans.At September 30, 2004, our borrowings under the revolving credit facilitywere $4.0 million and we had outstanding letters of credit in the amount of$28.1 million.

Our amended and restated credit agreement containscertain restrictive covenants, including minimum levels of net worth, interestcoverage, fixed charge coverage and leverage ratios, among other restrictions. Asof September 30, 2004, we were in compliance with all terms and conditionsof the amended and restated credit agreement.

Concurrent with theclosing of the IPO, we were required to repay our $30.0 million subordinatednote to Exelon.  Because the carryingamount of the Exelon note was recorded at a discount to reflect the fair valuebased upon applicable market rates for similar securities, we recorded a losson the early extinguishment of this debt in the amount of $5.7 million in the second quarter of 2004. Forthe nine months ended September 30, 2004, approximately $0.1 million ofthis loss on early extinguishment of debt,  which relates to the portion of debt assumed in theacquisition of ULMS in December 2003, isreflected in income from discontinued operations due to our decision to sellULMS.

**7. Initial Public Offering and Common andPreferred Stock**

On May 12, 2004, we completed our IPO of8,500,000 shares of common stock at a price to the public of $13 per share. Thenet proceeds of the offering to us of approximately $100.8 million, afterdeducting underwriters’ discounts and offering expenses, were used by us asfollows:  (1) $50.2 million was usedto repay a portion of term loans outstanding under our formersenior credit facility; (2) $30.0 million was used to repay the principalamount of our subordinated note to Exelon; and (3) the remaining proceedsof approximately $20.6 million were retained for general corporate purposes.

At inception of the Predecessor, its Board ofDirectors authorized 150,000,000 shares of InfraSource Incorporated’s commonstock with a par value of $.0001 per share. Common shares outstanding as of September 23,2003 were redeemed in connection with the Merger. At inception of the Company,our Board of Directors authorized 2,500,000 shares of common stock with a parvalue of $.001 per share. On March 24, 2004, our Board of Directorsauthorized an approximate 21.7625-to-one stock split and an increase in theauthorized common stock from 2,500,000 shares to 120,000,000 shares. Par valueof the common stock remained at $.001 per share. The effect of the stock splithas been retroactively reflected in 

15

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

our accompanying financialstatements, and all applicable references as to the number of common shares andper share information have been restated.

At inception of InfraSource Incorporated, its Board ofDirectors authorized 20,000,000 shares of InfraSource Incorporated’s preferredstock with a par value of $.0001 per share. On September 23, 2003 inanticipation of the Merger, InfraSource Incorporated issued one share ofpreferred stock to Exelon for $4.1 million. In connection with the Merger, on September 24,2003, Exelon exchanged this share of preferred stock, along with otherconsideration included in the Merger agreement, including certainindemnifications provided by Exelon and a volume agreement, for a $29.0 millionsubordinated note issued by us. At inception of the Company, we had noauthorized shares of preferred stock. On March 24, 2004, our Board ofDirectors authorized an increase in the authorized preferred stock from 0 sharesto 12,000,000 shares with a par value of $0.001 per share.

Thefollowing table presents shareholder’s equity activity for the nine monthsended September 30, 2004:
| ** **                                                | ** ** | ** **              | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|------------|------------|
| ** **                                                | ** ** | ** **              | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**       | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Common Stock**   | ** ** | **Paid-In** | ** ** | **Deferred**   | ** ** | **Comprehensive** | ** ** | **Retained**    | ** ** | ** **   | ** ** |
| ** **                                                | ** ** | **Shares**              | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation**  | ** ** | **Income**      | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| ** **                                                | ** ** | **(in thousands)** | ** ** |
| Balance as of  December 31, 2003                     |       | 19,914,840              |       |        | $          | 20             |       |              |       | $               | 91,695     |         |       |       | $          | (215) |   |   |   | $ | 14 |   |   |   | $ | 1,335 |   |   | $ | 92,849 |   |
| Common Stock issued:                                      |       |                    |       |        |       |           |       |              |       |            |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition of  Maslonka                                  |       | 4,330,820               |       |        | 4          |           |       |              | 50,667     |            |       |         | —     |       |       |   | — |   |   |   | — |   |   | 50,671 |   |
| Company management                                        |       | 37,367                  |       |        | —     |           |       |              | 437        |            |       |         | —     |       |       |   | — |   |   |   | — |   |   | 437 |   |
| Principal  shareholders                                   |       | 5,894,583               |       |        | 6          |           |       |              | 27,079     |            |       |         | —     |       |       |   | — |   |   |   | — |   |   | 27,085 |   |
| Initial public offering                                   |       | 8,500,000               |       |        | 9          |           |       |              | 100,827    |            |       |         | —     |       |       |   | — |   |   |   | — |   |   | 100,836 |   |
| Vesting of early exercised options                        |       | 139,852                 |       |        | —     |           |       |              | 646        |            |       |         | —     |       |       |   | — |   |   |   | — |   |   | 646 |   |
| Unearned  compensation                                    |       | —                  |       |        | —     |           |       |              | 289        |            |       |         | (289)      |       |       |   | — |   |   |   | — |   |   | — |   |
| Amortization of  unearned compensation                    |       | —                  |       |        | —     |           |       |              | —     |            |       |         | 82         |       |       |   | — |   |   |   | — |   |   | 82 |   |
| Fair market value  adjustments on derivatives, net of tax |       | —                  |       |        | —     |           |       |              | —     |            |       |         | —     |       |       |   | 195 |   |   |   | — |   |   | 195 |   |
| Net income                                                |       | —                  |       |        | —     |           |       |              | —     |            |       |         | —     |       |       |   | — |   |   |   | 4,097 |   |   | 4,097 |   |
| Balance as of  September 30, 2004                    |       | 38,817,462              |       |        | $          | 39             |       |              |       | $               | 271,640    |         |       |       | $          | (422) |   |   |   | $ | 209 |   |   |   | $ | 5,432 |   |   | $ | 276,898 |   |

 

In connection with the funding of the acquisition ofMaslonka in January 2004, we offered to sell 5,931,950 shares of commonstock to all of the then-existing shareholders at a price of $4.60 per commonshare. Shares issued pursuant to this offer are reflected in the table aboveunder the captions Company management and Principal Stockholders. As a resultof the issuance of a portion of these shares to ourmanagement, we recorded pre-tax compensation expense of $0.3 million representingthe difference between the fair value and the purchase price on the date ofsale, which amount is reflected in selling, general and administrative expensesin the condensed consolidated statement of operations for the nine months endedSeptember 30, 2004.

In December 2003 and January 2004, stockoption grants for the purchase of 134,818 shares were granted to members of theBoard of Directors and management. These options were issued below fair marketvalue resulting in an aggregate deferred compensation expense of approximately$0.5 million, which will be recognized as compensation expense over the fouryear vesting period.

16

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

During the three monthsended March 31, 2004, certain members of our management and Board ofDirectors consummated early exercises of unvested stock option awardsrepresenting a total of 489,547 shares of common stock. Pursuant to the termsof the related stock option agreements, we have the option to repurchase anyunvested shares prior to the date they vest at the original strike price of theoption grant. In accordance with the provisions of EITF No. 00-23, “IssuesRelated to the Accounting for Stock Compensation under APB Opinion No. 25and FASB Interpretation No. 44,” unvested shares are not consideredoutstanding for accounting purposes and are not included in the calculation ofbasic earnings per share until shares issued pursuant to these option grantsvest. As of September 30, 2004, early exercises of unvested options withrespect to 139,852 shares have vested, and these shares are consideredoutstanding for accounting purposes. Until the remaining 349,695 shares vest inaccordance with the terms of the option grants, the net proceeds from the earlyexercise of these option grants, which totaled $1.6 million at September 30,2004, are included in other long-term liabilities in the condensed consolidatedbalance sheet.

**8. Computation ofPer Share Earnings**

Thefollowing table is a reconciliation of the numerators and denominators of thebasic and diluted income (loss) per share computation. Common shares used inthe Predecessor’s earnings per share computations represent shares ofInfraSource Incorporated outstanding during the periods June 21, 2003 to September 23,2003 and January 1, 2003 to September 23, 2003. Such sharesoutstanding as of September 23, 2003 were redeemed in conjunction with theMerger.
| ** **                                                        | ** ** | **For the Period  June 21 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries) (Note 1)** | ** ** | ** ** | **Three Months  Ended September 30,  2004** | ** ** | **For the Period  January 1 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries) (Note 1)** | ** ** | ** ** | **Nine Months  Ended September 30,  2004** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|
| ** **                                                        | ** ** | **(in thousands)**                                                                                                                                                                | ** ** | ** ** | **(in thousands)**                                    | ** ** | **(in thousands)**                                                                                                                                                                  | ** ** | ** ** | **(in thousands)**                                   | ** ** |
| Income (loss) from continuing operations (numerator)              |       |                                                                                                                                                                                   | $          | (15,459    | )                                                          |       |                                                                                                                                                                                     |       | $          | 4,041                                                     |       |   |   | $ | (11,202 | ) |   |   |   | $ | 3,108 |   |   |
| Income (loss) from  discontinued  operations                      |       |                                                                                                                                                                                   | (6,769     | )          |                                                       |       |                                                                                                                                                                                     | 418        |       |                                                      |       | (12,316 | ) |   |   |   | 396 |   |   |
| Gain on disposition of discontinued operation                     |       |                                                                                                                                                                                   | —     |       |                                                       |       |                                                                                                                                                                                     | 593        |       |                                                      |       | — |   |   |   |   | 593 |   |   |
| Net income (loss)                                                 |       |                                                                                                                                                                                   | $          | (22,228    | )                                                          |       |                                                                                                                                                                                     |       | $          | 5,052                                                     |       |   |   | $ | (23,518 | ) |   |   |   | $ | 4,097 |   |   |
| Weighted average basic common shares outstanding  (denominator)   |       |                                                                                                                                                                                   | 47,037     |       |                                                       |       |                                                                                                                                                                                     | 38,690     |       |                                                      |       | 47,585 |   |   |   |   | 33,924 |   |   |
| Potential common stock  arising from stock  options               |       |                                                                                                                                                                                   | —     |       |                                                       |       |                                                                                                                                                                                     | 963        |       |                                                      |       | — |   |   |   |   | 994 |   |   |
| Weighted average  diluted common shares outstanding (denominator) |       |                                                                                                                                                                                   | 47,037     |       |                                                       |       |                                                                                                                                                                                     | 39,653     |       |                                                      |       | 47,585 |   |   |   |   | 34,918 |   |   |

 

17

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

Included in potentialcommon stock arising from stock options for the three and nine months ended September30, 2004 are early exercises of unvested stock option awards, which areexcluded from the weighted average basic common shares outstanding calculation (see Note 7).

For each of the Predecessor periods presented abovethere were 1,042,200 shares under option grants excluded from the calculationsof diluted earnings per share as the effect of these shares would have beenanti-dilutive. For the three and nine monthsended September 30, 2004, there were 685,003 shares under option grantsexcluded from the calculations of diluted earnings per share as the effect ofthese shares would have been anti-dilutive.

**9. Stock-BasedCompensation**

We have a stock-based employee compensation plan and,prior to the Merger, the Predecessor had a stock-based employee compensationplan. In anticipation of the Merger, as of September 18, 2003, all of thePredecessor’s outstanding common stock options were canceled for nominalconsideration. As permitted by SFAS No. 123, “Accounting for Stock-BasedCompensation,” we and the Predecessor account for stock-based compensation inaccordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. Under APB 25, werecognize no compensation expense related to employee stock options unlessoptions are granted at a price below the market price on the day of the grant.

18

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

Had weand the Predecessor applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation, net income (loss) and basic and dilutednet income (loss) per share would have been as follows:
| ** **                                                                                                                                                                | ** ** | **For the Period  June 21 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries) (Note 1)** | ** ** | ** ** | **Three Months  Ended September 30,  2004** | ** ** | **For the Period  January 1 to  September 23, 2003  (Predecessor entity—  InfraSource**

**Incorporated and  Subsidiaries) (Note 1)** | ** ** | ** ** | **Nine Months  Ended September 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                                                                | ** ** | **(in thousands)**                                                                                                                                                                | ** ** | ** ** | **(in thousands)**                                    | ** ** | **(in thousands)**                                                                                                                                                                      | ** ** | ** ** | **(in thousands)**                                   | ** ** |
| Net income (loss), as reported                                                                                                                                            |       |                                                                                                                                                                                   | $          | (22,228    | )                                                          |       |                                                                                                                                                                                         |       | $          | 5,052                                                     |       |   |   | $ | (23,518 | ) |   |   |   | $ | 4,097 |   |   |
| Deduct: Total stock-based employee compensation  expense, including  cancellations, determined under fair value based method for  all awards, net of related tax  effects |       |                                                                                                                                                                                   | 239        |       |                                                       |       |                                                                                                                                                                                         | (226       | )          |                                                      |       | — |   |   |   |   | (635 | ) |   |
| Add: Total stock-based employee compensation expense,  net of related tax effects included in the determination of net income as  reported                           |       |                                                                                                                                                                                   | —     |       |                                                       |       |                                                                                                                                                                                         | 20         |       |                                                      |       | — |   |   |   |   | 208 |   |   |
| Pro forma net income (loss)                                                                                                                                               |       |                                                                                                                                                                                   | $          | (21,989    | )                                                          |       |                                                                                                                                                                                         |       | $          | 4,846                                                     |       |   |   | $ | (23,518 | ) |   |   |   | $ | 3,670 |   |   |
| *Basic and diluted income (loss)  per share:*                                                                                                                             |       |                                                                                                                                                                                   |       |       |                                                       |       |                                                                                                                                                                                         |       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Basic net income (loss) per share—as reported                                                                                                                   |       |                                                                                                                                                                                   | $          | (0.47      | )                                                          |       |                                                                                                                                                                                         |       | $          | 0.13                                                      |       |   |   | $ | (0.50 | ) |   |   |   | $ | 0.12 |   |   |
| Basic net income (loss) per share—pro forma                                                                                                                          |       |                                                                                                                                                                                   | (0.47      | )          |                                                       |       |                                                                                                                                                                                         | 0.13       |       |                                                      |       | (0.50 | ) |   |   |   | 0.11 |   |   |
| Diluted net income (loss) per share—as reported                                                                                                                 |       |                                                                                                                                                                                   | (0.47      | )          |                                                       |       |                                                                                                                                                                                         | 0.13       |       |                                                      |       | (0.50 | ) |   |   |   | 0.12 |   |   |
| Diluted net income  (loss) per share—pro forma                                                                                                                       |       |                                                                                                                                                                                   | (0.47      | )          |                                                       |       |                                                                                                                                                                                         | 0.12       |       |                                                      |       | (0.50 | ) |   |   |   | 0.11 |   |   |

 

**10. Concentrationof Credit Risk**

We derive a significant portion of our revenues from asmall group of customers. Our top ten customers accounted for approximately 41%and 49% of our consolidated revenues for the three and nine months ended September 30,2004, respectively. Our top ten customers accounted for approximately 46% and45% of our consolidated revenues for the Predecessor periods June 21, 2003to September 23, 2003 and January 1 to September 23, 2003,respectively. Two customers, Exelon and Western Area Power Administration (“WAPA”),accounted for approximately 18% and 12%,respectively, of our consolidated revenues for the nine monthsended September 30, 2004. One customer, Exelon, accounted forapproximately 13% of our consolidated revenues for the three months ended September 30,2004. For the Predecessor periods June 21, 2003 to September 23, 2003and January 1, 2003 to September 23, 2003, the 

19

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

only customer thatprovided more than 10% of our consolidated revenues, Exelon, representedapproximately 14% of consolidated revenues in each period.

