**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**Form 10-Q**

| þ     | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
|       | ** ** | **For the quarterly period ended  June 30, 2006**                                                  |
| ** ** | ** ** | **OR**                                                                                                  |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       | ** ** | **For the transition period from            to**      |

 

**Commission filenumber 001-32164**

**INFRASOURCESERVICES, INC.**

***(Exact name of registrant asspecified in its charter)***

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

 

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

*(Address ofprincipal executive offices)*

**19063**

*(Zip Code)*

**(610) 480-8000**

*(Registrant’stelephone number, including area code)*

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.   Yes þ          No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

**Large accelerated filer **o          Acceleratedfiler þ          Non-acceleratedfiler o

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

At July 28,2006 there were 39,996,485 shares of InfraSource Services, Inc.Common Stock, par value of $.001, outstanding.

 

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**For the QuarterEnded June 30, 2006FORM 10-QINFRASOURCE SERVICES, INC. AND SUBSIDIARIESTable of Contents**

|                                         | ** ** | ** **                                                                                                      | ** ** | **Page #** |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|-----------------|
| Part I—FINANCIAL  INFORMATION |       | 3                                                                                                               |
| Item  1.                                |       | Financial  Statements (Unaudited)                                                                               |       | 3               |
|                                    |       | Condensed Consolidated Balance Sheets at  December 31, 2005 and June 30, 2006                         |       | 3               |
|                                    |       | Condensed Consolidated Statements of Operations for  the three and six months ended June 30, 2005 and 2006 |       | 4               |
|                                    |       | Condensed Consolidated Statement of Shareholders’  Equity for the six months ended June 30, 2006      |       | 5               |
|                                    |       | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2005 and 2006           |       | 6               |
|                                    |       | Notes to Condensed Consolidated Financial Statements                                                            |       | 7               |
| Item 2.                                 |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                     |       | 21              |
| Item 3.                                 |       | Quantitative and Qualitative Disclosures About Market  Risk                                                     |       | 36              |
| Item 4.                                 |       | Controls and Procedures                                                                                         |       | 37              |
| PART II—OTHER  INFORMATION    |       | 38                                                                                                              |
| Item  1.                                |       | Legal  Proceedings                                                                                              |       | 38              |
| Item  1A.                               |       | Risk Factors                                                                                                    |       | 38              |
| Item 2.                                 |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                    |       | 48              |
| 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                              |       | 50                                                                                                              |

 

2

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**PART I—FINANCIALINFORMATION**

**ITEM 1.**                *FINANCIAL STATEMENTS*

**INFRASOURCESERVICES, INC. AND SUBSIDIARIESCondensed Consolidated Balance Sheets**

| ** **                                                                                                                                                                                    | ** ** | **December 31,**                                 | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **2005**                                              | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                                                                    | ** ** | **(Unaudited)**                                       | ** ** |
| ** **                                                                                                                                                                                    | ** ** | **(In thousands, except  share data)** | ** ** |
| Current assets:                                                                                                                                                                               |       |                                                  |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                                                                     |       |                                                  | $          | 24,287            |       |   | $ | 20,491 |   |
| Contract receivables  (less allowances for doubtful accounts of $3,184 and $2,420, respectively)                                                                                              |       |                                                  | 137,762    |              |       | 138,307 |   |
| Costs and estimated  earnings in excess of billings                                                                                                                                           |       |                                                  | 84,360     |              |       | 92,791 |   |
| Inventories                                                                                                                                                                                   |       |                                                  | 9,183      |              |       | 8,828 |   |
| Deferred income taxes                                                                                                                                                                         |       |                                                  | 4,732      |              |       | 5,671 |   |
| Other current assets                                                                                                                                                                          |       |                                                  | 7,074      |              |       | 6,568 |   |
| Receivables due from  related party                                                                                                                                                           |       |                                                  | —     |              |       | 316 |   |
| Total current assets                                                                                                                                                                          |       |                                                  | 267,398    |              |       | 272,972 |   |
| Property and  equipment (less accumulated depreciation of $55,919 and $68,097,  respectively)                                                                                                 |       |                                                  | 144,200    |              |       | 148,667 |   |
| Goodwill                                                                                                                                                                                      |       |                                                  | 138,054    |              |       | 138,787 |   |
| Intangible assets  (less accumulated amortization of $19,861 and $20,355, respectively)                                                                                                       |       |                                                  | 1,884      |              |       | 1,390 |   |
| Deferred charges  and other assets, net                                                                                                                                                       |       |                                                  | 10,501     |              |       | 6,728 |   |
| Total assets                                                                                                                                                                                  |       |                                                  | $          | 562,037           |       |   | $ | 568,544 |   |
| Current liabilities:                                                                                                                                                                          |       |                                                  |       |              |       |   |   |
| Current portion of  long-term debt                                                                                                                                                            |       |                                                  | $          | 889               |       |   | $ | 51 |   |
| Other liabilities—related  parties                                                                                                                                                       |       |                                                  | 11,299     |              |       | 1,227 |   |
| Accounts payable                                                                                                                                                                              |       |                                                  | 44,939     |              |       | 47,482 |   |
| Accrued compensation and  benefits                                                                                                                                                            |       |                                                  | 20,454     |              |       | 22,798 |   |
| Other current and accrued  liabilities                                                                                                                                                        |       |                                                  | 20,515     |              |       | 20,338 |   |
| Accrued insurance  reserves                                                                                                                                                                   |       |                                                  | 30,550     |              |       | 35,329 |   |
| Billings in excess of  costs and estimated earnings                                                                                                                                           |       |                                                  | 15,012     |              |       | 18,456 |   |
| Deferred revenues                                                                                                                                                                             |       |                                                  | 6,590      |              |       | 6,569 |   |
| Total current liabilities                                                                                                                                                                     |       |                                                  | 150,248    |              |       | 152,250 |   |
| Long-term debt,  net of current portion                                                                                                                                                       |       |                                                  | 83,019     |              |       | 75,023 |   |
| Deferred revenues                                                                                                                                                                             |       |                                                  | 17,826     |              |       | 17,414 |   |
| Other long-term  liabilities—related party                                                                                                                                               |       |                                                  | 420        |              |       | — |   |
| Deferred income  taxes                                                                                                                                                                        |       |                                                  | 3,370      |              |       | 4,351 |   |
| Other long-term  liabilities                                                                                                                                                                  |       |                                                  | 5,298      |              |       | 5,363 |   |
| Total liabilities                                                                                                                                                                             |       |                                                  | 260,181    |              |       | 254,401 |   |
| 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—39,396,694 and 39,786,052 shares,  respectively, and outstanding—39,366,824 and 39,756,182, respectively) |       |                                                  | 39         |              |       | 40 |   |
| Treasury stock at cost  (29,870 shares)                                                                                                                                                       |       |                                                  | (137       | )                 |       | (137 | ) |
| Additional paid-in  capital                                                                                                                                                                   |       |                                                  | 278,387    |              |       | 281,608 |   |
| Deferred compensation                                                                                                                                                                         |       |                                                  | (1,641)    |              |       | — |   |
| Retained earnings                                                                                                                                                                             |       |                                                  | 24,640     |              |       | 32,433 |   |
| Accumulated other  comprehensive income                                                                                                                                                       |       |                                                  | 568        |              |       | 199 |   |
| Total shareholders’  equity                                                                                                                                                              |       |                                                  | 301,856    |              |       | 314,143 |   |
| Total liabilities  and shareholders’ equity                                                                                                                                              |       |                                                  | $          | 562,037           |       |   | $ | 568,544 |   |

 

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

3

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**INFRASOURCESERVICES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Operations**

** **

| ** **                                                                                                                     | ** ** | **Three Months  Ended  June 30, 2005**              | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **(Unaudited)**                                                    | ** ** |
| ** **                                                                                                                     | ** ** | **(In thousands, except per share data)** | ** ** |
| Contract revenues                                                                                                              |       |                                                               | $          | 231,670                                               |       |                                                |       | $                                                   | 258,027    |   |   |   | $ | 412,300 |   |   |   | $ | 475,267 |   |   |
| Cost of revenues                                                                                                               |       |                                                               | 212,828    |                                                  |       |                                                | 221,643    |                                                |       |   | 373,194 |   |   |   | 409,687 |   |   |
| Gross profit                                                                                                                   |       |                                                               | 18,842     |                                                  |       |                                                | 36,384     |                                                |       |   | 39,106 |   |   |   | 65,580 |   |   |
| Selling, general  and administrative expenses                                                                                  |       |                                                               | 17,651     |                                                  |       |                                                | 23,012     |                                                |       |   | 34,159 |   |   |   | 46,083 |   |   |
| Merger related  costs                                                                                                          |       |                                                               | 76         |                                                  |       |                                                | —     |                                                |       |   | 152 |   |   |   | — |   |   |
| Provision of uncollectible accounts                                                                                            |       |                                                               | 4          |                                                  |       |                                                | 41         |                                                |       |   | 84 |   |   |   | 31 |   |   |
| Amortization of  intangible assets                                                                                             |       |                                                               | 1,698      |                                                  |       |                                                | 237        |                                                |       |   | 3,310 |   |   |   | 494 |   |   |
| Income (loss) from operations                                                                                                  |       |                                                               | (587       | )                                                     |       |                                                | 13,094     |                                                |       |   | 1,401 |   |   |   | 18,972 |   |   |
| Interest income                                                                                                                |       |                                                               | 28         |                                                  |       |                                                | 173        |                                                |       |   | 222 |   |   |   | 409 |   |   |
| Interest expense                                                                                                               |       |                                                               | (2,246     | )                                                     |       |                                                | (1,682     | )                                                   |       |   | (3,703 | ) |   |   | (3,793 | ) |   |
| Write-off of  deferred financing costs                                                                                         |       |                                                               | —     |                                                  |       |                                                | (4,296     | )                                                   |       |   | — |   |   |   | (4,296 | ) |   |
| Other income  (expense), net                                                                                                   |       |                                                               | 634        |                                                  |       |                                                | 1,487      |                                                |       |   | 5,015 |   |   |   | 1,563 |   |   |
| Income (loss) from continuing operations before  income taxes                                                                  |       |                                                               | (2,171     | )                                                     |       |                                                | 8,776      |                                                |       |   | 2,935 |   |   |   | 12,855 |   |   |
| Income tax  expense (benefit)                                                                                                  |       |                                                               | (808       | )                                                     |       |                                                | 3,551      |                                                |       |   | 1,234 |   |   |   | 5,196 |   |   |
| Income (loss) from continuing operations                                                                                       |       |                                                               | (1,363     | )                                                     |       |                                                | 5,225      |                                                |       |   | 1,701 |   |   |   | 7,659 |   |   |
| Discontinued operations:                                                                                                       |       |                                                               |       |                                                  |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Income (loss)  from discontinued operations (net of income tax expense (benefit) of $(52),  $67, $(267) and $88, respectively) |       |                                                               | (47        | )                                                     |       |                                                | 102        |                                                |       |   | (369 | ) |   |   | 134 |   |   |
| Net income (loss)                                                                                                              |       |                                                               | $          | (1,410                                                | )          |                                                |       | $                                                   | 5,327      |   |   |   | $ | 1,332 |   |   |   | $ | 7,793 |   |   |
| Basic income (loss) per  share:                                                                                                |       |                                                               |       |                                                  |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                                                                                       |       |                                                               | $          | (0.04                                                 | )          |                                                |       | $                                                   | 0.13       |   |   |   | $ | 0.04 |   |   |   | $ | 0.19 |   |   |
| Income (loss) from discontinued operations                                                                                     |       |                                                               | —     |                                                  |       |                                                | —     |                                                |       |   | (0.01 | ) |   |   | 0.01 |   |   |
| Net income (loss)                                                                                                              |       |                                                               | $          | (0.04                                                 | )          |                                                |       | $                                                   | 0.13       |   |   |   | $ | 0.03 |   |   |   | $ | 0.20 |   |   |
| Weighted average basic common  shares outstanding                                                                              |       |                                                               | 39,056     |                                                  |       |                                                | 39,735     |                                                |       |   | 39,018 |   |   |   | 39,626 |   |   |
| Diluted income (loss)  per share:                                                                                              |       |                                                               |       |                                                  |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                                                                                       |       |                                                               | $          | (0.04                                                 | )          |                                                |       | $                                                   | 0.13       |   |   |   | $ | 0.04 |   |   |   | $ | 0.19 |   |   |
| Income (loss) from discontinued operations                                                                                     |       |                                                               | —     |                                                  |       |                                                | —     |                                                |       |   | (0.01 | ) |   |   | — |   |   |
| Net income (loss)                                                                                                              |       |                                                               | $          | (0.04                                                 | )          |                                                |       | $                                                   | 0.13       |   |   |   | $ | 0.03 |   |   |   | $ | 0.19 |   |   |
| Weighted average diluted common shares outstanding                                                                             |       |                                                               | 39,056     |                                                  |       |                                                | 40,336     |                                                |       |   | 39,801 |   |   |   | 40,242 |   |   |

 

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

4

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**INFRASOURCESERVICES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Shareholders’ Equity**

| ** **                                            | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **              | ** ** | ** **   | ** ** | **Accumulated Other  Comprehensive Income (Loss)** | ** ** | ** **                         | ** ** | ** **              | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|--------------|------------|-------------------------------------------------------------------|------------|------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **Common Stock**                                        | ** ** | **Treasury Stock** | ** ** | **Additional  Paid-In** | ** ** | **Deferred** | ** ** | **Fair Value  Adjustment**                                   | ** ** | **Foreign  Currency  Translation** | ** ** | **Retained**            | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Shares**                                                   | ** ** | **Amount**              | ** ** | **Shares**              | ** ** | **Amount**   | ** ** | **Capital**                                                       | ** ** | **Compensation**                   | ** ** | **on Derivatives** | ** ** | ** Adjustment** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                                              | ** ** |
| ** **                                            | ** ** | **(in thousands, except share amounts)** | ** ** |
| Balance as of December 31, 2005                  |       | 39,396,694                                                   |       |                    | $          | 39                      |       |         | (29,870    | )                                                                 |       | $                                  | (137       | )                       |       |   | $ | 278,387 |   |   |   | $ | (1,641 | ) |   |   | $ | 480 |   |   |   | $ | 88 |   |   |   | $ | 24,640 |   |   | $ | 301,856 |   |
| Vesting of early exercised options                    |       | 119,476                                                      |       |                    | —     |                    |       | —       |       |                                                              | —     |                               |       |                    | 549        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 549 |   |
| Reclass of deferred compensation                      |       | —                                                       |       |                    | —     |                    |       | —       |       |                                                              | —     |                               |       |                    | (1,641     | ) |   |   | 1,641 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Stock options exercised and vested restricted stock   |       | 195,381                                                      |       |                    | 1          |                    |       | —       |       |                                                              | —     |                               |       |                    | 1,211      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 1,212 |   |
| Income tax benefit from options exercised             |       | —                                                       |       |                    | —     |                    |       | —       |       |                                                              | —     |                               |       |                    | 579        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 579 |   |
| Issuance of shares under employee stock purchase plan |       | 74,501                                                       |       |                    | —     |                    |       | —       |       |                                                              | —     |                               |       |                    | 698        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 698 |   |
| Stock compensation expense                            |       | —                                                       |       |                    | —     |                    |       | —       |       |                                                              | —     |                               |       |                    | 1,825      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 1,825 |   |
| Net income                                            |       | —                                                       |       |                    | —     |                    |       | —       |       |                                                              | —     |                               |       |                    |       |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 7,793 |   |   | 7,793 |   |
| Other comprehensive loss                              |       | —                                                       |       |                    | —     |                    |       | —       |       |                                                              | —     |                               |       |                    | —     |   |   |   | — |   |   |   | (480 | ) |   |   | 111 |   |   |   | — |   |   | (369 | ) |
| Balance as of  June 30, 2006                     |       | 39,786,052                                                   |       |                    | $          | 40                      |       |         | (29,870    | )                                                                 |       | $                                  | (137       | )                       |       |   | $ | 281,608 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 199 |   |   |   | $ | 32,433 |   |   | $ | 314,143 |   |

 

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

5

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**INFRASOURCESERVICES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows**

| ** **                                                                               | ** ** | **Six Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **(Unaudited)**                                         | ** ** |
| ** **                                                                               | ** ** | **(In thousands)**                                 | ** ** |
| Cash flows from operating activities:                                                    |       |                                                    |       |                                                    |       |   |   |   |   |
| Net income                                                                               |       |                                                    | $          | 1,332                                                   |       |   |   | $ | 7,793 |   |   |
| Adjustments to reconcile net income to cash provided  by (used in) operating activities: |       |                                                    |       |                                                    |       |   |   |   |   |
| Loss (gain) from  discontinued operations—net of taxes                              |       |                                                    | 369        |                                                    |       |   | (134 | ) |   |
| Depreciation                                                                             |       |                                                    | 13,597     |                                                    |       |   | 13,664 |   |   |
| Amortization of  intangibles                                                             |       |                                                    | 3,310      |                                                    |       |   | 494 |   |   |
| Gain on sale of assets                                                                   |       |                                                    | (1,398     | )                                                       |       |   | (1,355 | ) |   |
| Deferred income taxes                                                                    |       |                                                    | (1,988     | )                                                       |       |   | (738 | ) |   |
| Write-off of deferred  financing costs                                                   |       |                                                    | —     |                                                    |       |   | 4,296 |   |   |
| Reversal of litigation  judgment                                                         |       |                                                    | (4,279     | )                                                       |       |   | — |   |   |
| Other                                                                                    |       |                                                    | (134       | )                                                       |       |   | 2,071 |   |   |
| Changes in operating assets and liabilities, net of  effects of acquisitions:            |       |                                                    |       |                                                    |       |   |   |   |   |
| Contract receivables, net                                                                |       |                                                    | (14,146    | )                                                       |       |   | (576 | ) |   |
| Costs and estimated  earnings in excess of billings, net                                 |       |                                                    | (38,749    | )                                                       |       |   | (4,986 | ) |   |
| Inventories and other  current assets                                                    |       |                                                    | (1,134     | )                                                       |       |   | 671 |   |   |
| Deferred charges and  other assets                                                       |       |                                                    | (1,844     | )                                                       |       |   | 242 |   |   |
| Current liabilities                                                                      |       |                                                    | 17,580     |                                                    |       |   | 9,413 |   |   |
| Other liabilities—related  parties                                                  |       |                                                    | —     |                                                    |       |   | (12 | ) |   |
| Other liabilities                                                                        |       |                                                    | (142       | )                                                       |       |   | 150 |   |   |
| Net cash flows provided  by (used in) operating activities from continuing operations    |       |                                                    | (27,626    | )                                                       |       |   | 30,993 |   |   |
| Net cash flows used in  operating activities from discontinued operations                |       |                                                    | (282       | )                                                       |       |   | — |   |   |
| Net cash flows provided  by (used in) operating activities                               |       |                                                    | (27,908    | )                                                       |       |   | 30,993 |   |   |
| Cash flows from investing activities:                                                    |       |                                                    |       |                                                    |       |   |   |   |   |
| Acquisitions of  businesses, net of cash acquired                                        |       |                                                    | (38        | )                                                       |       |   | (10,565 | ) |   |
| Proceeds from restricted  cash                                                           |       |                                                    | 5,000      |                                                    |       |   | — |   |   |
| Proceeds from sales of  equipment                                                        |       |                                                    | 2,871      |                                                    |       |   | 2,331 |   |   |
| Additions to property and  equipment                                                     |       |                                                    | (15,985    | )                                                       |       |   | (18,921 | ) |   |
| Net cash flows used in  investing activities from continuing operations                  |       |                                                    | (8,152     | )                                                       |       |   | (27,155 | ) |   |
| Net cash flows used in  investing activities from discontinued operations                |       |                                                    | (210       | )                                                       |       |   | — |   |   |
| Net cash flows used in  investing activities                                             |       |                                                    | (8,362     | )                                                       |       |   | (27,155 | ) |   |
| Cash flows from financing activities:                                                    |       |                                                    |       |                                                    |       |   |   |   |   |
| Increase in revolving  credit facility borrowings                                        |       |                                                    | 18,000     |                                                    |       |   | — |   |   |
| Borrowings of long-term  debt                                                            |       |                                                    | —     |                                                    |       |   | 75,000 |   |   |
| Repayments of long-term  debt and capital lease obligations                              |       |                                                    | (458       | )                                                       |       |   | (83,833 | ) |   |
| Debt issuance costs                                                                      |       |                                                    | —     |                                                    |       |   | (1,133 | ) |   |
| Excess tax benefits from  stock-based compensation                                       |       |                                                    | —     |                                                    |       |   | 416 |   |   |
| Proceeds from exercise of  stock options and employee stock purchase plan                |       |                                                    | 1,010      |                                                    |       |   | 1,908 |   |   |
| Net cash flows provided  by (used in) financing activities                               |       |                                                    | 18,552     |                                                    |       |   | (7,642 | ) |   |
| Cash and cash equivalents:                                                               |       |                                                    |       |                                                    |       |   |   |   |   |
| Net decrease in cash and  cash equivalents                                               |       |                                                    | (17,718    | )                                                       |       |   | (3,804 | ) |   |
| Cash and cash equivalents  transferred to discontinued operations                        |       |                                                    | 492        |                                                    |       |   | — |   |   |
| Cash and cash equivalents—beginning  of period                                      |       |                                                    | 21,222     |                                                    |       |   | 24,287 |   |   |
| Effect of exchange rates  on cash                                                        |       |                                                    | —     |                                                    |       |   | 8 |   |   |
| Cash and cash equivalents—end  of period                                            |       |                                                    | $          | 3,996                                                   |       |   |   | $ | 20,491 |   |   |
| **Supplemental Disclosure of Non-Cash Investing  and Financing Activities:**             |       |                                                    |       |                                                    |       |   |   |   |   |
| Accounts payable balance  related to purchases of property and equipment                 |       |                                                    | $          | 1,071                                                   |       |   |   | $ | 1,444 |   |   |