At September 30,2004, accounts receivable due from Exelon is $16.8 million or 16% of our totalaccounts receivable balance outstanding. At December 31, 2003, accountsreceivable due from Exelon totaled $14.6 million, or approximately 16% of totalaccounts receivable, and additionally one other customer represented $9.6million or 11% of accounts receivable.

**11. Other Income(Expense)**

Other income (expense) forthe three and nine months ended September 30, 2004, includes income of$1.0 million from a key-man insurance policy for whichwe are the beneficiary, due to the death of one of our projectmanagers. Other income (expense) includes various other miscellaneous items.

**12. ComprehensiveIncome (Loss)**

The following table presents the components ofcomprehensive income (loss) for the periods presented:
| ** **                        | ** ** | **For the Period  June 21 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries) (Note 1)** | ** ** | ** ** | **Three Months  Ended September 30,  2004** | ** ** | **For the Period  January 1 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries) (Note 1)** | ** ** | ** ** | **Nine Months  Ended September 30,  2004** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|
| ** **                        | ** ** | **(in thousands)**                                                                                                                                                                | ** ** | ** ** | **(in thousands)**                                    | ** ** | **(in thousands)**                                                                                                                                                                  | ** ** | ** ** | **(in thousands)**                                   | ** ** |
| Net income (loss)                 |       |                                                                                                                                                                                   | $          | (22,228    | )                                                          |       |                                                                                                                                                                                     |       | $          | 5,052                                                     |       |   |   | $ | (23,518 | ) |   |   |   | $ | 4,097 |   |   |
| Other comprehensive income (loss) |       |                                                                                                                                                                                   | —     |       |                                                       |       |                                                                                                                                                                                     | (204       | )          |                                                      |       | (75 | ) |   |   |   | 195 |   |   |
| Comprehensive  income (loss)      |       |                                                                                                                                                                                   | $          | (22,228    | )                                                          |       |                                                                                                                                                                                     |       | $          | 4,848                                                     |       |   |   | $ | (23,593 | ) |   |   |   | $ | 4,292 |   |   |

 

During the period January 1, 2003 to September 23, 2003, thePredecessor recognized other comprehensive loss of $0.1 million associated witha foreign currency translation adjustment recorded prior to 2001, due tonon-recoverability from foreign operations. Other comprehensive income duringthe three and nine months ended September 30, 2004 comprises changes inthe fair value of interest rate cap and swap agreements designated andqualifying as cash flow hedges under the provisions of SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”, as amended bySFAS Nos. 137, 138 and 149, net of reclassifications to net income.

**13. Segment Information**

We operate in one reportable segment as aspecialty contractor serving the utility transmission and distributioninfrastructure in the United States. Our customers primarily include electricpower utilities, natural gas utilities, government entities and heavyindustrial companies, such as petrochemical, processing and refiningbusinesses. Our broad range of services include the design, engineering,procurement, construction, testing, maintenance, and leasing of utilityinfrastructure. Each of these services is provided by our various subsidiaries,all of which have been aggregated into one reportable segment due to theirsimilar economic characteristics, customer bases, products and production anddistribution methods. We 

20

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

operate in multipleservice territories throughout the United States and do not have significantassets or operations outside of the United States.

The following table presents informationregarding revenues by end market
| ** **         | ** ** | **For the Period  January 1 to  September 23, 2003  (Predecessor entity—  InfraSource  Incorporated and  Subsidiaries) (Note 1)** | ** ** | ** ** | **Nine Months  Ended September 30,  2004** | ** ** |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|
| ** **         | ** ** | **(in thousands)**                                                                                                                                                                  | ** ** | ** ** | **(in thousands)**                                   | ** ** |
| Electric           |       |                                                                                                                                                                                     | $          | 214,513    |                                                      |       |   |   | $ | 265,424 |   |   |
| Gas                |       |                                                                                                                                                                                     | 109,042    |       |                                                      |       |   | 139,362 |   |   |
| Telecommunications |       |                                                                                                                                                                                     | 49,494     |       |                                                      |       |   | 36,264 |   |   |
| Other              |       |                                                                                                                                                                                     | 9,578      |       |                                                      |       |   | 15,572 |   |   |
|               |       |                                                                                                                                                                                     | $          | 382,627    |                                                      |       |   |   | $ | 456,622 |   |   |

 

**14. Related PartyTransactions**

On October 6, 1999, the InfraSource Group enteredinto a services agreement (“Services Agreement”) with Exelon for Exelon toprovide certain services, including contracting for employees, financial andaccounting services, payroll services, office and equipment leases and otheradministrative and support services. The scope of these services was reducedeach year of the agreement. This agreement was effective for a period of 12months commencing in October of each year and was renewable at bothparties’ discretion. The InfraSource Group, through InfraSource CorporateServices, Inc., was charged $0.3 million and $1.2 million for theseservices for the Predecessor periods June 21, 2003 to September 23,2003 and January 1, 2003 to September 23, 2003, respectively.Pursuant to the Merger, this Services Agreement was terminated.

The InfraSource Group has several service contractswith Exelon and performs various services including utility construction andmaintenance, telecommunications and infrastructure services on an outsourcedbasis to business and residential customers. Certain operating assets andliabilities of the Non-Acquired Group, including certain operating agreements(the “Operating Agreements”) with Exelon, were transferred to the InfraSourceGroup as of January 1, 2003, with operating results related to theOperating Agreements reflected in the accompanying consolidated statement ofoperations beginning with the date of transfer. Under the Operating Agreements,we perform infrastructure services on an outsourced basis to business andresidential customers. Each Operating Agreement has an annual term ending on December 31which automatically renews each year unless formally terminated by Exelon. Theservices were provided to Exelon at a rate that is intended to approximatemarket value. Revenues charged to Exelon under these contracts for thePredecessor periods June 21, 2003 to September 23, 2003 and January 1,2003 to September 23, 2003 were $10.9 million and $25.0 million,respectively. These Operating Agreements remained in place following theMerger. On January 29, 2004, Exelon relinquished its sole seat on ourBoard of Directors and ceased to be a related party at that time. Revenues fromExelon for the period January 1 through January 29, 2004 (the date itceased to be a related party) were $7.6 million.

21

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

In addition to the Operating Agreements, revenues forthe Predecessor periods June 21, 2003 to September 23, 2003 and January 1,2003 to September 23, 2003 related to contracts with Exelon were $10.9million and $28.5 million, respectively. Accounts receivable related to allrevenues due from Exelon were $14.6 million at December 31, 2003.

In March 2004, after receiving approval from therequired parties, we distributed $7.2 million of property and equipment thatpursuant to the original terms of a purchase agreement with Blair Park wereowed to three officers of Blair Park. The corresponding liability related tothese assets is reflected in other liabilities—related parties in the December 31,2003 condensed consolidated balance sheet. Additionally, we lease office andwarehouse space from Coleman Properties of which three officers of Blair Parkare general partners. Our annual lease payments are approximately $0.1 million.

We lease office and warehouse facilities inMichigan which are owned by an employee and his family members.  Our leasesfor these properties will run through February 2005, subject to a four-yearrenewal option. Pursuantto these leases, we expect to incur total annual lease paymentsof $0.3 million.

In connection with the Maslonka acquisition, ourPrincipal Stockholders secured the issuance of $10.0 million worth of lettersof credit. These letters of credit were provided as credit support to enableMaslonka to secure a performance bond on a new project award. Afterconsummation of the Maslonka acquisition, we caused the letters of credit to beterminated. We paid an aggregate fee of $0.2 million to the PrincipalStockholders for providing this security.

We lease our Maslonka headquarters in Mesa, Arizonaand our Maslonka Texas field office in San Angelo, Texas from EC Source, LLC,which is wholly-owned by Martin Maslonka, one of our shareholders. Our leasesfor these two properties will run through February 2009, subject to afive-year renewal option. Pursuant to these leases, we expect to incur totalannual lease payments of $0.2 million.

Maslonka is the issuer of a $1.0 million installmentpromissory note in favor of Martin Maslonka. The promissory note bears interestat an annual rate of 8.5%, and interest is payable in equal monthly payments of$7,000. The promissory note matures on June 30, 2006.

Wesublease two equipment yards, which are owned by one of ouremployees, from a subsidiary of SEMCO Energy Inc. Pursuantto six-month subleases through February 2005, we will incuraggregate lease payments of $0.1 million.

**15. Commitments andContingencies**

On February 7, 2003, Rahsanne Bickman filed suit in the Travis CountyDistrict Court in Texas State Court against Maslonka and one employee alleging,among other things, gross negligence and seeking approximately $24.0 million inactual and compensatory damages arising out of the death of her son. On October 27,2003, the father of the deceased, Kevin Sam, Sr., filed suit in Taylor CountyTexas District Court seeking unspecified damages. The claims arose out of anautomobile accident that took place on December 1, 2002 on an interstatehighway in Texas and resulted in death. In February 2004, Rahsanne Bickman’sclaims were resolved through an out of court settlement fully funded byinsurance proceeds (less a $10,000 deductible). The dismissal order was enteredon March 25, 2004. The claims of Kevin Sam, Sr. have been docketedfor trial on December 13, 2004.

22

----

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

In January 2004, a judgment was entered againstInfraSource in Superior Court of Fulton County, Georgia in the amount of $3.8million, including $3.2 million in punitive damages. The jury verdict upheldallegations by the plaintiff that in 1999 InfraSource Incorporated (formerlyknown as Exelon Infrastructure Services, Inc.) had fraudulently inducedthe plaintiff to incur expenses in connection with a proposed businessacquisition that was never consummated. We filed a notice of appeal on February 19,2004, and the plaintiff filed a notice of cross-appeal on March 2, 2004.Pursuant to the appellate court’s May 28, 2004 Notice of Docketing, wefiled a brief supporting our appeal on June 17, 2004. All briefings werecompleted on July 22, 2004, and oral arguments were heard on October 13,2004.

In addition, pursuant to our service contracts, wealso generally indemnify our customers for the services we provide thereunder. Furthermore,because our services are integral to the operation and performance of theelectric power transmission and distribution infrastructure, we may becomesubject to lawsuits or claims for any failure of the systems that we work on,even if our services are not the cause for such failures, and we could besubject to civil and criminal liabilities to the extent that our servicescontributed to any property damage or blackout. The outcome of theseproceedings could result in significant costs and diversion of management’sattention to our business. Payments of significant amounts, even if reserved,could adversely affect our reputation and liquidity position.

From time to time, we are a party to various otherlawsuits, claims and other legal proceedings that arise in the ordinary courseof our business. These actions typically seek, among other things, compensationfor alleged personal injury, breach of contract, property damage, punitivedamages, civil penalties or other losses, or injunctive or declaratory relief.With respect to such lawsuits, claims and proceedings, we accrue reserves whenit is probable a liability has been incurred and the amount of loss can bereasonably estimated. We do not believe any of these proceedings currentlypending, individually or in the aggregate, would be expected to have a materialadverse effect on our results of operations, cash flows, or financialcondition.

23

----

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

**Forward-Looking and Cautionary Statements**

In this Management’s Discussion and Analysis, andelsewhere in this Quarterly Report on Form 10-Q, we have madeforward-looking statements. Generally, these forward-looking statements can be identifiedby words like “may,” “will,” “should,” “expect,” “intend,” “anticipate,” “believe,”“estimate,” “predict,” “potential,” or “continue” or the negative of thosewords and other comparable words. These forward-looking statements generallyrelate to our plans, objectives and expectations for future operations and arebased upon our current estimates and projections of future results or trends.Although we believe that our plans and objectives reflected in or suggested bythese forward-looking statements are reasonable, we may not achieve these plansor objectives. These statements are subject to known and unknown risks,uncertainties and other factors that could cause the actual results to differmaterially from those contemplated by the statements. These statements onlyreflect our predictions. Except as required by law, we will not updateforward-looking statements even though our situation may change in the future.With respect to forward-looking statements, we claim the protection of the safeharbor for forward-looking statements contained in the Private SecuritiesLitigation Reform Act of 1995.