 

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

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**INFRASOURCESERVICES, INC. AND SUBSIDIARIES**

**Notes to CondensedConsolidated Financial Statements**

**(Unaudited)**

**1.  Organizationand Basis of Presentation**

InfraSource Services, Inc.(“InfraSource”) was organized on May 30, 2003 as a Delaware corporation.InfraSource and its wholly owned subsidiaries are referred to herein as “theCompany,” “we,” “us,” or “our.” We operate in two business segments. OurInfrastructure Construction Services (“ICS”) segment provides design,engineering, procurement, construction, testing and maintenance services forutility infrastructure. Our ICS customers include electric power utilities,natural gas utilities, telecommunication customers, government entities andheavy industrial companies, such as petrochemical, processing and refiningbusinesses. Our Telecommunication Services (“TS”) segment leases point-to-pointtelecommunications infrastructure in select markets and provides design,procurement, construction and maintenance services for telecommunicationsinfrastructure. Our TS customers include communication service providers, largeindustrial and financial services customers, school districts and otherentities with high bandwidth telecommunication needs. We operate in multipleservice territories throughout the United States. We do not have significantoperations or assets outside the United States.

On September 24,2003, we acquired all of the voting interests of InfraSource Incorporated andcertain of its wholly owned subsidiaries, pursuant to a merger transaction (the“Merger”). On May 12, 2004, we completed our initial public offering (“IPO”)of 8,500,000 shares of common stock. Our principal stockholders are OCM/GFIPower Opportunities Fund, L.P. and OCM Principal Opportunities Fund, L.P.(collectively, the “Principal Stockholders”), both Delaware limitedpartnerships.

On March 24, 2006,the Principal Stockholders and other stockholders completed a secondaryunderwritten public offering of 13,000,000 shares of our common stock at $17.50per share. On April 12, 2006, an additional 1,950,000 shares of our commonstock were sold following the exercise, in full, of the underwriters’over-allotment option to purchase additional shares for 30 days after theprospectus date. We did not issue any primary shares; therefore, we did notreceive any of the proceeds of this offering. As of the date of this filing, thePrincipal Stockholders own approximately 27.2% of our common stock.

On June 29, 2006, wefiled a registration statement on Form S-3 for an offering by thePrincipal Stockholders and certain members of our management team of 10,394,520shares of our common stock (11,953,699 shares if the underwriters exercise infull their over-allotment option). The selling stockholders have agreed to payour expenses with respect to such offering (refer to Note 14 foradditional information). The Principal Stockholders will own approximately 3.5%of our common stock after giving effect to such offering (no shares if theunderwriters’ over-allotment option is exercised in full).

The accompanying unauditedcondensed consolidated financial statements reflect our financial position asof December 31, 2005 and June 30, 2006; our results of operations forthe three and six months ended June 30, 2005 and 2006; and our cash flowsfor the six months ended June 30, 2005 and 2006. The accompanyingcondensed consolidated financial statements are unaudited and have beenprepared in accordance with the rules and regulations of the U.S.Securities and Exchange Commission (“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. The December 31, 2005 condensed consolidated balance sheet datawere derived from audited financial statements, but do not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America. The results for interim periods are not necessarilyindicative of results to be expected for a full year or future interim periods.These financial statements should be read in conjunction with our financialstatements and related notes included in our Report on Form 10-K forthe year ended December 31, 2005.

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

**2.  Summary ofSignificant Accounting Policies**

*Share-based compensation*

On January 1, 2006,we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share-BasedPayment,” which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees and directorsincluding employee stock options, restricted stock and employee stock purchasesrelated to the Employee Stock Purchase Plan (“employee stock purchases”) basedon estimated fair values. SFAS No. 123R supersedes our previous accountingunder Accounting Principles Board Opinion (“APB”) No. 25, “Accounting forStock Issued to Employees.” In March 2005, the SEC issued Staff AccountingBulletin (“SAB”) No. 107 “Share-Based Payment,” relating to SFAS No. 123R.We have applied the provisions of SAB No. 107 in our adoption of SFAS No. 123R.

Prior to the adoption ofSFAS No. 123R, we accounted for share-based awards to employees anddirectors using the intrinsic value method in accordance with APB 25 as allowedunder SFAS No. 123. Under the intrinsic value method, no share-basedcompensation expense had been recognized in our consolidated statements ofoperations, other than restricted stock awards and stock options granted toemployees and directors below the fair market value of the underlying stock atthe grant-date.

We adopted SFAS No. 123Rusing the modified prospective transition method. Our condensed consolidatedfinancial statements as of and for the three and six months ended June 30,2006 include the impact of SFAS No. 123R. In accordance with the modifiedprospective transition method, our condensed consolidated financial statementsfor prior periods have not been restated, and do not include, the impact ofSFAS No. 123R. Share-based compensation expense recognized under SFAS No. 123Rfor the three and six months ended June 30, 2006 was $1.0 million and$1.8 million, respectively (refer to Note 9 for additional information).For the three and six months ended June 30, 2005, we recorded share-basedcompensation expense of $4,000 and $20,000, respectively, related to stockoptions which were granted to employees and directors below the fair marketvalue of the underlying stock at the date of grant. Share-based compensationexpense is included in selling, general and administrative expenses in ourcondensed consolidated statements of operations.

Our income from continuingoperations before income taxes, income from continuing operations and netincome for the three months ended June 30, 2006 was $1.0 million,$0.6 million and $0.6 million lower, respectively, than if we hadcontinued to account for share-based compensation under APB No. 25. Basicand diluted earnings per share for the three months ended June 30, 2006would have been $0.15 and $0.14, respectively, if we had not adopted SFAS No. 123R,compared to reported basic and diluted earnings per share of $0.13 and $0.13,respectively.

Our income from continuingoperations before income taxes, income from continuing operations and netincome for the six months ended June 30, 2006 was $1.8 million,$1.1 million and $1.1 million lower, respectively, than if we hadcontinued to account for share-based compensation under APB No. 25. Basicand diluted earnings per share for the six months ended June 30, 2006would have been $0.22 and $0.22, respectively, if we had not adopted SFAS No. 123R,compared to reported basic and diluted earnings per share of $0.20 and $0.19,respectively.

SFAS No. 123Rrequires companies to estimate the fair value of share-based payment awards onthe grant-date using an option-pricing model. We value share-based awards usingthe Black-Scholes option pricing model and recognize compensation expense on astraight-line basis over the requisite service periods. Share-basedcompensation expense recognized during the current period is based on the valueof the portion of share-based payment awards that is ultimately expected tovest. SFAS No. 123R requires forfeitures to be estimated at the time ofgrant in order to estimate the amount of share-based awards that willultimately vest. The forfeiture rate is based on historical activity.Share-based compensation expense 

8

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recognizedin our condensed consolidated statements of operations for the three and sixmonths ended June 30, 2006 includes (i) compensation expense forshare-based payment awards granted prior to, but not yet vested as of December 31,2005, based on the grant-date fair value estimated in accordance with the proforma provisions of SFAS No. 123 and (ii) compensation expense forthe share-based payment awards granted subsequent to December 31, 2005,based on the grant-date fair value estimated in accordance with the provisionsof SFAS No. 123R. As share-based compensation expense recognized in ourcondensed consolidated statements of operations for fiscal 2006 is based onawards ultimately expected to vest, it has been reduced for estimatedforfeitures. Previously in our pro forma information required under SFAS No. 123for the periods prior to fiscal 2006, we accounted for forfeitures as theyoccurred.

The following tableillustrates the effect on net income and earnings per share for the periodprior to adoption of SFAS No. 123R, as if we had applied the fair valuerecognition provisions of SFAS No. 123, as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure.”

| ** **                                                                                                                                     | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **(in thousands)**                                   | ** ** |
| Net income (loss)  as reported                                                                                                                 |       |                                                      | $          | (1,410                                                  | )          |   |   | $ | 1,332 |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of relative tax effects |       |                                                      | (192       | )                                                       |       |   | (349 | ) |   |
| Add: Total stock-based employee compensation  expense, net of related tax effects included in the determination of net  income as reported     |       |                                                      | 4          |                                                    |       |   | 20 |   |   |
| Pro forma net income (loss)                                                                                                                    |       |                                                      | $          | (1,598                                                  | )          |   |   | $ | 1,003 |   |   |
| *Basic  and diluted income (loss) per share:*                                                                                                  |       |                                                      |       |                                                    |       |   |   |   |   |
| Basic net income  (loss) per share—as  reported                                                                                           |       |                                                      | $          | (0.04                                                   | )          |   |   | $ | 0.03 |   |   |
| Basic net income  (loss) per share—pro  forma                                                                                             |       |                                                      | (0.04      | )                                                       |       |   | 0.03 |   |   |
| Diluted net  income (loss) per share—as reported                                                                                          |       |                                                      | (0.04      | )                                                       |       |   | 0.03 |   |   |
| Diluted net income  (loss) per share—pro  forma                                                                                           |       |                                                      | (0.04      | )                                                       |       |   | 0.03 |   |   |

 

Prior to the adoption ofSFAS No. 123R, we presented all tax benefits of deductions resulting fromthe exercise of stock options as operating cash flows in our consolidatedstatement of cash flows. SFAS No. 123R requires the cash flow resultingfrom the tax deductions in excess of the compensation cost recognized for thoseoptions (excess tax benefit) to be classified as financing cash flows.

**3.  RecentlyIssued Accounting Pronouncements**

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109,” which clarifies the accounting for uncertainty intax positions. FIN No. 48 requires that the impact of a tax position berecognized if that position is more likely than not of being sustained onaudit, based on the technical merits of the position. The tax position ismeasured at the largest amount of benefit that is greater than 50% likely ofbeing realized upon the ultimate settlement. The provisions of FIN  No. 48 are effective for fiscal yearsbeginning after December 15, 2006, with any cumulative effect of thechange in accounting principle recorded as an adjustment to opening retainedearnings. We currently do not believe FIN No. 48 will have a significantimpact on our financial results.

**4.  DiscontinuedOperations**

In the third quarter of2004, we committed to a plan to sell substantially all of the assets of UtilityLocate & Mapping Services, Inc. (“ULMS”). Additionally, in thesecond quarter of 2005, we committed to a plan to sell substantially all of theassets of Electric Services, Inc. (“ESI”). Both ULMS and ESI were part ofour ICS segment. In accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of 

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Long-LivedAssets”, the financial position, results of operations and cash flows of ULMSand ESI were reflected as discontinued operations in our accompanying condensedconsolidated financial statements. On August 1, 2005 we sold certainassets of ULMS and the stock of ESI.

Statement of operationsinformation for discontinued operations:

| ** **            | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|-----------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **            | ** ** | **(in thousands)**                               | ** ** |
| Contract revenues     |       |                                                  | $          | 6,455                                                 |       |                                                |       | $                                                   | —     |   |   |   | $ | 11,333 |   |   |   | $ | — |   |   |
| Pre-tax income (loss) |       |                                                  | (99        | )                                                     |       |                                                | 169        |                                                |       |   | (636 | ) |   |   | 222 |   |   |

 

The discontinuedoperations activity for the six months ended June 30, 2006 relates to theresolution of an existing ULMS reserve for accounts receivable, as well as, anearn out arrangement that will continue through December 2006.

**5.  Costs And Estimated Earnings In Excess OfBillings and Contract Losses**

Included in costs and estimated earnings in excess ofbillings are costs related to claims and unapproved change orders ofapproximately $5.7 million and $12.4 million at June 30, 2006and December 31, 2005, respectively. During the six months ended June 30,2006 we recovered claim amounts of $5.8 million existing at December 31,2005. Estimated revenue related to claims and in amounts up to but notexceeding costs incurred is recognized when realization is probable and amountsare estimable. Profit from claims is recorded in the period such amounts areagreed to with the customer.

Included in our results ofoperations for the three and six months ended June 30, 2006 is a $5.0million contract loss related to an electric transmission project, whichassumes collection of a portion of current and projected claims, and theassociated reversal of pre-tax profit of $1.6 million recognized in priorperiods. This project began in August 2005 and is expected to besubstantially completed by December 2006. Consistent with our revenuerecognition policy for contracts that are in a forecasted loss position, werecognized the entire expected loss on this project in the second quarter of2006. The loss is attributable primarily to lower than expected productivitydue to ineffective supervision, insufficient access to experienced labor,supplier issues and extremely hot weather.

**6.  Goodwill and Intangible Assets**

Ourgoodwill and intangible assets are comprised of:

| ** **                      | ** ** | **December 31, 2005** | ** ** | **June 30, 2006** | ** ** |
|---------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(in thousands)**         | ** ** |
| Goodwill                        |       |                            | $          | 138,054                     |       |   |   | $ | 138,787 |   |   |
| Intangible assets:              |       |                            |       |                        |       |   |   |   |   |
| Construction backlog            |       |                            | $          | 17,184                      |       |   |   | $ | 17,184 |   |   |
| Volume agreements               |       |                            | 4,561      |                        |       |   | 4,561 |   |   |
| Total intangible  assets        |       |                            | 21,745     |                        |       |   | 21,745 |   |   |
| Accumulated  amortization:      |       |                            |       |                        |       |   |   |   |   |
| Construction backlog            |       |                            | (16,690    | )                           |       |   | (16,937 | ) |   |
| Volume agreements               |       |                            | (3,171     | )                           |       |   | (3,418 | ) |   |
| Total accumulated  amortization |       |                            | (19,861    | )                           |       |   | (20,355 | ) |   |
| Intangible assets, net          |       |                            | $          | 1,884                       |       |   |   | $ | 1,390 |   |   |

 

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The goodwill balance as of June 30, 2006 was$128.4 million and $10.4 million for the ICS and TS segments,respectively. The goodwill balance as of December 31, 2005 was$128.0 million and $10.0 million for the ICS and TS segments,respectively. The increase in goodwill during the six months endedJune 30, 2006 relates to the resolution of preacquistion tax items and thesettlement of the working capital adjustment for our 2005 acquisition of EHVPower Corporation (“EHV”).

As a result of the adoption of SFAS No. 142,“Goodwill and Intangible Assets,” goodwill is subject to an assessment forimpairment using a two-step fair value-based test with the first step performedat least annually, or more frequently if events or circumstances exist thatindicate that goodwill may be impaired. We complete our annual analysis of ourreporting units at each fiscal year end. The first step compares the fair valueof a reporting unit to its carrying amount, including goodwill. If the carryingamount of the reporting unit exceeds its fair value, the second step is thenperformed. The second step compares the carrying amount of the reporting unit’sgoodwill to the fair value of the goodwill. If the fair value of the goodwillis less than the carrying amount, an impairment loss would be recorded as areduction to goodwill and a corresponding charge to operating expense. Noprovisions for goodwill impairments were recorded during the six months endedJune 30, 2005 and 2006.

Expense for the amortization of intangible assets was$1.7 million and $0.2 million for the three months endedJune 30, 2005 and 2006, respectively, and $3.3 million and$0.5 million for the six months ended June 30, 2005 and 2006,respectively. When fully amortized, intangible assets are removed from ourbalance sheet.

The estimated aggregate amortization expense ofintangible assets for the next five succeeding fiscal years is:

| **For the year ended December, 31,** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------------------|------------|
| 2006 (excludes  the six months ended June 30, 2006)      |       |       | $          | 572                     |       |   |
| 2007                                                          |       |       | 432        |                    |       |
| 2008                                                          |       |       | 227        |                    |       |
| 2009                                                          |       |       | 159        |                    |       |
| 2010                                                          |       |       | —     |                    |       |
| Total                                                         |       |       | $          | 1,390                   |       |   |

 

**7.  Debt**

On June 30, 2006, we entered into a new creditagreement which provides for a secured revolving credit facility of$225.0 million which may be used for revolving credit borrowings, swingloans, not to exceed $10.0 million, and the issuance of standby letters ofcredit, not to exceed $100.0 million. We also have the right to seekadditional commitments to increase the aggregate commitments up to $350.0million, subject to compliance with applicable covenants. The new creditagreement replaces our previous secured credit facility, which included an$85.0 million revolving credit commitment and $84.0 million in termloan commitments.

The proceeds from borrowings under the new creditagreement were used to repay $83.6 million of outstanding debt existing asof June 30, 2006 under our previous amended and restated credit facilitywhich was terminated upon repayment. As of June 30, 2006, we have a $75.0million outstanding revolving credit borrowing and $34.0 million inletters of credit outstanding. As a result of the entry into the new creditagreement and refinancing of the previous credit facilities, we recorded acharge in the second quarter of 2006 of $4.3 million related to thewrite-off of deferred financing costs.

Under the new credit agreement, committed loans bearinterest at either the British Bankers Association LIBOR Rate, or a rate (equalto the higher of the Federal Funds Rate plus  1/2 of 1% or the Bank of America prime rate)plus, an applicable margin of 1-2% for LIBOR Rate borrowings and 0-1%

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for prime basedborrowings, based on our consolidated leverage ratio. We are subject to acommitment fee of between .175-.35%, and letter of credit fees between 1-2%based on our consolidated leverage ratio. We can prepay all or a portion of anycommitted loans from time to time during the term of the new credit agreementand reborrow up to the aggregate commitments. The maturity date of the newcredit agreement is June 30, 2012. The weighted average interest rate ofour borrowing at June 30, 2006 is 8.5%.

The new credit agreementcontains certain restrictive covenants, including financial covenants tomaintain our consolidated interest coverage ratio at not less than 2.00:1.00 ineach period of four trailing fiscal quarters; consolidated leverage ratio not greaterthan 3.25:1.00 in any four quarters prior to the incurrence of subordinateddebt in an amount equal to or greater than $25.0 million, and 4.00:1.00for any four quarters from and after such incurrence; and consolidated seniorleverage ratio greater than 2.50:1.00 in any four quarters from and afterincurring subordinated debt or senior unsecured debt equal to or greater than$25.0 million. There are also additional restrictions, including otherindebtedness, liens, fundamental changes, disposition of property, restrictedpayments and investments. The new credit agreement is secured by a pledge ofsubstantially all of our assets.

**8.  Computation of Per Share Earnings (Losses)**

The following table is a reconciliation of thenumerators and denominators of the basic and diluted income (loss) per sharecomputation. 

| ** **                                                                                                   | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **(in thousands)**                               | ** ** |
| Income (loss)  from continuing operations                                                                    |       |                                                  | $          | (1,363                                                | )          |                                                |       | $                                                   | 5,225      |   |   |   | $ | 1,701 |   |   |   | $ | 7,659 |   |   |
| Income (loss)  from discontinued operations, net of tax benefit of $(52), $67, $(267) and  $88, respectively |       |                                                  | (47        | )                                                     |       |                                                | 102        |                                                |       |   | (369 | ) |   |   | 134 |   |   |
| Net income (loss)  (numerator)                                                                               |       |                                                  | $          | (1,410                                                | )          |                                                |       | $                                                   | 5,327      |   |   |   | $ | 1,332 |   |   |   | $ | 7,793 |   |   |
| Weighted average basic common shares outstanding  (denominator)                                              |       |                                                  | 39,056     |                                                  |       |                                                | 39,735     |                                                |       |   | 39,018 |   |   |   | 39,626 |   |   |
| Potential common  stock arising from stock options and employee stock purchase plan                          |       |                                                  | —     |                                                  |       |                                                | 601        |                                                |       |   | 783 |   |   |   | 616 |   |   |
| Weighted average  diluted common shares outstanding (denominator)                                            |       |                                                  | 39,056     |                                                  |       |                                                | 40,336     |                                                |       |   | 39,801 |   |   |   | 40,242 |   |   |
| Basic net income (loss) per share                                                                            |       |                                                  | $          | (0.04                                                 | )          |                                                |       | $                                                   | 0.13       |   |   |   | $ | 0.03 |   |   |   | $ | 0.20 |   |   |
| Diluted net income  (loss) per share                                                                         |       |                                                  | (0.04      | )                                                     |       |                                                | 0.13       |                                                |       |   | 0.03 |   |   |   | 0.19 |   |   |

 

Included in potentialcommon stock arising from stock options for the six months ended June 30,2005 and three and six months ended June 30, 2006 are early exercises ofunvested stock option awards, which are excluded from the weighted averagebasic common shares outstanding. For the three months ended June 30, 2005there were 1,983,335 shares, for the six months ended June 30, 2005there were 626,560 shares  and  for both the three and six months ended June 30,2006 there were 136,126 shares, under option grants excluded from thecalculation of diluted earnings per share as the effect of these shares wouldhave been anti-dilutive.