The factors that couldaffect future results and could cause those results to differ materially fromthose expressed in the forward-looking statements include, but are not limitedto those described below under “Risks Relating to Our Business and Industry”and other risks outlined in our periodic filings with the Securities andExchange Commission.

**Introduction**

The following discussionshould be read in conjunction with the unaudited condensed consolidatedfinancial statements and notes of InfraSource Services, Inc. and its wholly owned subsidiariesincluded elsewhere in this Quarterly Report on Form 10-Q and withthe audited financial statements and notes included in our Prospectus filed pursuant to Rule 424(b)(1) (SECFile Number 333-112375) and contained in the related registrationstatement declared effective on May 6, 2004 (the “IPO Prospectus”)*.*

**General**

We operate in one reportable segment and we are one ofthe largest specialty contractors serving the utility transmission anddistribution infrastructure in the United States based on market share. Ourbroad range of services includes the design, engineering, procurement,construction, testing, maintenance, and leasing of utility infrastructure. Ourcustomers primarily include electric power utilities, natural gas utilities,government entities and heavy industrial companies, such as petrochemical,processing and refining businesses. Each of these services is provided by ourvarious subsidiaries, which provide management with monthly financialstatements. All of our subsidiaries have been aggregated into one reportablesegment due to their similar economic characteristics, customer bases, productsand production methods, and distribution methods. We operate in multipleservice territories throughout the United States and do not have significantoperations or assets in countries outside of the United States.

We had revenues of $164.2 million for the three monthsended September 30, 2004, of which approximately 47% was attributable toelectric power customers, 40% to natural gas customers, 9% totelecommunications customers, and 4% for ancillary services. For the threemonths ended September 30, 2004, our top ten customers accounted forapproximately 41% of our consolidated revenues, of which Exelon Corporation (“Exelon”)represented approximately 13%.

We had revenues of $456.6million for the nine months ended September 30,2004, of which approximately 58% was attributable to electric power customers,31% to natural gas customers, 8% to telecommunications customers, and 3% forancillary services. For the nine months ended September 30, 

24

----

2004,our top ten customers accounted for approximately 49% of our consolidatedrevenues. Two customers, Exelon and Western Area Power Administration (“WAPA”),accounted for approximately 18% and 12%, respectively, of our consolidatedrevenues for the nine months ended September 30, 2004. Our revenue backlogwas $992 million as of September 30, 2004, 13.9% higher than our backlogof $871 million as of June 30, 2004 and 69.0% higher than our backlog of$587 million as of September 30, 2003. All prior period backlog balancesinclude amounts for Maslonka;  howeverbacklog balances for the third quarter acquisitions, Utili-Trax ContractingPartnerships, LLC (“Utili-Trax”) and EnStructure Corporation’s operatingcompanies (“EnStructure”),  have not beenincluded in their respective preacquisition periods. Utili-Trax and EnStructurecollective backlog of approximately $107 million is included in our September 30,2004 backlog.

**Overview of Operations**

Our historicalperformance is affected by the capital spending of our customers. In the lastseveral years, our business has been impacted by several important trendsaffecting our end markets.

·       Electricutilities are key customers and provide us with a diversified variety ofprojects, including aerial transmission work, substations, in-plantengineering, maintenance and upgrades. In recent years, our business from thesecustomers has been relatively stable despite financial pressures on someutilities. Although some utilities have restrained their overall capitalspending, the effects on third-party contractors have been partially offset byan increase in the proportion of work that these customers outsource.

·       Thederegulation of the electric utility industry in the 1990s createdopportunities for independent power producers, or IPPs, which constructed oracquired substantial generating capacity resulting in an increased demand forour services, particularly in providing “turnkey” substations, switching yardsand interconnections. In these projects, we would typically engineer, procurematerials for, and construct the entire project. These turnkey projects have asubstantial impact on our revenues because, when we procure materials for ourcustomers in addition to providing services, the value of those materialsresults in higher revenues than in a services-only contract. As a number of largeIPPs have been under significant financial stress, IPP spending declinedsignificantly in 2003, with a substantially reduced contribution to our 2003financial performance. This trend has continued into 2004, although we areexperiencing a recent increase in bidding activity and awards.

·       Weprovide a variety of electrical design, engineering and construction servicesto heavy industrial customers, including petrochemical, processing and refiningbusinesses. Higher oil prices have enhanced the financial performance of manyof our refinery customers, which has contributed to increased spending andconsequently greater demand for our services. By contrast, high natural gasprices have negatively impacted the financial performance of some of ourpetrochemical customers, leading to decreases in their capital spending andconsequently reduced demand for our services.

·       Duringthe late 1990s, service contractors like us benefited from rapidly expandingdemand for telecommunications infrastructure, as telecommunications providersinstalled new long-haul optical fiber networks nationwide. This demand peakedin 2000 and declined significantly through 2003 as many of these customers haveexperienced bankruptcies and have been unable to access capital. We continue tosee low levels of activity in this sector.

·       Thedecline in telecommunications spending on fiber-optic network construction ledto an overcapacity of contractors serving this market. In response, many ofthese contractors began competing for opportunities in other industries, suchas natural gas distribution infrastructure. This led to increased competitionfor projects from natural gas utilities, and pricing pressure, resulting inlower gross margins for us, particularly in 2002 and the first half of 2003. Webelieve some of these new market entrants have begun to exit the natural gasdistribution market. In addition, there has 

25

----

been continued strength inthe housing construction market. As a result of these factors, we experiencedimproved bidding conditions and profit margins in the latter half of 2003 andinto 2004.

In addition to industrytrends described above, during 2002 we completed a review of our existingnatural gas distribution contracts. As a result of this review, we exited orrenegotiated a number of underperforming contracts. This strategy reduced ournatural gas revenues during 2002 and 2003. Additionally, the effects of extremeadverse weather and losses on certain contracts completed in 2003 contributedto lower gross margins in the first half of the year. As has been common in ourindustry, we also experienced increases in workers’ compensation and insuranceexpenses in recent years.

**Acquisitions and Dispositions**

*Merger*

On September 24, 2003, we acquired theInfraSource Group pursuant to an Agreement and Plan of Merger dated June 17,2003 (the “Merger”). In connection with the Merger, we acquired all of thevoting interests of InfraSource Incorporated for a total purchase priceconsideration of $228.6 million. In accordance with the terms of the Merger,the purchase price was subject to adjustment based upon the determination ofadjusted working capital as of September 23, 2003. We finalized theworking capital adjustment, as well as various other purchase pricecontingencies, in the third quarter of 2004, resulting in a payment to us fromExelon of approximately $7.7 million, including interest of approximately $0.2million. We had previously included an expected amount due from Exelon of $10.5million in our purchase price calculation; therefore in thethird quarter when we received the settlement payment, we adjusted thereceivable and increased goodwill by $3.0 million. During the third quarter of2004, we also finalized certain allocation estimates and purchase pricecontingencies, including the valuation of certain specialty equipment acquired,which resulted incertain purchase price allocation adjustments. The aggregate effect of thesepurchase price allocation adjustments was a decrease to goodwill ofapproximately $2.2 million. In accordance with the terms of the Merger, we maybe entitled to additional contingency payments from Exelon. Any such paymentswould result in future adjustments to goodwill, which could be material.

As of September 30,2004, goodwill related to the Merger is $72.5 million.  In addition to the Merger related purchaseaccounting adjustments, goodwillalso increased in thethird quarter of 2004 by $2.3 million for additional contingent purchase price consideration tothe former owners of Blair Park Services, Inc. and Sunesys, Inc.(collectively “Blair Park”). Blair Park was acquired by the Predecessor in 2001.As of September 30, 2004, the aggregate liability of $5.0 million forcontingent purchase price consideration tothe former owners of Blair Park is accrued in other long-term liabilities onthe condensed consolidated balance sheet. Further modifications to the earn outcalculation will result in additional adjustments to goodwill, which could bematerial. Final settlement of the contingency is required in 2006.

*MaslonkaAcquisition*

On January 27, 2004, we acquired all of thevoting interests of Maslonka & Associates (“Maslonka”), acomplementary infrastructure services business, for total purchase priceconsideration of $77.6 million, which included the issuance of 4,330,820 sharesof our common stock. The final allocation of the purchase price is subject to aworking capital adjustment and settlement of holdback adjustments to thepurchase price in accordance with the terms of the acquisition agreement. Weexpect the working capital adjustmentto be finalized during the first quarter of 2005 and expect the holdback amounts, less any amounts retained byus, will be released to the sellers in 2005 and 2006. Any adjustments resultingfrom the working capital adjustmentand holdback adjustments could result in an adjustment to goodwill, whichamounts could be material. The value of the shares issued to Maslonkastockholders was determined to be approximately $50.7 million. Under the termsof the holdback provisions, wewithheld $6.6 million in cash payable at closing and 957,549 shares of commonstock. Of the cash holdback amount, $5.5 million is contingent upon 

26

----

Maslonka’s achievement ofcertain performance targets as well as satisfaction of any indemnificationobligations owed to us, which may be set-off against all other portions of theholdback. The results of Maslonka are included in our consolidated resultsbeginning January 27, 2004.

Additionally,**at the time of the acquisition, Maslonka had an outstandingletter of credit collateralized with a $5.0 million time deposit accountprovided by the Maslonka stockholders, which we acquired in the acquisition. Asrequired pursuant to the acquisition agreement, we reimbursed the Maslonkastockholders for the $5.0 million in the third quarter of 2004. After givingeffect to the holdback and the reimbursement of the time deposit account, theamount paid at closing was $26.7 million in cash and 3,373,271 shares of ourcommon stock. We financed the cash portion of the Maslonka acquisition withcash on hand and the issuance of 5,931,950 shares of our common stock to thePrincipal Stockholders and certain members of our management for cash of $27.5million (see Note 7 to our condensed consolidated financial statements). Thepreliminary purchase price has been initially allocated to the assets acquiredand liabilities assumed based on their estimated fair value, which resulted ingoodwill of $59.6 million.

*Utili-TraxAcquisition*

On August 18, 2004,we acquired substantially all of the assets and assumed certain liabilities ofUtili-Trax Contracting Partnerships, LLC (“Utili-Trax”), which provides underground and overheadconstruction services for electric cooperatives and municipal utilitiesthroughout the upper Midwest, for a total purchase price considerationof $5.2 million in cash, including transaction costs. The final allocation ofthe purchase price is subject to a working capital adjustment and valuations ofcertain property and equipment and intangible assets which we expect tofinalize during the fourth quarter of 2004. Anyadjustments resulting from the working capital adjustment could result in anadjustment to goodwill which could be material. The results ofUtili-Trax are included in our consolidated results beginning August 18,2004. The preliminary purchase price has been initially allocated to the assetsacquired and liabilities assumed based on their estimated fair value, whichresulted in goodwill of $2.3 million.

*EnStructureAcquisition*

On September 3, 2004,we acquired substantially all of the assets and assumed certain liabilities ofEnStructure Corporation’s (“EnStructure”) operating companies: Sub-SurfaceConstruction Company, Flint Construction Company and Iowa Pipeline Associates,for total purchase price consideration of $21.2 million in cash, includingtransaction costs and $2.0 million of cash withheld pursuant to holdbackprovisions. EnStructure, the construction services business of SEMCO Energy, Inc.,providesconstruction services within the utilities, oil and gas markets throughout theMidwestern, Southern and Southeastern regions of the United States.  The final allocation of the purchaseprice is subject to a working capital adjustment, final settlement of theholdback adjustments to the purchase price in accordance with the terms of theacquisition agreement and valuations of certain property and equipment andintangible assets which we expect to finalize during the fourth quarter of2004.  Any adjustmentsresulting from the working capital adjustments and holdback adjustments couldresult in an adjustment to purchase accounting, which amounts could bematerial. The results of EnStructure are included in our consolidated resultsbeginning September 3, 2004. The fair value of the EnStructure net assetsexceeded the preliminary purchase price. Therefore, as described in FinancialAccounting Standards (“SFAS”) No. 141, “Business Combinations”, we decreased the eligibleassets by the excess amount.

*DiscontinuedOperations*

During 2003,subsequent to the Merger, we committed to a plan to sell substantially all ofthe assets of OSP Consultants, Inc. and subsidiaries (“OSP”). On September 21,2004, we completed the sale of substantially all of the assets of RJE Telecom, Inc.(“RJE”), a wholly owned subsidiary of OSP, for cash proceeds of $8.4 million,net of transaction costs. Additional proceeds of approximately $0.9 million are

27

----

expected in the fourth quarter of 2004 based on a working capitaladjustment pursuant to the agreement. The sale of the RJE assets resulted in again of $0.6 million (net of $0.4 million tax), which is includedin gain on disposal of discontinued operations in our condensed consolidatedstatement of operations. The RJE sale completed our commitment to sellsubstantially all of the assets of OSP.

In addition, in the third quarter of 2004, we committed to a plan tosell substantially all of the assets of Utility Locate & MappingServices, Inc., (“ULMS”).  Inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” the financial position, results of operations and cashflows of OSP and ULMS are reflected as discontinued operations in ouraccompanying financial statements for the three and nine month periods ended September 30,2004. For the Predecessor periods June 21, 2003 to September 23,2003 and January 1, 2003 to September 23, 2003, OSP is included incontinuing operations.  ULMS was held forsale by the Predecessor for the period January 1, 2003 to September23, 2003; therefore ULMS’s financial position, results of operations and cashflows are included in discontinued operations in the Predecessor’s financialstatements. We acquired ULMS from Exelon in December 2003.