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**9.  Stock Compensation Plans**

Ourstock based compensation expense includes the following:

| ** **                              | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **(in thousands)**                               | ** ** |
| Stock option  expense                   |       |                                                  | $          | 639                                                 |       |   |   | $ | 1,301 |   |   |
| Restricted stock  expense               |       |                                                  | 115        |                                                |       |   | 218 |   |   |
| Employee stock  purchase plan expense   |       |                                                  | 201        |                                                |       |   | 306 |   |   |
| Total stock based  compensation expense |       |                                                  | $          | 955                                                 |       |   |   | $ | 1,825 |   |   |

 

*Stock Options*

Our 2003 Omnibus Stock Incentive Plan as amendedeffective April 29, 2004 (the “2003 Stock Plan”), was originally adoptedon September 23, 2003 to allow the grant of stock options and restrictedstock to designated key employees. The options currently issued under the 2003Stock Plan include time-based options that vest over four years. All optionshave a maximum term of ten years. The 2003 Stock Plan was terminated uponcompletion of the IPO. Options previously issued under the 2003 Stock Planremain outstanding.

Our 2004 Omnibus Stock Incentive Plan (the “2004 StockPlan”) was adopted on April 29, 2004 to allow the grant of stock options,stock appreciation rights, restricted stock, and deferred stock or performanceshares to employees and directors. The options currently issued under the 2004Stock Plan vest over a period of four years. All options have a maximum term often years. The aggregate number of shares reserved for issuance under the 2004Stock Plan is 800,000 plus an amount to be added annually on the first day ofour fiscal year (beginning 2005) equal to the lesser of (i) 1,000,000shares or (ii) two percent of our outstanding shares of common stock onthe last day of the immediately preceding fiscal year. As of June 30,2006, 2.4 million shares have been reserved for issuance under the 2004Stock Plan.

For the purpose of calculating the fair value of ourstock options, we estimate expected stock price volatility based on our commonstock’s historical volatility. The risk-free interest rate assumption includedin the calculation is based upon observed interest rates appropriate for theterm of our employee stock options. The dividend yield assumption is based onour intent not to issue a dividend. We are currently using the simplifiedmethod to calculate expected holding periods as provided for under SAB No. 107.

As stock-based compensation expense recognized in thecondensed consolidated statements of operations for the three and six monthsended June 30, 2006 is based on awards ultimately expected to vest, it hasbeen reduced for estimated forfeitures. SFAS No. 123R requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. Forfeitures wereestimated based on historical experience. In accordance with SFAS No. 123,pro forma information for the periods prior to fiscal 2006 was based onrecognizing the effect of forfeitures as they occurred.

The weighted-average grant-date fair value of optionsgranted during the three and six months ended June 30, 2005 and the threeand six months ended June 30, 2006 was $0.8 million, $0.8 million,$1.0 million and $1.2 million, respectively. The total intrinsicvalue of options exercised during the three and six months ended June 30,2005 and the three and six months ended June 30, 2006, was$0.1 million, $0.5 million, $0.3 million and $1.4 million,respectively.

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Thefair value of each option grant was estimated on the grant-date using theBlack-Scholes option pricing model with the following weighted averageassumptions:

| ** **                          | ** ** | **Three months  ended  June 30, 2005** | ** ** | **Six months  ended  June 30, 2005** | ** ** | **Three months  ended  June 30, 2006** | ** ** | **Six months  ended  June 30, 2006** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Weighted Average  Assumptions:      |       |                                                  |       |                                                |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Expected  volatility                |       |                                                  | 58         | %                                                   |       |                                                  | 58         | %                                                   |       |   | 43 | % |   |   | 44 | % |   |
| Dividend yield                      |       |                                                  | 0          | %                                                   |       |                                                  | 0          | %                                                   |       |   | 0 | % |   |   | 0 | % |   |
| Risk-free  interest rate            |       |                                                  | 3.81       | %                                                   |       |                                                  | 3.81       | %                                                   |       |   | 4.99 | % |   |   | 4.93 | % |   |
| Annual forfeiture  rate             |       |                                                  | 0          | %                                                   |       |                                                  | 0          | %                                                   |       |   | 7 | % |   |   | 7 | % |   |
| Expected holding period  (in years) |       |                                                  | 6.00       |                                                |       |                                                  | 6.00       |                                                |       |   | 6.25 |   |   |   | 6.25 |   |   |

 

Thefollowing table summarizes information for the options outstanding andexercisable for the year ended December 31, 2005 and three months ended June 30,2006:

| ** **                                                          | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price  per share** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Balance,  December 31, 2004                                    |       | 2,212,701   |       |                                                           | $          | 7.53                                                        |       |                                                     |       |   |   |   |   |   |   |   |
| Granted                                                             |       | 701,563     |       |                                                           | 11.48      |                                                        |       |                                                     |       |   |   |   |   |   |   |
| Exercised                                                           |       | (176,997    | )          |                                                           | 5.02       |                                                        |       |                                                     |       |   |   |   |   |   |   |
| Cancelled                                                           |       | (331,526    | )          |                                                           | 7.84       |                                                        |       |                                                     |       |   |   |   |   |   |   |
| Balance,  December 31, 2005                                    |       | 2,405,741   |       |                                                           | $          | 8.81                                                        |       |                                                     |       |   |   |   |   |   |   |   |
| Granted                                                             |       | 136,126     |       |                                                           | 17.62      |                                                        |       |                                                     |       |   |   |   |   |   |   |
| Exercised                                                           |       | (153,494    | )          |                                                           | 7.89       |                                                        |       |                                                     |       |   |   |   |   |   |   |
| Cancelled                                                           |       | (36,650     | )          |                                                           | 9.05       |                                                        |       |                                                     |       |   |   |   |   |   |   |
| Balance,  June 30, 2006                                        |       | 2,351,723   |       |                                                           | 9.22       |                                                        |       |                                                     |       |   |   |   |   |   |   |
| Options fully vested and expected to vest as of  June 30, 2006 |       | 2,155,528   |       |                                                           | $          | 8.99                                                        |       |                                                     |       | 8.1 |   |   |   | $ | 19,884 |   |   |
| Options exercisable as of June 30, 2006                        |       | 628,396     |       |                                                           | $          | 7.95                                                        |       |                                                     |       | 7.6 |   |   |   | $ | 6,445 |   |   |
|                                                                |       |        |       |                                                           | `          |                                                        |       |                                                     |       |   |   |   |   |   |   |

 

The aggregate intrinsic value in the preceding tablerepresents the total pre-tax intrinsic value, based on our closing stock priceof $18.21 on June 30, 2006, which would have been received by the optionholders had all option holders exercised their options as of that date. Thetotal number of in-the-money options exercisable on June 30, 2006 was628,396.

As of June 30, 2006,there was approximately $7.0 million of total unrecognized compensationcost related to nonvested stock options. That cost is expected to be recognizedover a weighted average period of 8.4 years.

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*Restricted Stock*

Ourrestricted stock vests based on the passage of time. The following tablepresents a summary of the status of our nonvested restricted stock as of June 30,2006 and changes during the six months ended June 30, 2006:

| ** **                                  | ** ** | **Shares** | ** ** | **Weighted-Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| Nonvested shares at  December 31, 2005 |       | 167,556    |       |                                              | $          | 13.13 |   |   |
| Shares issued                               |       | 28,601     |       |                                              | 18.01      |   |   |
| Shares vested                               |       | (41,889    | )          |                                              | 13.13      |   |   |
| Nonvested shares at June 30, 2006      |       | 154,268    |       |                                              | $          | 14.03 |   |   |

 

As of June 30, 2006,there was approximately $1.8 million of total unrecognized compensationcost related to nonvested restricted stock. That cost is expected to berecognized over a weighted average period of 3.0 years. The total fairvalue of shares vested during the six months ended June 30, 2006 was$0.6 million.

*Employee Stock Purchase Plan*

In April 2004, ourboard of directors adopted the 2004 Employee Stock Purchase Plan for allemployees meeting its eligibility criteria. Under this plan, eligible employeesmay purchase shares of our common stock, subject to certain limitations, at 85%of the market value. Purchases are limited to 15% of an employee’s eligiblecompensation, up to a maximum of 2,000 shares per purchase period. The maximumaggregate number of shares reserved for issuance under the plan is 2,000,000plus an amount to be added annually on the first day of our fiscal year (beginning2005) equal to the lesser of (i) 600,000 shares or (ii) one percent ofour outstanding shares of common stock on the last day of the immediatelypreceding fiscal year. As of June 30, 2006, 2.8 million shares havebeen reserved for issuance under the 2004 Employee Stock Purchase Plan.

**10.  Concentration of Credit Risk**

We derive a significantportion of our revenues from a small group of customers. Our top ten customersaccounted for 56% and 54%, of our consolidated revenues for the three monthsended June 30, 2005 and 2006, respectively, and 48% and 47% of ourconsolidated revenues for the six months ended June 30, 2005 and 2006,respectively. Exelon Corporation (“Exelon”) accounted for approximately 25% and18%, of our consolidated revenues for the three months ended June 30, 2005and 2006, respectively, and 23% and 17%, of our consolidated revenues for thesix months ended June 30, 2005 and 2006, respectively.

At December 31, 2005and June 30, 2006, accounts receivable due from Exelon, inclusive ofamounts due from a prime contractor for Exelon work, represented 9% and 16%,respectively, of our total accounts receivable balance. Additionally, one othercustomer accounted for 10% of our accounts receivable balance at June 30,2006.

**11.  OtherIncome (Expense), Net**

Other income (expense),net consists primarily of gains (losses) on sale of property and equipment. Otherincome (expense), net for the six months ended June 30, 2005 includes areversal of a $3.8 million charge for a litigation judgment recorded in 2003.

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**12.  Comprehensive Income (Loss)**

Thefollowing table presents the components of comprehensive income (loss) for theperiods presented:

| ** **                               | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **(in thousands)**                               | ** ** |
| Net income (loss)                        |       |                                                  | $          | (1,410                                                | )          |                                                |       | $                                                   | 5,327      |   |   |   | $ | 1,332 |   |   |   | $ | 7,793 |   |   |
| Foreign currency  translation adjustment |       |                                                  | —     |                                                  |       |                                                | 126        |                                                |       |   | — |   |   |   | 111 |   |   |
| Fair value  adjustments on derivatives   |       |                                                  | (144       | )                                                     |       |                                                | (480       | )                                                   |       |   | 87 |   |   |   | (480 | ) |   |
| Comprehensive income                     |       |                                                  | $          | (1,554                                                | )          |                                                |       | $                                                   | 4,973      |   |   |   | $ | 1,419 |   |   |   | $ | 7,424 |   |   |

 

Other comprehensive income (loss) during the three andsix months ended June 30, 2005 and 2006 was comprised of changes in thefair value of interest rate cap and swap agreements designated and qualifyingas cash flow hedges under the provisions of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” as amended by SFAS Nos. 137,138 and 149, net of reclassifications to net income. Other comprehensive incomeduring the three and six months ended June 30, 2006 also includes aforeign currency translation adjustment related to our Canadian operations.

At June 30, 2006,upon the repayment of our old credit facility (see note 7), our interest rateswap and interest rate cap no longer qualified as cash  flow hedges. Therefore we reclassified theremaining other comprehensive income of $0.5 million related to thesederivatives to interest expense on June 30, 2006.

**13.  Segment Information**

We operate in two business segments. Our ICS segmentprovides design, engineering, procurement, construction, testing andmaintenance services for utility infrastructure. Our ICS customers includeelectric power utilities, natural gas utilities, telecommunication customers,government entities and heavy industrial companies, such as petrochemical,processing and refining businesses. Our ICS services are provided by four ofour operating units, all of which have been aggregated into one reportablesegment due to their similar economic characteristics, customer bases, productsand production and distribution methods. Our TS segment, consisting of a singleoperating unit, leases point-to-point telecommunications infrastructure inselect markets and provides design, procurement, construction and maintenanceservices for telecommunications infrastructure. Our TS customers includecommunication service providers, large industrial and financial servicescustomers, school districts and other entities with high bandwidthtelecommunication needs. Within our TS segment, we are regulated as a publictelecommunication utility in various states. We operate in multiple territoriesthroughout the United States. We do not have significant operations or assetsoutside the United States. We acquired a Canadian entity in November 2005which represents less than 2% of our revenue for the six months ended June 30,2006 and 2% of total assets as of June 30, 2006.

Business segment performance measurements are designedto facilitate evaluation of operating unit performance and assist in allocationof resources for the reportable segments. The primary financial measures we useto evaluate our segment operations are contract revenues and income(loss) from operations as adjusted, a non-GAAP financial measure. Income(loss) from operations as adjusted excludes expenses for the amortizationof intangibles related to our acquisitions and share-based compensation.Amortization and share-based compensation expenses are excluded because webelieve these expenses do not reflect the core performance of our businesssegments operations. In the second quarter of 2006, we began excludingshare-based compensation expense from our income (loss) from operations asadjusted since we do not believe this expense is indicative of the coreperformance of our business segments operations. We did not reclassifyshare-based compensation expense for the 2005 

16

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periods, since the expensewas insignificant for the 2005 periods. A reconciliation of income(loss) from operations as adjusted to the nearest GAAP equivalent, income(loss) from operations is provided below.

We donot allocate corporate costs to our business segments for internal managementreporting. Corporate and eliminations includes unallocated corporate costs,revenue related to administrative services we provide to one of our customersand elimination of revenues between reporting segments which are notsignificant. The following tables present segment information by period:

| **For the Three Months Ended  June 30, 2005** | ** **   | ** **              | ** ** | **Infrastructure  Construction  Services** | ** ** | **Telecommunication  Services** | ** ** | **Corporate and  Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------|--------------|-------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                                                                  | ** **   | **(in thousands)** | ** ** |
| Revenues                                                                    |         |                    | $          | 221,179                                    |       |                            |       | $                                    | 9,570      |      |       |   | $ | 921 |   |   | $ | 231,670 |   |
| Income (loss)  from operations as adjusted                                  |         |                    | 586        |                                       |       |                            | 3,859      |                                 |       |      | (3,334     | ) |   | 1,111 |   |
| Depreciation                                                                |         |                    | 5,908      |                                       |       |                            | 845        |                                 |       |      | 50         |   |   | 6,803 |   |
| Amortization                                                                |         |                    | 1,698      |                                       |       |                            | —     |                                 |       |      | —     |   |   | 1,698 |   |
| Total assets                                                                |         |                    | 394,739    |                                       |       |                            | 80,584     |                                 |       |      | 81,271     |   |   | 556,594 |   |
| Capital  expenditures                                                       |         |                    | 3,815      |                                       |       |                            | 2,868      |                                 |       |      | 762        |   |   | 7,445 |   |
| ***reconciliation:***                                                       | *** *** |                    |       |                                       |       |                            |       |                                 |       |      |       |   | *** *** | *** *** | *** *** |
| Income (loss)  from operations as adjusted                                  |         |                    | $          | 586                                        |       |                            |       | $                                    | 3,859      |      |       |   | $ | (3,334 | ) |   | $ | 1,111 |   |
| Less:  Amortization                                                         |         |                    | 1,698      |                                       |       |                            | —     |                                 |       |      | —     |   |   | 1,698 |   |
| Income (loss)  from operations                                              |         |                    | (1,112     | )                                          |       |                            | 3,859      |                                 |       |      | (3,334     | ) |   | (587 | ) |
| Interest income                                                             |         |                    | 9          |                                       |       |                            | 1          |                                 |       |      | 18         |   |   | 28 |   |
| Interest expense                                                            |         |                    | (1,878     | )                                          |       |                            | (88        | )                                    |       |      | (280       | ) |   | (2,246 | ) |
| Other income, net                                                           |         |                    | 639        |                                       |       |                            | (5         | )                                    |       |      | —     |   |   | 634 |   |
| Income (loss) before  income taxes                                          |         |                    | $          | (2,342                                     | )          |                            |       | $                                    | 3,767      |      |       |   | $ | (3,596 | ) |   | $ | (2,171 | ) |

 

| **For the Three Months Ended  June 30, 2006** | ** **   | ** **              | ** ** | **Infrastructure  Construction Services** | ** ** | **Telecommunication  Services** | ** ** | **Corporate and  Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------|--------------|-------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                                                                  | ** **   | **(in thousands)** | ** ** |
| Revenues                                                                    |         |                    | $          | 244,993                                        |       |                            |       | $                                    | 9,503      |      |       |   | $ | 3,531 |   |   | $ | 258,027 |   |
| Income (loss)  from operations as adjusted                                  |         |                    | 13,382     |                                           |       |                            | 4,743      |                                 |       |      | (3,839     | ) |   | 14,286 |   |
| Depreciation                                                                |         |                    | 5,687      |                                           |       |                            | 1,007      |                                 |       |      | 59         |   |   | 6,753 |   |
| Amortization and  share-based compensation                                  |         |                    | 841        |                                           |       |                            | 38         |                                 |       |      | 313        |   |   | 1,192 |   |
| Total assets                                                                |         |                    | 398,480    |                                           |       |                            | 90,959     |                                 |       |      | 79,105     |   |   | 568,544 |   |
| Capital  expenditures                                                       |         |                    | 3,736      |                                           |       |                            | 5,527      |                                 |       |      | 101        |   |   | 9,364 |   |
| ***reconciliation:***                                                       | *** *** |                    |       |                                           |       |                            |       |                                 |       |      |       |   | *** *** | *** *** | *** *** |
| Income (loss)  from operations as adjusted                                  |         |                    | $          | 13,382                                         |       |                            |       | $                                    | 4,743      |      |       |   | $ | (3,839 | ) |   | $ | 14,286 |   |
| Less:  Amortization and share-based compensation                            |         |                    | 841        |                                           |       |                            | 38         |                                 |       |      | 313        |   |   | 1,192 |   |
| Income (loss)  from operations                                              |         |                    | 12,541     |                                           |       |                            | 4,705      |                                 |       |      | (4,152     | ) |   | 13,094 |   |
| Interest income                                                             |         |                    | —     |                                           |       |                            | —     |                                 |       |      | 173        |   |   | 173 |   |
| Interest expense                                                            |         |                    | (1,121     | )                                              |       |                            | 236        |                                 |       |      | (797       | ) |   | (1,682 | ) |
| Write-off of  deferred financing costs                                      |         |                    | (3,535     | )                                              |       |                            | (677       | )                                    |       |      | (84        | ) |   | (4,296 | ) |
| Other income, net                                                           |         |                    | 1,482      |                                           |       |                            | 5          |                                 |       |      | —     |   |   | 1,487 |   |
| Income (loss) before  income taxes                                          |         |                    | $          | 9,367                                          |       |                            |       | $                                    | 4,269      |      |       |   | $ | (4,860 | ) |   | $ | 8,776 |   |

 

17

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| **For the Six Months Ended  June 30, 2005** | ** **   | ** **              | ** ** | **Infrastructure  Construction  Services** | ** ** | **Telecommunication  Services** | ** ** | **Corporate and  Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|--------------|-------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                                                                | ** **   | **(in thousands)** | ** ** |
| Revenues                                                                  |         |                    | $          | 390,535                                    |       |                            |       | $                                    | 20,084     |      |       |   | $ | 1,681 |   |   | $ | 412,300 |   |
| Income (loss)  from operations as adjusted                                |         |                    | 3,878      |                                       |       |                            | 8,052      |                                 |       |      | (7,219     | ) |   | 4,711 |   |
| Depreciation                                                              |         |                    | 11,820     |                                       |       |                            | 1,681      |                                 |       |      | 96         |   |   | 13,597 |   |
| Amortization                                                              |         |                    | 3,310      |                                       |       |                            | —     |                                 |       |      | —     |   |   | 3,310 |   |
| Total assets                                                              |         |                    | 394,739    |                                       |       |                            | 80,584     |                                 |       |      | 81,271     |   |   | 556,594 |   |
| Capital  expenditures                                                     |         |                    | 7,589      |                                       |       |                            | 7,328      |                                 |       |      | 1,068      |   |   | 15,985 |   |
| ***reconciliation:***                                                     | *** *** |                    |       |                                       |       |                            |       |                                 |       |      |       |   | *** *** | *** *** | *** *** |
| Income (loss)  from operations as adjusted                                |         |                    | $          | 3,878                                      |       |                            |       | $                                    | 8,052      |      |       |   | $ | (7,219 | ) |   | $ | 4,711 |   |
| Less:  Amortization                                                       |         |                    | 3,310      |                                       |       |                            | —     |                                 |       |      | —     |   |   | 3,310 |   |
| Income (loss)  from operations                                            |         |                    | 568        |                                       |       |                            | 8,052      |                                 |       |      | (7,219     | ) |   | 1,401 |   |
| Interest income                                                           |         |                    | 96         |                                       |       |                            | —     |                                 |       |      | 126        |   |   | 222 |   |
| Interest                                                                  |         |                    | (3,204     | )                                          |       |                            | (112       | )                                    |       |      | (387       | ) |   | (3,703 | ) |
| Other income, net                                                         |         |                    | 1,233      |                                       |       |                            | (3         | )                                    |       |      | 3,785      |   |   | 5,015 |   |
| Income (loss) before  income taxes                                        |         |                    | $          | (1,307                                     | )          |                            |       | $                                    | 7,937      |      |       |   | $ | (3,695 | ) |   | $ | 2,935 |   |