**Initial Public Offering**

On May 12, 2004, we completed our IPO of8,500,000 shares of common stock at a price to the public of $13 per share. Thenet proceeds of the offering to us of approximately $100.8 million, afterdeducting underwriters’ discounts and offering expenses, were used by us asfollows: (1) $50.2 million was used to repay a portion of term loansoutstanding under our senior credit facility; (2) $30.0 million was usedto repay the principal amount of our subordinated note with Exelon; and (3) theremaining proceeds of approximately $20.6 million were retained for generalcorporate purposes. Because the carrying amount of the Exelon note was recordedat a discount to reflect the fair value based upon applicable market rates forsimilar securities, we recorded a loss on the early extinguishment of this debtin the amount of $5.7 million in the second quarter of 2004. For the ninemonths ended September 30, 2004, approximately $0.1 million of this losson early extinguishment of debt, whichrelates to the portion of debt assumed in the acquisition of ULMS in December2003, is reflected in income from discontinued operations dueto our decision to sell ULMS.

As part of our arrangementwith Exelon to repay the principal portion of the $30.0 million subordinatednote at the IPO date, Exelon agreed to forgive the accrued and unpaid intereston the subordinated note if within six months of the IPO date we had notinitiated certain transactions. As of November 8, 2004, we have not and donot expect to initiate any such transactions specified in the arrangement priorto the expiration of the six-month period; therefore we expect our accruedinterest balance to be forgiven and recorded as a reduction to loss on earlyextinguishment of debt expense duringthe fourth quarter of 2004. The accrued interest balance related to the Exelonnote of approximately $1.1 million at September 30, 2004, is included inother current and accrued liabilities on the condensed consolidated balancesheets.

**Results of Operations**

The following analysisincludes a comparison of the results of our operations for the three and ninemonths ended September 30, 2004 with the Predecessor’s actual results forthe periods June 21, 2003 to September 23, 2003 (“Predecessor 2003three-month period”) and January 1, 2003 to September 23, 2003 (“Predecessor2003 nine-month period”). The following analysis also compares our results ofoperations for (1) the three months ended September 30, 2004 (“2004three-month period”) with the Predecessor’s historical results of operationsfor the period June 21, 2003 to September 23, 2003 as adjusted toreflect the pro forma effects of the Merger (“Predecessor pro forma 2003three-month period”); and (2) the nine months ended September 30,2004 (“2004 nine-month period”) with the Predecessor’s historical results ofoperations for the period January 1, 2003 to September 23, 2003 asadjusted to reflect the pro forma 

28

----

effects of the Merger (“Predecessorpro forma 2003 nine-month period”). The principaladjustments associated with the Predecessor pro forma 2003 three- andnine-month periods include (1) the elimination of Merger-related costs andexpenses; (2) the effects on depreciation expense (which is included incost of revenues and selling, general and administrative expenses) resultingfrom changes in lives and book basis of certain fixed assets; (3) additionalamortization of intangible assets resulting from the Merger; (4) additionalinterest expense and debt discount amortization for debt and a subordinatednote entered into as part of the Merger; and (5) relatedincome tax effects of the previously mentioned adjustments.

The comparisons of our 2004 three- and nine-monthresults, as applicable, with the Predecessor’s 2003 actual and pro formaresults, as applicable, is affected by the Maslonka acquisition on January 27,2004. In addition, asdisclosed in Note 1 to the condensed consolidated financial statements, the2004 nine-month period reflects results from January 1, 2004 to September 30,2004. The corresponding 2003 Predecessor period reflects the Predecessor’sresults for the period January 1, 2003 to September 23, 2003. 

Our results of operationscan be subject to seasonal variations. During the winter months, demand for newprojects and new maintenance service arrangements may be lower due to reducedconstruction activity. We generally experience lower gross operating marginsduring the winter months due to lower demand for our services and moredifficult operating conditions. However, demand for repair and maintenanceservices attributable to damage caused by inclement weather during the wintermonths may partially offset the loss of revenues from lower demand for newprojects and new maintenance service arrangements. Work is also hindered duringother inclement weather events. In addition, during periods of peak electricitydemand, utilities generally are unable to remove their electric powertransmission and distribution equipment from service, decreasing the demand forour services during this period. Accordingly, operating results in anyparticular quarter may not be indicative of the results that can be expectedfor any other quarter or for the entire year.

**2004 Three-Month Period Compared to the Predecessor2003 Three-Month Period.**

Revenues: Revenues increased $29.1 million, or 22%, to$164.2 million for the 2004 three-month period compared to the Predecessor 2003three-month period due primarily to a $11.8 million increase in aerial electrictransmission revenues, including the work performed by Maslonka which weacquired on January 27, 2004, and an increase of $20.7 million fromunderground natural gas work, including approximately $5.0 million from thirdquarter acquisitions. Partially offsetting these increases in revenues was adecrease in telecommunications revenue of $4.8 million. The decrease intelecommunications revenue of $4.8 million is attributable to the inclusion of$7.7 million of revenue from OSP, the subsequently discontinued operation,which is included in the Predecessor 2003 three-month period. Absent thisamount, telecommunications revenue increased$2.9 million.

Gross profit: Gross profit increased $5.9 million, or29%, to $26.0 million in the 2004 three-month period as compared to thePredecessor 2003 three-month period due primarily to higher gross profit fromour natural gas and telecommunications businesses. Theseincreases in gross profit were partially offset by the absence of gross margins from OSP, which is reflected indiscontinued operations for the three-month period ended September 30,2004.

Selling, general and administrative expenses: Selling,general and administrative expenses decreased $9.7 million, or 37%, to $16.2million in the 2004 three-month period compared to the Predecessor 2003three-month period. This decrease is primarily due to an $8.6 million insurancecharge and $1.2 million of expenses related to OSP included in the Predecessor’s2003 three-month period. OSP operations are included in discontinued operationsfor the 2004 three-month period. Overall, these decreases were partially offsetby incremental expenses related to the Maslonka, Utili-Trax and EnStructureacquisitions of approximately $2.5 million.

29

----

Merger related costs: Merger related costs incurred by thePredecessor in the 2003 three-month period of $14.3 millioninclude severance costs, retention costs and professional services fees.In the 2004 three-month period, we recorded a credit tomerger related expense of $0.4 million for retention bonusesaccrued at the closing of the Merger which have been determined to benefitfuture periods. Offsettingthis amount, in part, is a charge to expense of $0.1 million for retentionbonuses earned during the current quarter.

Amortization of intangible assets: Amortization ofintangible assets was $2.4 million in the 2004 three-month period compared withno such amortization expense in the Predecessor 2003 three-month period as aresult of the amortization of intangible assets acquired in the Maslonkaacquisition and the Merger.

Interest expense and amortization of debt discount: Weincurred $2.0 million of interest expense in the 2004 three-month periodreflecting interest on debt resulting from the Merger.

Other income (expense), net: Other income (expense)increased by $4.4 million to an other income, net balance for the 2004three-month period of $1.0 million compared to an other expense, net balance of$3.4 million for the Predecessor’s 2003 three-month period . The increase inother income is primarily due to a $3.8 million charge for a litigation judgmentrecorded in the Predecessor’s 2003 three-month period and income of $1.0million from a key-man life insurance policy included in the 2004 three-monthperiod. The increase in other income, net was partially offset by slightincreases in various other miscellaneous expenses.

**2004 Three-MonthPeriod Compared to the Predecessor Pro Forma 2003 Three-Month Period.**
| ** **                                          | ** ** | **Predecessor**                      | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **    | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|---------------|------------|----------------------------------|------------|---------------|------------|
| ** **                                          | ** ** | **Pro Forma**                   | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **    | ** ** |
| ** **                                          | ** ** | **Three**                            | ** ** | ** **    | ** ** | **Three**                        | ** ** | ** **    | ** ** |
| ** **                                          | ** ** | **Months Ended**                | ** ** | **% of** | ** ** | **Months Ended**            | ** ** | **% of** | ** ** |
| ** **                                          | ** ** | **September 23, 2003(a)**  | ** ** | **Revenue**   | ** ** | **September 30, 2004** | ** ** | **Revenue**   | ** ** |
| ** **                                          | ** ** | **(Thousands of dollars)** | ** ** |
| Revenues                                            |       |                                 | $          | 135,080       |       |                             |       | 100.0         | %          |   |   | $ | 164,209 |   |   |   | 100.0 | % |   |
| Gross profit                                        |       |                                 | 21,572     |          |       |                             | 16.0       | %             |       |   | 25,974 |   |   |   | 15.8 | % |   |
| Selling, general and administrative expenses        |       |                                 | 25,864     |          |       |                             | 19.1       | %             |       |   | 16,197 |   |   |   | 9.9 | % |   |
| Merger related  costs                               |       |                                 | —     |          |       |                             | 0.0        | %             |       |   | (334 | ) |   |   | -0.2 | % |   |
| Provision of  uncollectible accounts                |       |                                 | 193        |          |       |                             | 0.1        | %             |       |   | 104 |   |   |   | 0.1 | % |   |
| Amortization of  intangible assets                  |       |                                 | 500        |          |       |                             | 0.4        | %             |       |   | 2,420 |   |   |   | 1.5 | % |   |
| Income (loss)  from operations                      |       |                                 | (4,985     | )             |       |                             | -3.7       | %             |       |   | 7,587 |   |   |   | 4.6 | % |   |
| Interest income                                     |       |                                 | 415        |          |       |                             | 0.3        | %             |       |   | 228 |   |   |   | 0.1 | % |   |
| Interest expense  and amortization of debt discount |       |                                 | (3,219     | )             |       |                             | -2.4       | %             |       |   | (1,969 | ) |   |   | -1.2 | % |   |
| Other income  (expense)                             |       |                                 | (3,426     | )             |       |                             | -2.5       | %             |       |   | 955 |   |   |   | 0.6 | % |   |
| Income (loss)  before income taxes                  |       |                                 | (11,215    | )             |       |                             | -8.3       | %             |       |   | 6,801 |   |   |   | 4.1 | % |   |
| Income tax  expense (benefit)                       |       |                                 | (2,913     | )             |       |                             | -2.2       | %             |       |   | 2,760 |   |   |   | 1.7 | % |   |
| Income (loss) from  continuing operations      |       |                                 | $          | (8,302        | )          |                             |       | -6.1          | %          |   |   | $ | 4,041 |   |   |   | 2.5 | % |   |

----

(a)           Pro forma for theeffects of the Merger which amounts exclude merger-related costs of $14.3 million.

Revenues: Revenues increased $29.1 million, or 22%, to$164.2 million for the 2004 three-month period compared to the Predecessor proforma 2003 three-month period due primarily to a $11.8 million increase inaerial electric transmission revenues, including the work performed by Maslonkawhich we acquired on January 27, 2004, and an increase of $20.7 millionfrom underground natural gas work, 

30

----

including approximately$5.0 million from third quarter acquisitions. Partially offsetting theseincreases in revenues was a decrease in telecommunications revenue of $4.8million. The decrease in telecommunications revenue of $4.8 million isattributable to the inclusion of $7.7 million of revenue from OSP, thesubsequently discontinued operation, which is included in the Predecessor proforma 2003 three-month period. Absent this amount, telecommunications revenue increased $2.9 million.

Gross profit: Gross profit increased $4.4  million, or 20%, to $26.0 millionin the 2004 three-month period as compared to the Predecessor pro forma 2003three-month period due primarily to higher gross profit from our natural gas andtelecommunications businesses. Theseincreases in gross profit were partially offset by the absence of gross margins from OSP, which is reflected indiscontinued operations for the three-month period ended September 30,2004.

Selling, general and administrative expenses: Selling,general and administrative expenses decreased $9.7 million, or 37%, to $16.2million in the 2004 three-month period compared to the Predecessor pro forma2003 three-month period. This decrease is primarily due to an $8.6 millioninsurance charge and $1.2 million of expenses related to OSP included in thePredecessor’s pro forma 2003 three-month period. OSP operations are included indiscontinued operations for the 2004 three-month period. Overall, thesedecreases were partially offset by incremental expenses related to theMaslonka, Utili-Trax and EnStructure acquisitions ofapproximately $2.5 million.

Merger related costs: In the 2004 three-month period, we recorded a creditto merger related expense of $0.4 million for retention bonusesaccrued at the closing of the Merger which have been determined to benefitfuture periods.  Offsetting this amount, in part, is a chargeto expense of $0.1 million for retention bonuses earned during the currentquarter.

Amortization of intangible assets: Amortization ofintangible assets increased $1.9 million, or 384%,to $2.4 million in the 2004 three-month period compared to $0.5 million in thePredecessor pro forma 2003 three-month period due to amortization of theintangible assets acquired in the Maslonka acquisition partially offset bylower amortization of intangible assets related to the Merger.

Interest expense and amortization of debt discount: Weincurred $2.0 million of interest expense in the 2004 three-month period, adecrease of $1.3 million from the Predecessor pro forma 2003 three-month periodprincipally reflecting lower interest expense due to the early extinguishmentof the note payable to Exelon during the second quarter of 2004.

Other income (expense), net: Other income (expense)increased by $4.4 million to an other income, net balance for the 2004three-month period of $1.0 million compared to an other expense, net balance of$3.4 million for the Predecessor’s pro forma 2003 three-month period . Theincrease in other income is primarily due to a $3.8 million charge for alitigation judgment recorded in the Predecessor pro forma 2003 three-monthperiod and income of $1.0 million from a key-man life insurance policy includedin the 2004 three-month period. The increase in other income, net was partiallyoffset by slight increases in various other miscellaneous expenses.

**2004 Nine Month Period Compared to the Predecessor2003 Nine-month Period.**

Revenues: Revenues increased $74.0 million, or 19%, to$456.6 million for the 2004 nine-month period compared to the Predecessor 2003nine-month period due primarily to a $74.8 million increase in aerial electrictransmission revenues, including the work performed by Maslonka which weacquired on January 27, 2004, and an increase of $30.3 million fromunderground natural gas work, including approximately $5.0 million from thirdquarter acquisitions. Partially offsetting these increases were declines inrevenues of $10.4 million from other electric work, primarily from independentpower producers, $13.5 million from underground electric transmission work and$13.2 million of telecommunications. The decrease in telecommunications revenueof $13.2 million is attributable to the 

31

----

inclusion of $17.6 millionof revenue from OSP, the subsequently discontinued operation, which is includedin the Predecessor 2003 nine-month period. Absent this amount,telecommunications revenue increased$4.4 million.

Gross profit: Gross profit increased $23.1 million, or44%, to $75.4 million in the 2004 nine-month period compared to the Predecessor2003 nine-month period due primarily to an increase in gross profit of $18.1million from aerial electric transmission work, including gross profit fromwork performed by Maslonka, and to a lesser extent higher gross profit from ournatural gas and telecommunications businesses (including the impact of lowerdepreciation expense resulting from changes in estimated lives and bases ofcertain fixed assets resulting from the merger). These increases in grossprofit were partially offset by declines in other electric power gross margins,and the absence of gross margins from OSP, which is reflected in discontinuedoperations for the nine-month period ended September 30, 2004.

Selling, general and administrative expenses: Selling,general and administrative expenses decreased $2.3 million, or 5%, to $47.7million in the 2004 nine-month period compared to the Predecessor 2003nine-month period. This decrease is primarily due to an $8.6 million insurancecharge and $2.8 million of expenses related to OSP included in the Predecessor’s2003 nine-month period. OSP operations are included in discontinued operationsfor the 2004 nine-month period. Overall, these decreases were partially offsetby incremental expenses related to the Maslonka, Utili-Trax and EnStructureacquisitions of approximately $5.2 million and IPO related expenses ofapproximately $2.4 million.

Merger related costs: Merger related costs incurred by thePredecessor in the 2003 nine-month period of $16.2 million,include severance costs, retention costs and professional services fees. In the2004 nine-month period, we recorded a credit tomerger related expense of $0.4 million for retention bonusesaccrued at the closing of the Merger which have been determined to benefitfuture periods.Offsetting this amount, in part, is a charge to expense of $0.1 million forretention bonuses earned during the current quarter.

Provision (recoveries) of uncollectible accounts: Duringthe 2004 nine-month period, we recorded recoveries of $0.4 million related tosettlements with customers whose balances had been provided for with anallowance.

Amortization of intangible assets: Amortization ofintangible assets was $11.0 million in the 2004 nine-month period compared withno such amortization in the Predecessor 2003 nine-month period as a result ofthe amortization of intangible assets acquired in the Maslonka acquisition andthe Merger.

Interest expense and amortization of debt discount: Weincurred $8.2 million of interest expense in the 2004 nine-month periodreflecting interest on debt resulting from the Merger.

Loss on early extinguishment of debt: In the secondquarter of 2004, we recorded a charge of $5.7 million related to the earlyextinguishment of the note payable to Exelon.  During the third quarter of 2004, $0.1 millionof this charge allocated to ULMS was reclassified to discontinued operations.

Other income (expense), net: Other income (expense)increased by $4.7 million to an other income, net balance for the 2004nine-month period of $1.1 million compared to an other expense, net balance of$3.6 million for the Predecessor’s  2003nine-month period.. The increase in other income is primarily due to a $3.8million charge for a litigation judgment recorded in the Predecessor 2003nine-month period and income of $1.0 million from a key-man life insurancepolicy included in the 2004 nine-month period. The increase in other income,net was partially offset by slight increases in various other miscellaneousexpenses.

32

----

**2004 Nine-MonthPeriod Compared to the Predecessor Pro Forma 2003 Nine-Month Period.**
| ** **                                          | ** ** | **Predecessor**                      | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **    | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|---------------|------------|----------------------------------|------------|---------------|------------|
| ** **                                          | ** ** | **Pro Forma**                   | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **    | ** ** |
| ** **                                          | ** ** | **Nine**                             | ** ** | ** **    | ** ** | **Nine**                         | ** ** | ** **    | ** ** |
| ** **                                          | ** ** | **Months Ended**                | ** ** | **% of** | ** ** | **Months Ended**            | ** ** | **% of** | ** ** |
| ** **                                          | ** ** | **September 23, 2003(a)**  | ** ** | **Revenue**   | ** ** | **September 30, 2004** | ** ** | **Revenue**   | ** ** |
| ** **                                          | ** ** | **(Thousands of dollars)** | ** ** |
| Revenues                                            |       |                                 | $          | 382,627       |       |                             |       | 100.0         | %          |   |   | $ | 456,622 |   |   |   | 100.0 | % |   |
| Gross profit                                        |       |                                 | 56,847     |          |       |                             | 14.9       | %             |       |   | 75,449 |   |   |   | 16.5 | % |   |
| Selling, general and administrative expenses        |       |                                 | 50,062     |          |       |                             | 13.1       | %             |       |   | 47,747 |   |   |   | 10.5 | % |   |
| Merger related  costs                               |       |                                 | —     |          |       |                             | 0.0        | %             |       |   | (334 | ) |   |   | -0.1 | % |   |
| Provision  (recoveries) of uncollectible accounts   |       |                                 | 236        |          |       |                             | 0.1        | %             |       |   | (367 | ) |   |   | -0.1 | % |   |
| Amortization of  intangible assets                  |       |                                 | 3,600      |          |       |                             | 0.9        | %             |       |   | 10,989 |   |   |   | 2.4 | % |   |
| Income from  operations                             |       |                                 | 2,949      |          |       |                             | 0.8        | %             |       |   | 17,414 |   |   |   | 3.8 | % |   |
| Interest income                                     |       |                                 | 1,376      |          |       |                             | 0.4        | %             |       |   | 350 |   |   |   | 0.1 | % |   |
| Interest expense  and amortization of debt discount |       |                                 | (9,298     | )             |       |                             | -2.4       | %             |       |   | (8,161 | ) |   |   | -1.8 | % |   |
| Loss on early  extinguishment of debt               |       |                                 | —     |          |       |                             | 0.0        | %             |       |   | (5,549 | ) |   |   | -1.2 | % |   |
| Other income (expense)                              |       |                                 | (3,556     | )             |       |                             | -0.9       | %             |       |   | 1,126 |   |   |   | 0.2 | % |   |
| Income (loss)  before income taxes                  |       |                                 | (8,529     | )             |       |                             | -2.2       | %             |       |   | 5,180 |   |   |   | 1.1 | % |   |
| Income tax  expense (benefit)                       |       |                                 | (1,996     | )             |       |                             | -0.5       | %             |       |   | 2,072 |   |   |   | 0.5 | % |   |
| Income (loss) from  continuing operations           |       |                                 | $          | (6,533        | )          |                             |       | -1.7          | %          |   |   | $ | 3,108 |   |   |   | 0.7 | % |   |

----

(a)           Pro forma for theeffects of the Merger which amounts exclude merger-related costs of $16.2 million.

Revenues: Revenues increased $74.0 million, or 19%, to$456.6 million for the 2004 nine-month period compared to the Predecessor proforma 2003 nine-month period due primarily to a $74.8 million increase inaerial electric transmission revenues, including the work performed by Maslonkawhich we acquired on January 27, 2004, and an increase of $30.3 million fromunderground natural gas work, including approximately $5.0 million from thirdquarter acquisitions. Partially offsetting these increases were declines inrevenues of $10.4 million from other electric work, primarily from independentpower producers, $13.5 million from underground electric transmission work and$13.2 million of telecommunications. The decrease in telecommunications revenueof $13.2 million is attributable to the inclusion of $17.6 million of revenuefrom OSP, the subsequently discontinued operation, which is included in thePredecessor pro forma 2003 nine-month period. Absent this amount,telecommunications revenue increased$4.4 million.

Gross profit: Gross profit increased $18.6 million, or33%, to $75.4 million in the 2004 nine-month period compared to the Predecessorpro forma 2003 nine-month period due primarily to an increase in gross profitof $18.1 million from aerial electric transmission work, including gross profitfrom work performed by Maslonka, and to a lesser extent higher gross profitfrom our natural gas and telecommunications business. These increases in grossprofit were partially offset by declines in other electric power gross marginsand the absence of gross margins from OSP, which is reflected in discontinuedoperations for the nine-month period ended September 30, 2004.

Selling, general and administrative expenses: Selling,general and administrative expenses decreased $2.3 million, or 5%, to $47.7million in the 2004 nine-month period compared to the Predecessor pro forma2003 nine-month period. This decrease is primarily due to an $8.6 millioninsurance charge and $2.8 

33

----

million of expensesrelated to OSP included in the Predecessor’s pro forma 2003 nine-month period. OSPoperations are included in discontinued operations for the 2004 nine-monthperiod. Overall, these decreases were partially offset by incremental expensesrelated to the Maslonka, Utili-Trax and EnStructure acquisitions ofapproximately $5.2 million and IPO related expenses of approximately $2.4million.

Merger related costs: In the 2004 nine-month period,we recorded a credit tomerger related expense of $0.4 million for retention bonusesaccrued at the closing of the Merger which have been determined to benefitfuture periods.  Offsetting this amount, inpart, is a charge to expense of $0.1 million for retention bonuses earnedduring the current quarter.

Provision (recoveries) of uncollectible accounts:During the 2004 nine-month period, we recorded recoveries of $0.4 millionrelated to settlements with customers whose balances had been provided for withan allowance.

Amortization of intangible assets: Amortization ofintangible assets increased $7.4 million, or 205%, to $11.0 million in the 2004nine-month period compared to $3.6 million in the Predecessor pro forma 2003nine-month period. This increase is due to amortization of intangible assetsacquired in the Maslonka acquisition, partially offset by lower amortization ofMerger-related intangible assets in the 2004 nine-month period.

Interest expense and amortization of debt discount: Weincurred $8.2 million of interest expense in the 2004 nine-month period, adecrease of $1.1 million from the Predecessor pro forma 2003 nine-month period,principally reflecting our debt reduction during the 2004 nine month period.

Loss on early extinguishment of debt: In the secondquarter of 2004, we recorded a charge of $5.7 million related to the earlyextinguishment of the note payable to Exelon.  During the third quarter of 2003, $0.1 millionof this charge allocated to ULMS was reclassified to discontinued operations.

Other income (expense), net: Other income (expense)increased by $4.7 million to an other income, net balance for the 2004nine-month period of $1.1 million compared to an other expense, net balance of$3.6 million for the Predecessor’s pro forma 2003 nine-month period. Theincrease in other income is primarily due to a $3.8 million charge for alitigation judgment recorded in the Predecessor pro forma 2003 nine-monthperiod and income of $1.0 million from a key-man life insurance policy includedin the 2004 nine-month period. The increase in other income, net was partiallyoffset by slight increases in various other miscellaneous expenses.

**Liquidity and Capital Resources**

As of September 30, 2004, we had cash and cashequivalents of $6.7 million, working capital of $91.5 million and long-term debtof $85.1 million principally consisting of term loans under our amended andrestated credit agreement. As of September 30, 2004, we had $4.0 millionin borrowings under our revolving credit facility and $28.1 million in lettersof credit outstanding thereunder, leaving $39.9 million as of that dateavailable for additional borrowings. As of November 10, 2004, our borrowings under the revolving credit facilitywere $4.0 million.

On January 22, 2004,we amended our then-existing senior credit facility to permit the acquisitionof Maslonka and to obtain additional liquidity and operating flexibility,including expanding our capacity for making capital expenditures. As a resultof the amendment, the commitment of the banks under the revolving creditfacility was increased by $10.0 million to $50.0 million, and the amountavailable for letters of credit was increased by $10.0 million to $35.0million. Concurrent with the IPO, in order to provide for additional borrowingflexibility and to reduce our borrowing rates to reflect our improved financialposition, we entered into an amended and restated credit agreement to, amongother things, provide for a revolving credit facility in the original amount of$40.0 million that could be increased to $85.0 million and 

34

----

toprovide for a term loan facility in the initial amount of $85.3 million, whichrepresented the amount of term loans outstanding under the formersenior credit facility at May 12, 2004 after giving effect to themandatory prepayment of $50.2 million of such loans required in connection withthe IPO. As of July 31, 2004, therevolving credit facility had been increased to the full $85.0 million. Aportion of the revolving credit facility not in excess of 80% of the amountthereof may be used for issuances of letters of credit. Term loans andrevolving loans under the amended and restated credit agreement initially bearinterest, at our option, at the bank’s prime interest rate plus a spread of2.00% or LIBOR plus a spread of 3.00%. Beginning in 2005, such interest ratespreads will be dependent upon our Consolidated Leverage Ratio, as defined inthe amended and restated credit agreement, and range from 1.50% to 3.50% forrevolving loans and 1.75% to 3.00% for term loans.

Our amended and restatedcredit agreement contains certain restrictive covenants, including minimumlevels of net worth, interest coverage, fixed charge coverage and leverageratios, among other restrictions. As of September 30, 2004, we were incompliance with all terms and conditions of the amended and restated creditagreement.

Our working capital needs are influenced by theseasonality of our business. We experience a need for additional workingcapital during the spring when we increase our level of outdoor construction inweather-affected regions of the country. Conversely, we convert working capitalassets to cash during the winter months.

We expect capital expenditures to range from $5.0million to $7.0 million during the remainder of 2004. We intend to fund thoseexpenditures primarily from operating cash flow. We have reduced our capitalexpenditures over the past two years in order to increase the utilization ratesof our equipment.