 

| **For the Six Months Ended  June 30, 2006** | ** **   | ** **              | ** ** | **Infrastructure  Construction  Services** | ** ** | **Telecommunication  Services** | ** ** | **Corporate and  Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|--------------|-------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                                                                | ** **   | **(in thousands)** | ** ** |
| Revenues                                                                  |         |                    | $          | 450,500                                    |       |                            |       | $                                    | 19,576     |      |       |   | $ | 5,191 |   |   | $ | 475,267 |   |
| Income (loss)  from operations as adjusted                                |         |                    | 21,766     |                                       |       |                            | 9,222      |                                 |       |      | (9,697     | ) |   | 21,291 |   |
| Depreciation                                                              |         |                    | 11,557     |                                       |       |                            | 1,993      |                                 |       |      | 114        |   |   | 13,664 |   |
| Amortization and  share-based compensation                                |         |                    | 1,630      |                                       |       |                            | 59         |                                 |       |      | 630        |   |   | 2,319 |   |
| Total assets                                                              |         |                    | 398,480    |                                       |       |                            | 90,959     |                                 |       |      | 79,105     |   |   | 568,544 |   |
| Capital  expenditures                                                     |         |                    | 9,090      |                                       |       |                            | 9,697      |                                 |       |      | 134        |   |   | 18,921 |   |
| ***reconciliation:***                                                     | *** *** |                    |       |                                       |       |                            |       |                                 |       |      |       |   | *** *** | *** *** | *** *** |
| Income (loss) from  operations as adjusted                                |         |                    | $          | 21,766                                     |       |                            |       | $                                    | 9,222      |      |       |   | $ | (9,697 | ) |   | $ | 21,291 |   |
| Less:  Amortization and share-based compensation                          |         |                    | 1,630      |                                       |       |                            | 59         |                                 |       |      | 630        |   |   | 2,319 |   |
| Income (loss)  from operations                                            |         |                    | 20,136     |                                       |       |                            | 9,163      |                                 |       |      | (10,327    | ) |   | 18,972 |   |
| Interest income                                                           |         |                    | 1          |                                       |       |                            | —     |                                 |       |      | 408        |   |   | 409 |   |
| Interest expense                                                          |         |                    | (2,394     | )                                          |       |                            | 391        |                                 |       |      | (1,790     | ) |   | (3,793 | ) |
| Write-off of  deferred financing costs                                    |         |                    | (3,535     | )                                          |       |                            | (677       | )                                    |       |      | (84        | ) |   | (4,296 | ) |
| Other income, net                                                         |         |                    | 1,435      |                                       |       |                            | 2          |                                 |       |      | 126        |   |   | 1,563 |   |
| Income (loss) before  income taxes                                        |         |                    | $          | 15,643                                     |       |                            |       | $                                    | 8,879      |      |       |   | $ | (11,667 | ) |   | $ | 12,855 |   |

 

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Thefollowing table presents information regarding revenues by end market:

| ** **                                    | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Electric  Transmission                        |       |                                                  | $          | 38,103                                                |       |                                                |       | $                                                   | 59,447     |   |   |   | $ | 77,588 |   |   |   | $ | 117,207 |   |   |
| Electric  Substation                          |       |                                                  | 40,360     |                                                  |       |                                                | 58,102     |                                                |       |   | 72,996 |   |   |   | 96,851 |   |   |
| Utility  Distribution and Industrial Electric |       |                                                  | 43,141     |                                                  |       |                                                | 32,259     |                                                |       |   | 84,921 |   |   |   | 69,602 |   |   |
| Total Electric                                |       |                                                  | 121,604    |                                                  |       |                                                | 149,808    |                                                |       |   | 235,505 |   |   |   | 283,660 |   |   |
| Natural Gas                                   |       |                                                  | 75,864     |                                                  |       |                                                | 72,303     |                                                |       |   | 119,005 |   |   |   | 126,229 |   |   |
| Telecommunications                            |       |                                                  | 25,408     |                                                  |       |                                                | 29,742     |                                                |       |   | 44,789 |   |   |   | 54,054 |   |   |
| Other                                         |       |                                                  | 8,794      |                                                  |       |                                                | 6,174      |                                                |       |   | 13,001 |   |   |   | 11,324 |   |   |
|                                          |       |                                                  | $          | 231,670                                               |       |                                                |       | $                                                   | 258,027    |   |   |   | $ | 412,300 |   |   |   | $ | 475,267 |   |   |

 

**Electric,gas and other end market revenues are entirely part of the ICS segment, whiletelecommunications end market revenue is included in both the ICS and TSsegments. Approximately 38%, 45%, 32% and 36%, of our telecommunications endmarket revenues for the three and six months ended June 30, 2005 and forthe three and six months ended June 30, 2006, respectively, were from theTS segment.**

**14.  Related Party Transactions**

As of June 30, 2006, we had $0.3 million duefrom our Principal Stockholders included in receivables from related party onour condensed consolidated balance sheet. This amount relates to reimbursementsfor certain secondary offering costs.

On June 28, 2006, we entered into a SecondAmendment to Registration Rights Agreement (the “Second Amendment”) to allow thePrincipal Stockholders to request that we file with the Securities and ExchangeCommission a registration statement on Form S-3 within 180 daysfollowing March 20, 2006 for an underwritten public offering (the “Offering”)of shares of our common stock. In connection with the Offering, ourstockholders participating in the Offering must pay their own expenses as wellas their pro rata share of our expenses incurred in connection with theOffering.

In addition, on June 28, 2006, in connection withthe Second Amendment, we entered into an Agreement (the “Agreement”) with ourPrincipal Stockholders and Ian Schapiro and Michael Harmon, two members of theour board of directors, to set forth certain agreements of the partiesfollowing the closing of the Offering. Pursuant to the Agreement, Messrs. Schapiroand Harmon, representatives of the Principal Stockholders, agreed to work withus in good faith to determine a mutually acceptable transition plan for theirboard of directors and committee responsibilities. In addition, the PrincipalStockholders have entered into non-disclosure agreements with us and haveagreed to certain limited restrictive covenant obligations following theclosing of the Offering.

As of December 31, 2005, we had $7.1 milliondue to the former owners of Blair Park accrued in other liabilities—relatedparties on our condensed consolidated balance sheet for additional contingent purchaseprice consideration. Blair Park was acquired by InfraSource Incorporated in2001. The balance was paid in the second quarter of 2006.

As of June 30, 2006, we had $0.8 million dueto the sellers of the Maslonka business, who are also employees, accrued inother liabilities—related parties on our condensed consolidated balance sheet.This balance relates to amounts due upon collection from a third party. In January 2006,we paid the sellers of the Maslonka business $3.5 million of holdbackconsideration, including interest, and released the holdback shares.

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We lease our InfraSource Transmission Services (“ITS”)headquarters in Mesa, Arizona and our ITS Texas field office in San Angelo,Texas from EC Source, LLC, which is wholly owned by Martin Maslonka. 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.

We lease office and warehouse space from ColemanProperties of which three officers of Blair Park are general partners. Thelease for this space continues through October 2008. Our annual paymentsunder this agreement are approximately $0.1 million.

We also lease ducts in two river bores under theDelaware River from Coleman Properties. Our lease commenced on May 1, 2005and has a term of five years, with an option to extend. Our annual leasepayment is $0.02 million for each pair of fiber installed in the conduitup to a maximum of $0.2 million per year if additional ducts are leased.

As of June 30, 2006 we had $0.4 million dueto the EHV stockholders, who are currently our employees, accrued in other liabilities—relatedparties on our condensed consolidated balance sheet. This amount is a portionof the holdback consideration from our acquisition of EHV, which is payable in2007 and not contingent on future events, with the exception of anyindemnification obligations owed to us.

We lease office andwarehouse facilities in Michigan which are owned by an employee and his familymembers. Our leases for these properties are through March 2011 and May 2007.Pursuant to these leases, we expect to incur total annual lease payments of$0.3 million.

**15.  Commitments and Contingencies**

On September 21, 2005, a petition, as amended,was filed against InfraSource, certain of its officers and one of its directorsand various other defendants in the Harris County, Texas District Court seekingunspecified damages. The plaintiffs allege that the defendants violated theirfiduciary duties and committed constructive fraud by failing to maximizeshareholder value in connection with the Merger and committed other acts ofmisconduct following the filing of the petition. At this time, it is too earlyto form a definitive opinion concerning the ultimate outcome of thislitigation. Management of InfraSource plans to vigorously defend against thisclaim.

Pursuant to our service contracts, we generallyindemnify our customers for the services we provide under such contracts.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, other legal proceedings and aresubject, due to the nature of our business, to governmental agency oversight,audits, investigations and review. Such actions may seek, among other things,compensation for alleged personal injury, breach of contract, property damage,punitive damages, civil penalties or other losses, or injunctive or declaratoryrelief. Under such governmental audits and investigations, we may becomesubject to fines and penalties or other monetary damages. With respect to suchlawsuits, claims, proceedings and governmental investigations and audits, weaccrue reserves when it is probable a liability has been incurred and theamount of loss can be reasonably estimated. We do not believe any of theseproceedings currently pending, individually or in the aggregate, would beexpected to have a material adverse effect on our results of operations, cashflows or financial condition.

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**Item 2.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Forward-Looking andCautionary Statements**

In this Quarterly Report on Form 10 Q, we have madeforward-looking statements. Generally, these forward-looking statements can beidentified by words like “may,” “will,” “should,” “expect,” “intend,”“anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” orthe negative of those words and other comparable words. These forward-lookingstatements generally relate to our plans, objectives and expectations forfuture operations and are based upon our current estimates and projections offuture results or trends. Although we believe that our plans and objectivesreflected in or suggested by these forward-looking statements are reasonable,we may not achieve these plans or objectives. These statements are subject toknown and unknown risks, uncertainties and other factors that could cause theactual results to differ materially from those contemplated by the statements. Thesestatements only reflect our predictions. Except as required by law, we will notupdate forward-looking statements even though our situation may change in thefuture. With respect to forward-looking statements, we claim the protection ofthe safe harbor for forward-looking statements contained in the PrivateSecurities Litigation 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 under Part I, Item 1A, “Risk Factors” in ourAnnual Report on Form 10-K for the year ended December 31, 2005and other risks outlined in our filings with the Securities and ExchangeCommission (“SEC”).

**Introduction**

The following discussionshould be read in conjunction with the unaudited condensed consolidatedfinancial statements and notes of InfraSource Services, Inc. and itswholly owned subsidiaries and Part II, Item 1A, “Risk Factors” includedelsewhere in this Quarterly Report on Form 10-Q and with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” “RiskFactors” and the audited financial statements and notes included in our AnnualReport on Form 10-K.