As of October 1,2004, we increased our stop loss deductible from $0.5 million per accident oroccurrence to $0.75 million for workers’ compensation, employer’s liability andgeneral liability insurance claims. Losses up to the stop loss amounts areaccrued based upon our estimates of the ultimate liability for claims incurredand an estimate of claims incurred but not reported. The accruals are basedupon known facts and historical trends and management believes such accruals tobe adequate. In addition claims coveredby the insurance carrier are accrued, with corresponding receivable amounts inour condensed consolidated balance sheet.

During the third quarter of 2004, we completed twoacquisitions using approximately $24.6 million of cash. Funding forthese acquisitions was primarily from operations, borrowings under ourrevolving credit facility of $4.0 million, the cash payment from Exelon of $7.7million from the purchase price adjustment related to the Merger, and cashproceeds of $8.4 million from the sale of RJE assets.

During the nine months ended September 30, 2004,our contract receivables, including contractreceivables due from related parties, and costs and estimatedearnings in excess of billings, net of billings in excess of costs andestimated earnings have increased 17% and 165%, respectively. Theoverall increase was due to increased revenues in 2004, as well as the seasonaleffect of increased work during the summer and fall months. A significantportion of the increases are also related to our two largest customers, Exelonand WAPA.

Included in costs and estimated earnings in excess ofbillings are costs related to claims of approximately $3.3 million and $0 at September 30,2004 and December 31, 2003, respectively. The claim amounts are primarilyrelated to a delay in the anticipated start date of one of our electrictransmission contracts. Costs incurred that are attributable to claims areincluded in the total estimated revenue when realization is probable andamounts are estimable. Profit from claims is recorded in the period suchamounts are agreed to with the customer.

35

----

Weanticipate that our cash flow from operations, cash on hand, and our amendedand restated credit facility will provide sufficient cash to enable us to meetour working capital needs, debt service requirements and planned capitalexpenditures for property and equipment over the next twelve to eighteenmonths. However, deterioration in the markets we serve, material changes in ourcustomers’ businesses or cash flows or adverse weather conditions couldnegatively impact our revenues and cash flows. These factors, coupled withrestrictive covenants under our amended and restated credit agreement, maynegatively impact our ability to meet these needs.

*Cash from operatingactivities from continuing operations.**  *During the 2004 nine-month period, net cashused by operating activities from continuing operations was $0.9 millioncompared to net cash provided by operating activities from continuingoperations of $17.8 million for the Predecessor 2003 nine-month period. Theprincipal uses of operating cash during the 2004 nine-month period werepayments for labor and materials related to performance of services andselling, general and administrative expenses. Changes in operating assets andliabilities during the 2004 nine-month period used $25.3 million of operatingcash flow from continuing operations, while in the Predecessor 2003 nine-monthperiod changes in operating assets and liabilities provided $15.3 million inoperating cash flow. The greater use of cash from changes in operating assetsand liabilities from continuing operations for the 2004 nine-month period isprimarily due to a $9.8 million use in other current and accrued liabilitiesfor payments of income taxes and employee bonus and retention payments as compared tothe Predecessor 2003 nine-month period increase of $13.2 million in othercurrent and accrued liabilities balance; and an increaseof $24.6 million in the 2004 nine-month period compared to the Predecessor 2003nine-month period for contract receivables, net, contract receivables due fromrelated parties, net, and costs and estimated earnings in excess of billings,net. Additionally, amounts due from affiliates were reduced from thePredecessor 2003 nine-month period as a result of payments received in theprior year of $9.6 million.

*Cashfrom investing activities from continuing operations.**  *During the 2004 nine-month period, net cashused by investing activities from continuing operations was $55.1 millioncompared to cash used by investing activities from continuing operations of$12.5 million for the Predecessor 2003 nine-month period. The primary uses ofcash for the 2004 nine-month period were cash payments for the acquisitions ofMaslonka, Utili-Trax and EnStructure, net of cash acquired, of $49.6 million,and purchases of equipment of $17.5 million,offset in part, by cash proceeds from the sale of equipment of $3.3 million and thesale of OSP of $8.6 million.The principal use of cash during the Predecessor 2003 nine-month periodconsisted of purchases of equipment of $16.4 million, offset in part by $3.8million in cash proceeds from sales of equipment.

*Cash from financingactivities from continuing operations.**  *During the 2004 nine-month period, net cashprovided by financing activities from continuing operations was $49.6 millioncompared to net cash used in financing activities from continuing operations of$10.2 million for the Predecessor 2003 nine-month period. The primary sourcesof cash from financing activities for the 2004 nine-month period of $130.3 million consisted of $29.5 million ofproceeds from the issuance of our common stock to the Principal Shareholdersand certain members of management in conjunction with the acquisition ofMaslonka and $100.8 million of net cash from our initial public offering, whichoccurred on May 12, 2004. The proceeds from the issuance of our commonstock were used to repay $50.2 million of our term loan, $30.0 million to repay the principalamount outstanding of our subordinated note with Exelon and the remaining $20.6million retained for general corporate purposes. The prior year period use of$10.2 million consisted primarily of purchases of treasury stock and redemptionof redeemable stock.

36

----

**Contractual Obligations and Other Commitments**

The following tablerepresents contractual obligations and other commitments as of September 30,2004.
| ** **                                    | ** ** | **Payments due by Period** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| **Current and Long-Term Debt** | ** ** | ** **                                | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | ** Thereafter ** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                   | ** ** |
| Senior credit  facility                       |       | $                                         | 213        |   | $ | 853 |   | $ | 853 |   | $ | 853 |   | $ | 853 |   |   | $ | 81,258 |   |   | $ | 84,883 |   |
| Revolving credit  facility                    |       | 4,000                                     |       | — |   | — |   | — |   | — |   |   | — |   |   | 4,000 |   |
| Long-term  debt—related party            |       | —                                    |       | — |   | 1,000 |   | — |   | — |   |   | — |   |   | 1,000 |   |
| Bank notes                                    |       | 34                                        |       | 69 |   | — |   | — |   | — |   |   | — |   |   | 103 |   |
| Other                                         |       | 97                                        |       | — |   | — |   | — |   | — |   |   | — |   |   | 97 |   |
| Total                                         |       | $                                         | 4,344      |   | $ | 922 |   | $ | 1,853 |   | $ | 853 |   | $ | 853 |   |   | $ | 81,258 |   |   | $ | 90,083 |   |
|                                               |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                     | ** ** | **Payments due by Period** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| **Other Contractual Obligations(1)** | ** ** | ** **                                | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | ** Thereafter ** | ** ** | **Total** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                   | ** ** |
| Other long-term  liabilities:                  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contingent earnout                             |       | $                                         | —     |   | $ | — |   | $ | 5,009 |   | $ | — |   | $ | — |   |   | $ | — |   |   | $ | 5,009 |   |
| Non-vested options exercised                   |       | 69                                        |       | 512 |   | 512 |   | 513 |   | — |   |   | — |   |   | 1,606 |   |
| Other                                          |       | —                                    |       | 374 |   | — |   | — |   | — |   |   | — |   |   | 374 |   |
| Total                                          |       | $                                         | 69         |   | $ | 886 |   | $ | 5,521 |   | $ | 513 |   | $ | — |   |   | $ | — |   |   | $ | 6,989 |   |
|                                                |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Tradeaccounts payable are not included in Contractual Obligations. 
| ** **                                 | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| **Other Commercial Commitments** | ** ** | ** **                                                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | ** Thereafter ** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                                                 | ** ** |
| Operating leases                           |       | $                                                                       | 1,587      |   | $ | 6,055 |   | $ | 5,574 |   | $ | 3,777 |   | $ | 1,915 |   |   | $ | 1,064 |   |   | $ | 19,972 |   |
|                                            |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of September 30,2004, future cash requirements for interest payments on our senior creditfacility are as follows:
| ** ** | ** ** | **In**     | ** ** |
|------------|------------|------------|------------|
| **Period** | ** ** | ** ** | ** ** | **Thousands** | ** ** |
| 2004       |       |       | $          | 1,129 |   |   |
| 2005       |       |       | 4,489      |   |   |
| 2006       |       |       | 4,444      |   |   |
| 2007       |       |       | 4,399      |   |   |
| 2008       |       |       | 4,353      |   |   |
| 2009       |       |       | 4,308      |   |   |
| 2010       |       |       | 3,201      |   |   |
|            |            |            |            |  |  |  |  |  |

 

In accordance with theholdback provisions of the acquisition agreement to acquire Maslonka, we areholding back purchase price consideration in the amount of $6.6 million fromcertain of Maslonka’s former shareholders. Of this amount, $5.5 million iscontingent upon Maslonka’s achievement of certain performance targets as wellas the satisfaction of any indemnification obligations owed to us, which mayalso be set-off against all other portions of the holdback. We expect that theholdback amount, less any amounts retained by us, will be released to thesellers in part in 2005 and the remainder in 2006.

**Related PartyTransactions**

On October 6, 1999,the InfraSource Group entered into a services agreement (“Services Agreement”)with Exelon for Exelon to provide certain services, including contracting foremployees, financial and accounting services, payroll services, office andequipment leases and other administrative 

37

----

andsupport services. The scope of these services was reduced each year of theagreement. This agreement was effective for a period of 12 months commencing inOctober of each year and was renewable at both parties’ discretion. TheInfraSource Group, through InfraSource Corporate Services, Inc., wascharged $0.3 million and $1.2 million for these services for the Predecessorperiods June 21, 2003 to September 23, 2003 and January 1, 2003to September 23, 2003, respectively. Pursuant to the Merger, this ServicesAgreement was terminated.

The InfraSource Group hasseveral service contracts with Exelon and performs various services includingutility construction and maintenance, telecommunications and infrastructureservices on an outsourced basis to business and residential customers. Certainoperating assets and liabilities of the Non-Acquired Group, including certainoperating agreements (the “Operating Agreements”) with Exelon, were transferredto the InfraSource Group as of January 1, 2003, with operating resultsrelated to the Operating Agreements reflected in the accompanying consolidatedstatement of operations beginning with the date of transfer. Under theOperating Agreements, we perform infrastructure services on an outsourced basisto business and residential customers. Each Operating Agreement has an annualterm ending on December 31 which automatically renews each year unlessformally terminated by Exelon. The services were provided to Exelon at a ratethat is intended to approximate market value. Revenues charged to Exelon underthese contracts for the Predecessor periods June 21, 2003 to September 23,2003 and January 1, 2003 to September 23, 2003 were $10.9 million and$25.0 million, respectively. These Operating Agreements remained in placefollowing the Merger. On January 29, 2004, Exelon relinquished its soleseat on our Board of Directors and ceased to be a related party at that time.Revenues from Exelon for the period January 1 through January 29,2004 (the date it ceased to be a related party) were $7.6 million.

In addition to theOperating Agreements, revenues for the Predecessor periods June 21, 2003to September 23, 2003 and January 1, 2003 to September 23, 2003related to contracts with Exelon were $10.9 million and $28.5 million,respectively. Accounts receivable related to all revenues due from Exelon were$14.6 million at December 31, 2003.

In March 2004, afterreceiving approval from the required parties, we distributed $7.2 million ofproperty and equipment that pursuant to the original terms of a purchaseagreement with Blair Park were owed to three officers of Blair Park. Thecorresponding liability related to these assets is reflected in otherliabilities—related parties in the December 31, 2003 condensedconsolidated balance sheet. Additionally, we lease office and warehouse spacefrom Coleman Properties of which three officers of Blair Park are general partners.Our annual lease payments are approximately $0.1 million.

We leaseoffice and warehouse facilities in Michigan which are owned by an employee andhis family members. Ourleases for these facilities will run through February 2005, subject to a four-yearrenewal option. Pursuant to these leases, we expect to incur total annual leasepayments of $0.3 million.

In connection with theMaslonka acquisition, our Principal Stockholders secured the issuance of $10.0million worth of letters of credit. These letters of credit were provided ascredit support to enable Maslonka to secure a performance bond on a new projectaward. After consummation of the Maslonka acquisition, we caused the letters ofcredit to be terminated. We paid an aggregate fee of $0.2 million to thePrincipal Stockholders for providing this security.

We lease our Maslonkaheadquarters in Mesa, Arizona and our Maslonka Texas field office in SanAngelo, Texas from EC Source, LLC, which is wholly-owned by Martin Maslonka,one of our shareholders. Our leases for these two properties will run through February 2009,subject to a five-year renewal option. Pursuant to these leases, we expect toincur total annual lease payments of $0.2 million.

Maslonka is the issuer ofa $1.0 million installment promissory note in favor of Martin Maslonka. Thepromissory note bears interest at an annual rate of 8.5%, and interest ispayable in equal monthly payments of $7,000. The promissory note matures on June 30,2006.

38

----

Wesublease two equipment yards, which are owned by one of ouremployees, from a subsidiary of SEMCO Energy Inc. Pursuantto six-month subleases through February 2005, we will incuraggregate lease payments of $0.1 million.

**Risks Relating toOur Business and Industry**

**Demand for ourservices is cyclical and vulnerable to downturns in the industries we serve,which may result in extended periods of low demand for our services.**

The demand forinfrastructure services in the industries we serve has been, and will likelycontinue to be, cyclical in nature and vulnerable to general downturns in theU.S. economy. A number of other factors, including financial conditions in theindustries we serve, could adversely affect our customers and their ability orwillingness to fund capital expenditures in the future. For example, we haveexperienced reductions in our revenues from independent power producers in 2003and through the first half of 2004, which reflects the significant decline inconstruction activity and new construction awards for power generation projects.The demand for our services to natural gas distribution customers is affectedby the level of new housing construction. In addition, our petrochemicalcustomers’ demand has recently been restrained by the impact of high naturalgas prices. We are also dependent on the amount of infrastructure services thatour customers outsource. During downturns in the economy, our customers maydetermine to outsource fewer projects resulting in decreased demand for ourservices. In addition, the historical trend toward outsourcing ofinfrastructure services may not continue as we expect. As a result, demand forour services could substantially decline for extended periods, particularlyduring economic downturns.

**The award of newcontracts and the timing of these awards may result in unpredictablefluctuations in our cash flow and profitability.**

A substantial portion ofour revenues is derived from project-based work. It is generally very difficultto predict whether and when we will be awarded contracts for these projects,resulting in unpredictability in our cash flow and profitability. We expect tohave a higher percentage of revenues from large-scale projects going forward,further exacerbating the unpredictability of our operating results. Forexample, Maslonka’s transmission line portion of the Path 15 project is anapproximately $88 million contract that will be performed primarily in 2004.There can be no assurance that we will be awarded contracts for other projectsto replace the revenues generated from the Path 15 contract.

In addition, some of ourcontracts are subject to financing and other contingencies that may delay orresult in termination of projects. In certain circumstances, customers mayrequire us to provide credit enhancements, including surety bonds, letters ofcredit and, in rare instances, cash collateral, which we may be unable tosatisfactorily obtain or provide, placing us at a competitive disadvantagecompared to providers with more liquidity. The uncertainty of our contractaward timing can also present difficulties in matching workforce size withcontract needs. In some cases, we maintain and bear the cost of a readyworkforce that is larger than necessary in anticipation of future workforceneeds for expected contract awards. If an expected contract award is delayed ornot received, we could incur costs that could be substantial without receipt ofany corresponding revenues.

**We derive asignificant portion of our revenue from a small group of customers. The loss ofone or more of these customers could negatively impact our revenues.**

Our top ten customersaccounted for approximately 48% and 49% of our revenues during 2003 and thenine month period ended September 30, 2004, respectively, which includeswork performed for those customers as a subcontractor through others. Sales toExelon accounted for 16.0% of our revenues during 2003. In September 2003,we entered into a volume agreement with Exelon, pursuant to which we areassured a continuing level of business from Exelon through 2006 at approximatelythe same levels as in 2003, subject to earlier termination under limitedcircumstances. Revenue under the contract may vary 

39

----

significantlyfrom period-to-period and may be concentrated later in the contract period. Wemay be unable to sustain our volume of business with Exelon after expiration ofthe contract.

In May 2003, Maslonkawas awarded an approximately $88 million transmission line contract, relatingto the Path 15 upgrade project, scheduled to be substantially completed in2004. The Western Area Power Authority, which manages the Path 15 project, isone of our key customers in 2004. We may not be able to replace this contractafter its completion.

**The anticipatedinvestment in electric infrastructure may not be as large as expected, whichcould reduce demand for our services or slow our growth.**

Our business strategy isdependent, in part, upon the expected increased investment in the electricpower grid, which may not materialize. This expected increase is based, inpart, upon prospects for passage of certain Federal energy legislation andincentive based ratemaking initiatives being considered by FERC. There isconsiderable uncertainty as to when or whether the United States Congress willpass comprehensive Federal energy legislation as proposed in 2003, or whetherit will enact any other form of energy legislation that would improve theprospects for increased investment in energy infrastructure. Even if Federalenergy legislation is passed, the provisions may not incentivize increasedinvestments in electric power transmission infrastructure in a manner that willincrease demand for our services. In addition, it is uncertain whether FERCwill establish incentive-based ratemaking for all interstate transmission underthe control of regional transmission operators. Continued uncertainty mayresult in decreased demand or slower growth in demand for our services.

**Seasonal and othervariations may cause significant fluctuations in our cash flows andprofitability, which may cause the market price of our common stock to fall incertain periods.**

Due to the fact that asignificant portion of our business is performed outdoors, our results ofoperations are subject to seasonal variations. Less work is performed by us inthe winter months and work is hindered during other inclement weather events.Our profitability often decreases during the winter months and during severeweather conditions because work performed during these periods is more costlyto complete. For example, in the first half of 2003, severe cold and wetconditions increased the cost and reduced the profitability of many of oursubsurface construction projects. Similar wet conditions were experiencedduring the second and third quarters of 2004. In addition, during periods ofpeak electricity demand, utilities generally are unable to remove theirelectric power transmission and distribution equipment from service, decreasingthe demand for our maintenance services during this period. If our operatingresults fall below the public’s or analysts’ expectations in some future periodor periods, the market price of our common stock will likely fall in suchperiod or periods.

**Our dependence uponfixed-price contracts could result in reduced profitability or losses onprojects.**

We currently generate, andexpect to continue to generate, the majority of our revenues under fixed-pricecontracts. Under fixed-price contracts, we agree to perform the entire projectfor a fixed price on an agreed upon schedule. We may be unable to recover anycost overruns to the approved contract price. We have experienced delays andadditional costs that we have been unable to recover resulting from severeweather conditions and the required replacement of defective materials from athird party that we installed. As a result, our actual revenue and grossprofits for a project may differ from those we originally estimated and couldresult in reduced profitability or losses on projects. Depending on the size ofa particular project, variations from the estimated contract costs can have asignificant impact on our operating results for any fiscal quarter or year. Weexpect that industry trends and our acquisition of Maslonka will result in anincrease in the proportion of our fixed-price contracts, as most of Maslonka’sbusiness is performed on a fixed-price basis.

40

----

**Our customers oftenhave no obligation to assign work to us and many of our contracts may beterminated on short notice. As a result, we are at risk of losing significantbusiness on short notice.**

Certain of our customersassign work to us under master service agreements. Under these arrangements,our customers generally have no obligation to assign work to us. Most of ourcontracts, including our master service agreements, may be terminated by ourcustomers on short notice, typically 30 to 90 days, sometimes less. Moreover,our reported backlog includes estimated work to be performed under theseagreements, and our reported backlog may not be realized as revenues if thesecontracts are cancelled. In addition, many of our contracts, including ourmaster service agreements, are open to competitive bidding at the expiration oftheir terms. As a result, we have been displaced on these contracts bycompetitors from time to time. Our revenues could materially decline if our customersdo not assign work to us or if they cancel a significant number of contractsand we cannot replace them with similar projects.

**Project delays orcancellations may result in additional costs to us, reductions in revenues orthe payment of liquidated damages.**

In certain circumstances,we guarantee project completion by a scheduled acceptance date or achievementof certain acceptance and performance testing levels. Failure to meet any ofthese schedules or performance requirements could result in additional costs orpenalties, including liquidated damages, and these amounts could exceedexpected project profit margins. Many of our projects involve challengingengineering, procurement and construction phases that may occur over extendedtime periods, sometimes up to two years. We may encounter difficulties inengineering, equipment and supply delivery, schedule changes, weather-relateddelays and other factors, some of which are beyond our control, that impact ourability to complete the project in accordance with the original deliveryschedule. In addition, we occasionally contract with third-party subcontractorsto assist us with the completion of contracts. Any delay by suppliers or bysubcontractors in the completion of their portion of the project, or anyfailure by a subcontractor to satisfactorily complete its portion of theproject may result in delays in the overall progress of the project or maycause us to incur additional costs, or both. We also may encounter projectdelays due to local public opposition against the siting of transmission lines orother facilities, which may include injunctive actions as well as publicprotests. For example, the construction of the PowerUp Wisconsin transmissionline project was delayed for several years due to such factors.

Delays and additionalcosts may be substantial, and, in some cases we may be required to compensatethe project customer for these delays. We may not be able to recover all ofthese costs. In extreme cases, the above-mentioned factors could cause projectcancellations, and we may not be able to replace such projects with similarprojects or at all.

In addition, our projectcontracts may require that our customers or other parties provide us withdesign or engineering information or with equipment or materials to be used ona project. In some cases, we may be provided with deficient design orengineering information or equipment or provided with information or equipmentlater than required by the project schedule. Our customers may also determine,after commencement of the project, to change various elements of the project.Under these circumstances, we generally negotiate with the customer withrespect to the amount of additional time required and the compensation to bepaid to us. We are subject to the risk that we are unable to obtain, throughnegotiation, arbitration, litigation or otherwise, adequate amounts tocompensate us for the additional work or expenses incurred by us due tocustomer-requested change orders or failure by the customer to timely provideitems required to be provided by the customer. A failure to obtain adequatecompensation for these matters could require us to record a negative adjustmentto amounts of revenue and gross profit that were recognized in prior periodsunder the percentage of completion accounting method. Any such adjustmentscould be substantial.

41

----

**Skilled laborshortages and increased labor costs could negatively affect our ability tooperate efficiently and implement our growth strategy.**

We have from time-to-timeexperienced shortages of certain types of qualified personnel. For example,there is currently a shortage of linemen capable of working on and supervisingthe construction of high-voltage lines, and linemen are frequently recruitedacross geographic regions to satisfy demand. The supply of experienced linemenand supervisors may not be sufficient to meet current or expected demand.Further, we may not be able to allocate or hire sufficient project managers fornew electric power transmission projects. As a result, we may not be able topursue certain projects and we may not be able to maintain an adequate skilledlabor force necessary to operate efficiently and support our growth strategy.

**Our use ofpercentage-of-completion accounting could result in a reduction or eliminationof previously reported profits.**

A significant portion ofour revenues is recognized on a percentage-of-completion method of accounting,using the cost-to-cost method. This method is used because management considersexpended costs to be the best available measure of progress on these contracts.This accounting method is standard for fixed-price contracts. Thepercentage-of-completion accounting practice we use results in our recognizingcontract revenues and earnings ratably over the contract term in proportion toour incurrence of contract costs. The earnings or losses recognized onindividual contracts are based on estimates of contract revenues, costs andprofitability. Contract losses are recognized in full when determined, andcontract profit estimates are adjusted based on ongoing reviews of contractprofitability. Further, a substantial portion of our contracts contain variouscost and performance incentives. Penalties are recorded when known orfinalized, which is generally during the latter stages of the contract. Inaddition, we record cost recovery claims when we believe recovery is probableand the amounts can be reasonably estimated. Actual collection of claims coulddiffer from estimated amounts and could result in a reduction or elimination ofpreviously recognized earnings. In certain circumstances, it is possible thatsuch adjustments could be significant.

**Provisions of ourcredit facility restrict our business operations and may restrict our access tosufficient funding, including letters of credit, in the future to financedesired growth.**

We have an amended and restated credit facility with agroup of financial institutions secured by substantially all of our assets. Theterms of the amended and restated credit facility contain customary events ofdefault and covenants that limit us from taking certain actions withoutobtaining the consent of the lenders. In addition, our amended and restatedcredit facility requires us to achieve certain financial ratios. Theserestrictions and covenants may limit our ability to respond to changingbusiness and economic conditions and we may be prevented from engaging intransactions that might otherwise be considered beneficial to us, includingstrategic acquisitions. Covenants in our amended and restated credit facilityalso restrict our ability to incur indebtedness, subject to certain exceptions,including domestic intercompany indebtedness, guarantee obligations incurred inthe ordinary course of business, up to $20.0 million of secured indebtednessincurred to acquire fixed or capital assets, indebtedness in respect of performancebonds, letters of credit and similar obligations incurred in the ordinarycourse of business, and up to $20.0 million of additional indebtedness. We had$52.9 million of availability under our secured revolving credit facility as ofSeptember 30, 2004 (after giving effect to $28.1 million of outstandingletters of credit and $4.0 million in borrowings under the revolving creditfacility at that date).

Our business also frequently requires us to postletters of credit, which reduces availability under our revolving creditfacility. If we are required to post letters of credit in excess of the $68million sublimit in effect as of September 30, 2004 under our amended andrestated credit facility, we would be required either to increase this sublimitor cash collateralize the letters of credit. We cannot assure you that we 

42

----

would be able to increasethe sublimit under our credit facility or that we would have sufficient cash toobtain the required letters of credit.

A breach of our amendedand restated credit agreement, including our inability to comply with therequired financial ratios, could result in a default under our amended andrestated credit facility. In the event of any default under our amended andrestated credit facility, the lenders thereunder would be entitled toaccelerate the repayment of amounts outstanding, plus accrued and unpaidinterest. Moreover, these lenders would have the option to terminate anyobligation to make further extensions of credit under our credit facility. Inthe event of a default under any of our secured indebtedness, including ourcredit facility which is secured by substantially all of our assets, thelenders thereunder could proceed to foreclose against the assets securing suchobligations. In the event of a foreclosure on all or substantially all of ourassets, we may not be able to continue to operate as a going concern.

**If we areunsuccessful at integrating companies that we acquire or have acquired, we maynot achieve the expected benefits and our profitability could suffer.**

One of our businessstrategies is to pursue highly strategic acquisitions. We have completedseveral acquisitions and plan to continue to consider strategic acquisitionsnow and in the future. Integrating acquisitions is often costly, and delays orother operational or financial problems may result that interfere with ouroperations. In addition, our operating subsidiaries have generally maintainedtheir own procedures and operating systems, which makes it more difficult forus to evaluate and integrate their systems and controls on a reliablecompany-wide basis. We have, however, imposed or are imposing specificcompany-wide requirements on our operating subsidiaries in a number of areas aswe continue the process of integrating our acquired businesses, but theserequirements may not be effective. We plan to introduce a company-wide internalaudit function in the fourth quarter of 2004 to enhance our controls andprocedures, including those necessary for a public company. We may experience difficultiesimplementing these new company-wide systems. If we fail to implement properoverall business controls, including as required to support our growth,inconsistent operating and financial practices at companies we acquire or haveacquired could result.

**A significantportion of our business depends on our ability to provide surety bonds. We maybe unable to compete for or work on certain projects if we are not able toobtain the necessary surety bonds.**

Surety market conditionsare currently difficult as a result of significant losses incurred by manysureties in recent periods, both in the construction industry as well as incertain larger corporate bankruptcies. As a result, less bonding capacity isavailable in the market and terms have become more expensive and restrictive.After the Exelon Transaction, we were required to post letters of credit tosupport a new surety bond program. Further, under standard terms in the suretymarket, sureties issue bonds on a project-by-project basis and can decline toissue bonds at any time. Historically, approximately 10% to 20% of our annualvolume of business, including a number of our fixed-price contracts, hasrequired bonds. These percentages may increase depending on our mix ofcontracts. Current or future market conditions, as well as changes in oursurety’s assessment of our operating and financial risk, could cause our suretyproviders to decline to issue, or substantially reduce the amount of, bonds forour work and could increase our bonding costs. These actions can be taken onshort notice. If our surety providers were to limit or eliminate our access tobonding, our alternatives include seeking bonding capacity from other sureties,finding more business that does not require bonds and posting other forms ofcollateral for project performance, such as letters of credit or cash. We maybe unable to secure these alternatives in a timely manner, on acceptable termsor at all. Accordingly, if we were to experience an interruption or reductionin the availability of bonding capacity, we may be unable to compete for orwork on certain projects.

43

----

**We are subject to the risks associated with being agovernment contractor.**

We are a provider of services to government agencies,primarily the U.S. Department of Energy’s Federal power marketing agencies,such as the Western Area Power Authority and the Bonneville PowerAdministration, and therefore are exposed to the risks associated withgovernment contracting. For example, a reduction in spending by thesegovernment agencies could limit the continued funding of existing contractswith these agencies and could limit our ability to obtain additional contracts,which could result in lower revenues from these customers. The risks ofgovernment contracting also include the risk of civil and criminal fines andpenalties for violations of applicable regulations and statutes and the risk ofpublic scrutiny of our performance on high profile sites. In addition, ourfailure to comply with the terms of one or more of our government contracts,other government agreements, or government regulations and statutes couldresult in our being suspended or barred from future government contractprojects for a significant period of time.

In addition, governmentcustomers typically can terminate or modify any of their contracts with us attheir convenience, and some of these government contracts are subject torenewal or extension annually. If a government customer terminates a contractor fails to renew or extend a contract, our backlog or revenue may be reducedor we may incur a loss, either of which could impair our financial conditionand operating results. A termination due to our unsatisfactory performancecould expose us to liability and adversely affect our ability to compete forfuture contracts and orders. In cases where we might be a subcontractor, theprime contract under which we would be a subcontractor could be terminated,regardless of the quality of our services as a subcontractor or ourrelationship with the relevant government agency. Our government customers canalso reduce the value of existing contracts, issue modifications to a contract,and control and potentially prohibit the export of our services and associatedmaterials.

**Our projects aresubject to numerous hazards. If we do not maintain an adequate safety record,we may be ineligible to bid on certain projects, could be terminated fromexisting projects and could have difficulty procuring adequate insurance.**

Hazards related to our activities includeelectrocutions, fires, natural gas explosions, mechanical failure,transportation accidents and damage to equipment we work on. These hazards cancause personal injury and loss of life, severe damage to or destruction ofproperty and equipment and other consequential damages, including blackouts,and may result in suspension of operations, large damage claims, and, inextreme cases, criminal liability. At any given time, we are subject tomultiple workers’ compensation and personal injury claims. We maintainsubstantial loss accruals for workers’ compensation claims, and our workers’compensation and insurance costs have been rising for several yearsnotwithstanding our emphasis on safety. Our insurance does not cover all typesor amounts of liabilities. Our third-party insurance is subject to largedeductibles for which we establish reserves and, accordingly, we effectivelyself-insure for much of our exposures. In addition, for a variety of reasonssuch as increases in claims, a weak economy, projected significant increases inmedical costs and wages, lost compensation, and reductions in coverage,insurance carriers may be unwilling to provide the current levels of coveragewithout a significant increase in collateral requirements to cover ourdeductible obligations. We may not be able to maintain adequate insurance atreasonable rates or meet collateral requirements. Further, regulatory changesimplemented by OSHA could impose additional costs on us. Our safety record isan important consideration for our customers. If serious accidents orfatalities occur or our safety record were to deteriorate, we may be ineligibleto bid on certain projects and could be terminated from existing projects. Inaddition, our reputation and our prospects for future projects could benegatively affected. The OSHA Recordable rate of certain of our subsidiarieshas historically been higher than the industry average. If we cannot improve onthese subsidiaries’ safety records, we may not be able to bid successfully onfuture projects.

44

----

**Our unionized workforcecould cause interruptions in our provision of services. In addition, wecontribute to multiemployer plans that could result in liabilities to us ifthese plans are terminated or we withdraw.**

A significant percentage of our workforce is coveredby collective bargaining agreements. Strikes or work stoppages could occurthat would adversely impact our relationships with our customers and ourability to conduct our business.

In addition, we contributeto several multiemployer pension plans for employees covered by collectivebargaining agreements. These plans are not administered by us, andcontributions are determined in accordance with provisions of negotiated laborcontracts. The Employee Retirement Income Security Act of 1974 (“ERISA”), asamended by the Multiemployer Pension Plan Amendments Act of 1980, imposescertain liabilities upon employers who are contributors to a multiemployer planin the event of the employer’s withdrawal from, or upon termination of, suchplan. We do not have information on the net assets and actuarial present valueof the multiemployer pension plans’ unfunded vested benefits allocable to us,if any, or the amounts, if any, for which we may be contingently liable if wewere to withdraw from any of these plans.

**If Congress or theFCC changes the law or regulations that provide subsidies fortelecommunications services to schools, libraries, and certain health-carefacilities, demand for some of our telecommunications services could decreasesubstantially. Furthermore, additional regulation of our telecommunicationsservices could reduce the profitability of those services.**

Many of our telecommunications customers benefit fromthe Universal Service “E-rate” program, which was set-up by Congress in the1996 Telecommunications Act and is administered by the Universal ServiceAdministrative Company (“USAC”) under the oversight of the FederalCommunications Commission (“FCC”). To remain eligible to provide services underthis program in any state, we must maintain our telecommunicationsauthorizations in that state. Under the E-rate program, schools**,** libraries and certain health-carefacilities****may receive subsidiesfor certain approved telecommunications services, internet access, and internalconnections. From time to time, bills have been introduced in Congress thatwould eliminate or curtail the E-rate program. If such a bill were passed, orif the FCC or USAC were to further limit E-rate subsidies, it could result in adecrease in the demand for our telecommunications infrastructure services bycertain customers.

It is our position that the telecommunicationsservices that we provide wholly within a particular state are subject toregulation exclusively by such state. Thus, except for a few facilities that weoffer across state lines, we believe that our telecommunications-relatedservices are not subject to regulation by the FCC as interstatetelecommunications services. It is possible that the FCC may take the position,as a result of an interpretation of existing regulations and/or a change tosuch regulations, that some of our services are subject to FCC regulation asinterstate telecommunications services. We may also expand our serviceofferings to include activities that are definitely subject to FCC regulation. Tothe extent that we are subject to FCC regulation for interstatetelecommunications services, we would be required to make certain filings andrevenue-based contributions related to the federal Universal Service Fund,which could reduce the profitability of our telecommunications business. Wecould also be subject to fines if the FCC were to determine that any of ouractivities or positions violated its regulations.

45

----

**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk**

Our exposure to market risks results primarily fromadverse changes in interest rates. We have not historically used derivativeinstruments for trading purposes or to speculate on changes in interest ratesor commodity prices.

In October 2003, weentered into an interest rate swap agreement and an interest rate cap agreementwith terms of three years, both of which qualify and have been designated ascash flow hedges to reduce market interest rate risk associated with $70million notional amount of our variable rate term loan. After considering theeffect of these agreements, a portion of our long-term debt obligations remainsubject to interest rate risk. The annual detrimental net income effect of a 50basis point increase in interest rates on these long-term obligations, afterconsidering the $50.2 million reduction in our term loan concurrent with theIPO, would be less than $0.1 million.

**Item 4. Controls and Procedures**

(a)          **Evaluationof Disclosure Controls and Procedures**

The Company’s management, with the participation ofthe Company’s Chief Executive Officer and Chief Financial Officer, evaluatedthe effectiveness of the Company’s disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d- 15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport were designed and functioning effectively to provide reasonableassurance that the information required to be disclosed by the Company inreports filed under the Exchange Act, is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.The Company believes that a controls system, no matter how well designed andoperated, cannot provide absolute assurance that the objectives of the controlssystem are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within a company havebeen detected.

(b) Change inInternal Control over Financial Reporting

No change in the Company’sinternal control over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15 (f) under the Exchange Act) occurred during the Company’smost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

46

----

**PART II OTHER INFORMATION**

**Item 1. Legal Proceedings**

On February 7, 2003, Rahsanne Bickman filed suit in the Travis CountyDistrict Court in Texas State Court against Maslonka and one employee alleging,among other things, gross negligence and seeking approximately $24 million inactual and compensatory damages arising out of the death of her son. On October 27,2003, the father of the deceased, Kevin Sam, Sr., filed suit in TaylorCounty Texas District Court seeking unspecified damages. The claims arose outof an automobile accident that took place on December 1, 2002 on aninterstate highway in Texas and resulted in death. In February 2004,Rahsanne Bickman’s claims were resolved through an out of court settlementfully funded by insurance proceeds (less a $10,000 deductible). The dismissalorder was entered on March 25, 2004. The claims of Kevin Sam, Sr.have been docketed for trial on December 13, 2004.

In January 2004, a judgment was entered againstInfraSource in Superior Court of Fulton County, Georgia in the amount of $3.8million, including $3.2 million in punitive damages. The jury verdict upheldallegations by the plaintiff that in 1999 InfraSource Incorporated (formerlyknown as Exelon Infrastructure Services, Inc.) had fraudulently inducedthe plaintiff to incur expenses in connection with a proposed businessacquisition that was never consummated. We filed a notice of appeal on February 19,2004, and the plaintiff filed a notice of cross-appeal on March 2, 2004.Pursuant to the appellate court’s May 28, 2004 Notice of Docketing, wefiled a brief supporting our appeal on June 17, 2004. All briefings werecompleted on July 22, 2004, and oral arguments were heard on October 13,2004.

In addition, pursuant to our service contracts, wealso generally indemnify our customers for the services we provide thereunder.Furthermore, because our services are integral to the operation and performanceof the electric power transmission and distribution infrastructure, we maybecome subject to lawsuits or claims for any failure of the systems that wework on, even if our services are not the cause for such failures, and we couldbe subject to civil and criminal liabilities to the extent that our servicescontributed to any property damage or blackout. The outcome of theseproceedings could result in significant costs and diversion of management’sattention to our business. Payments of significant amounts, even if reserved,could adversely affect our reputation and liquidity position.

From time to time, we area party to various other lawsuits, claims and other legal proceedings thatarise in the ordinary course of our business. These actions typically seek,among other things, compensation for alleged personal injury, breach ofcontract, property damage, punitive damages, civil penalties or other losses,or injunctive or declaratory relief. With respect to such lawsuits, claims andproceedings, we accrue reserves when it is probable a liability has beenincurred and the amount of loss can be reasonably estimated. We do not believeany of these proceedings currently pending, individually or in the aggregate,would be expected to have a material adverse effect on our results ofoperations, cash flows, or financial condition.

**Item 2. Unregistered Sales of Equity Securities andUse of Proceeds.**

The Securities and Exchange Commission (“SEC”)declared our first registration statement, which we filed on Form S-1(File No. 333-112375) in connection with the initial public offeringof our common stock, effective on May 6, 2004. Under this registrationstatement, we registered an aggregate offering price of $128.6 million of ourcommon stock, or 9,890,000 shares of common stock, including the shares subjectto the underwriters’ over-allotment option. We registered 8,500,000 of theseshares on our behalf and 1,390,000 shares on behalf of certain sellingstockholders. The selling stockholders sold 100,000 shares of common stock andgranted the underwriters an over-allotment option to purchase an additional1,290,000 shares of common stock, which option was not exercised.

47

----

The underwriting syndicate was managed by LehmanBrothers Inc. This offering terminated upon the closing of our initial publicoffering.

The initial publicoffering was completed on May 12, 2004, at a price to the public of $13.00per share, with an aggregate offering price of $111.8 million. The sale ofshares of common stock by us resulted in gross proceeds to us of $110.5 million,$7.3 million of which we applied to underwriting discounts and commissions andapproximately $2.4 million of which we applied to offering expenses. As aresult, we received net proceeds of approximately $100.8 million. The netproceeds of the offering were used by us as follows: (1) $50.2 million wasused to repay a portion of term loans outstanding under our senior creditfacility; (2) $30 million was used to repay the principal amount of oursubordinated note with Exelon; and (3) the remaining proceeds ofapproximately $20.6 million were retained for general corporate purposes.

**Item 3. Defaults Upon Senior Securities.**

None.

**Item 4. Submission of Matters to a Vote of SecurityHolders.**

None.

**Item 5. Other Information.**

None.

**Item 6. Exhibits**
| 31.1 |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934                                                                       |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934                                                                       |
| 32.1 |   | Certification of  Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

48

----

 

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                               |   | INFRASOURCE SERVICES, INC. |
|-------------------------------|--------|----------------------------|
|                          |   | (Registrant)               |
| Date: November 15,  2004 |   | By:                        |   | /s/ TERENCE R. MONTGOMERY |
|                          |   |                       |   | Terence R. Montgomery |
|                          |   |                       |   | *Chief Financial Officer and Senior Vice President* |

 

49

----

**EXHIBIT INDEX**
| 31.1 |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934                                                                  |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934                                                                 |
| 32.1 |   | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

----