**Overview**

We are one of the largest specialty contractorsservicing electric, natural gas and telecommunications infrastructure in theUnited States based on market share. We operate in two business segments. OurInfrastructure Construction Services (“ICS”) segment, provides design,engineering, procurement, construction, testing and maintenance services forutility infrastructure. Our ICS customers include electric power utilities,natural gas utilities, telecommunication customers, government entities andheavy industrial companies, such as petrochemical, processing and refiningbusinesses. Our ICS services are provided by four of our operating units, allof which have been aggregated into one reportable segment due to their similareconomic characteristics, customer bases, products and production anddistribution methods. Our Telecommunication Services (“TS”) segment, consistingof a single operating unit, leases point-to-point telecommunicationsinfrastructure in select markets and provides design, procurement, constructionand maintenance services for telecommunications infrastructure. Our TScustomers include communication service providers, large industrial andfinancial services customers, school districts and other entities with highbandwidth telecommunication needs. Within our TS segment, we are regulated as apublic telecommunication utility in various states. We operate in multipleservice territories throughout the United States. We do not have significantoperations or assets outside the United States. We acquired EHV PowerCorporation (“EHV”), a Canadian entity, in November of 2005, whichrepresented less than 2% of our revenue in 2006.

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During the secondquarter of 2006:

·       Grossprofit increased $17.5 million, as compared to the second quarter of 2005,and our gross profit margin increased from 8.1% in 2005 to 14.1% in 2006. Theincrease in gross profit was due primarily to an increase in the volume ofelectric substation and electric transmission work which generally provideshigher margins; the earning of performance bonuses for our strong operatingperformance on certain electric distribution and substation projects; the absenceof certain performance-related pricing concessions we made to a large customerin 2005; the exit of certain unprofitable natural gas contracts; and anincrease in volume of dark fiber lease revenue. This increase was partiallyoffset by a decrease in the volume of utility distribution and industrialelectric work. Additionally, we incurred a charge of $6.6 million for anelectric transmission contract determined to be in a loss position during thequarter which was less than the $8.5 million charge in the second quarterof 2005 for the loss on one of our underground utility construction projects.

·       Duringthe second quarter of 2006, we recorded a $5.0 million contract loss relatedto an electric transmission project, which assumes collection of a portion of currentand projected claims, and the associated reversal of pre-tax profit of $1.6 millionrecognized in prior periods. This project began in August 2005 and isexpected to be substantially completed by December 2006. Consistent withour revenue recognition policy for contracts that are in a forecasted lossposition, we recognized the expected loss on this project in the second quarterof 2006. The loss is attributable primarily to lower than expected productivitydue to ineffective supervision, insufficient access to experienced labor,supplier issues and extremely hot weather.

·       OnJune 30, 2006, we entered into a new credit agreement which provides for asecured revolving credit facility of $225.0 million which may be used forrevolving credit borrowings, swing loans and the issuance of standby letters ofcredit. We also have the right to seek additional commitments to increase theaggregate commitments up to $350.0 million, subject to compliance withapplicable covenants. The new credit agreement replaces our previous securedcredit facility, which included an $85.0 million revolving creditcommitment and $84.0 million in term loan commitments. The proceeds fromborrowings under the new credit agreement were used to repay $83.6 millionof outstanding debt existing as of June 30, 2006 under our previousamended and restated credit facility which was terminated upon repayment. As ofJune 30, 2006, we have a $75.0 million outstanding revolving creditborrowing and $34.0 million in letters of credit outstanding. As a resultof the entry into the new credit agreement and refinancing of the previouscredit facilities, we recorded a charge in the second quarter of 2006 of $4.3 millionrelated to the write-off of deferred financing costs.

·       Werecorded $1.0 million of share-based compensation expense.

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For thethree and six months ended June 30, 2006, we had revenues of $258.0 millionand $475.3 million, respectively, in comparison to $231.7 million and$412.3 million, respectively, for the three months and six months ended June 30,2005. Our revenue mix by end market for the three and six months ended June 30,2005 and 2006 is presented in the table below:

**End Market**

| ** **                                    | ** ** | **Three Months**       | ** ** | **Three Months**       | ** ** | **Six Months**         | ** ** | **Six Months**         | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| ** **                                    | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** |
| Electric  Transmission                        |       |                        | 16         | %                           |       |                        | 23         | %                           |       |   | 19 | % |   |   | 25 | % |   |
| Electric  Substation                          |       |                        | 17         | %                           |       |                        | 23         | %                           |       |   | 18 | % |   |   | 20 | % |   |
| Utility  Distribution and Industrial Electric |       |                        | 19         | %                           |       |                        | 12         | %                           |       |   | 20 | % |   |   | 15 | % |   |
| Total Electric                                |       |                        | 52         | %                           |       |                        | 58         | %                           |       |   | 57 | % |   |   | 60 | % |   |
| Natural Gas                                   |       |                        | 33         | %                           |       |                        | 28         | %                           |       |   | 29 | % |   |   | 27 | % |   |
| Telecommunications                            |       |                        | 11         | %                           |       |                        | 12         | %                           |       |   | 11 | % |   |   | 11 | % |   |
| Other                                         |       |                        | 4          | %                           |       |                        | 2          | %                           |       |   | 3 | % |   |   | 2 | % |   |

 

Our top ten customers accounted for 56% and 54%, ofour consolidated revenues for the three months ended June 30, 2005 and2006, respectively, and 48% and 47% of our consolidated revenues for the sixmonths ended June 30, 2005 and 2006, respectively. Exelon Corporation (“Exelon”)accounted for approximately 25% and 18%, of our consolidated revenues for thethree months ended June 30, 2005 and 2006, respectively, and 23% and 17%,of our consolidated revenues for the six months ended June 30, 2005 and2006, respectively. Exelon has recently indicated its intent to curtailexpenditures to a level below that sustained in recent years and they have alsobegun to modify contracting practices to seek alternative commercialarrangements with suppliers like us, including increased use of competitivebidding on certain projects. Approximately 38%, 45%, 32% and 36% of ourtelecommunications end market revenues were from the TS segment for the threeand six months ended June 30, 2005 and for the three and six months ended June 30,2006, respectively.

Backlog represents the amount of revenue that weexpect to realize from work to be performed on uncompleted contracts, includingnew contracts for which we have received a notice to begin work. In some cases,we are awarded a contract in advance of receiving the notice to begin work and,in such event, we do not classify the work as backlog. Contracts withcontingent financing arrangements or those awaiting release of particularpermits are not included in backlog. Backlog includes our estimate of work tobe performed under our master service agreements (“MSAs”), which often havetwo-to-three year terms and revenues under lease commitments. Our customers arenot contractually committed to specific volumes of services under our MSAs orlong-term maintenance contracts, and many of those contracts may be terminatedwith minimal notice.

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Belowis a period-over-period (second quarter 2005 as to second quarter 2006) andsequential (first quarter 2006 as to second quarter 2006) comparison of endmarket backlog:

| ** **                                    | ** ** | **Backlog as of** | ** ** | **Increase/**     | ** ** | **Increase/**  | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-------------------|------------|----------------|------------|
| ** **                                    | ** ** | **June 30,**           | ** ** | **June 30,** | ** ** | **(Decrease)** | ** ** | **(Decrease)** | ** ** |
| ** **                                    | ** ** | **2005**                    | ** ** | **2006**          | ** ** | **($)**        | ** ** | **(%)** | ** ** |
| ** **                                    | ** ** | **(in millions)**      | ** ** |
| Electric  Transmission                        |       |                        | $          | 118               |       |           |       | $ | 215 |   |   |   | $ | 97 |   |   |   | 82 | % |   |
| Electric  Substation                          |       |                        | 93         |              |       |           | 137        |   |   |   | 44 |   |   |   | 47 | % |   |
| Utility  Distribution and Industrial Electric |       |                        | 55         |              |       |           | 88         |   |   |   | 33 |   |   |   | 60 | % |   |
| Total Electric                                |       |                        | 266        |              |       |           | 440        |   |   |   | 174 |   |   |   | 65 | % |   |
| Natural Gas                                   |       |                        | 370        |              |       |           | 247        |   |   |   | (123 | ) |   |   | (33 | )% |   |
| Telecommunications                            |       |                        | 190        |              |       |           | 221        |   |   |   | 31 |   |   |   | 16 | % |   |
| Other                                         |       |                        | 18         |              |       |           | 8          |   |   |   | (10 | ) |   |   | (56 | )% |   |
| Total                                         |       |                        | $          | 844               |       |           |       | $ | 916 |   |   |   | $ | 72 |   |   |   | 9 | % |   |

 

| ** **                                    | ** ** | **Backlog as of** | ** ** | **Increase/**     | ** ** | **Increase/**  | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-------------------|------------|----------------|------------|
| ** **                                    | ** ** | **March 31,**          | ** ** | **June 30,** | ** ** | **(Decrease)** | ** ** | **(Decrease)** | ** ** |
| ** **                                    | ** ** | **2006**                    | ** ** | **2006**          | ** ** | **($)**        | ** ** | **(%)** | ** ** |
| ** **                                    | ** ** | **(in millions)**      | ** ** |
| Electric  Transmission                        |       |                        | $          | 176               |       |           |       | $ | 215 |   |   |   | $ | 39 |   |   |   | 22 | % |   |
| Electric  Substation                          |       |                        | 136        |              |       |           | 137        |   |   |   | 1 |   |   |   | 1 | % |   |
| Utility  Distribution and Industrial Electric |       |                        | 73         |              |       |           | 88         |   |   |   | 15 |   |   |   | 21 | % |   |
| Total Electric                                |       |                        | 385        |              |       |           | 440        |   |   |   | 55 |   |   |   | 14 | % |   |
| Natural Gas                                   |       |                        | 294        |              |       |           | 247        |   |   |   | (47 | ) |   |   | (16 | )% |   |
| Telecommunications                            |       |                        | 234        |              |       |           | 221        |   |   |   | (13 | ) |   |   | (6 | )% |   |
| Other                                         |       |                        | 19         |              |       |           | 8          |   |   |   | (11 | ) |   |   | (58 | )% |   |
| Total                                         |       |                        | $          | 932               |       |           |       | $ | 916 |   |   |   | $ | (16 | ) |   |   | (2 | )% |   |

 

Belowis a period-over-period (second quarter 2005 as to second quarter 2006) andsequential (first quarter 2006 as to second quarter 2006) comparison of backlogby business segment:

| ** ** | ** ** | **Backlog as of** | ** ** | **Increase/**     | ** ** | **Increase/** | ** ** |
|------------|------------|-----------------------------|------------|-------------------|------------|---------------|------------|
| ** ** | ** ** | **June 30,**           | ** ** | **June 30,** | ** ** | **Decrease**  | ** ** | **Decrease** | ** ** |
| ** ** | ** ** | **2005**                    | ** ** | **2006**          | ** ** | **($)**       | ** ** | **(%)** | ** ** |
| ** ** | ** ** | **(in millions)**      | ** ** |
| ICS        |       |                        | $          | 740               |       |          |       | $ | 782 |   |   |   | $ | 42 |   |   |   | 6 | % |   |
| TS         |       |                        | 104        |              |       |          | 134        |   |   |   | 30 |   |   |   | 29 | % |   |
| Total      |       |                        | $          | 844               |       |          |       | $ | 916 |   |   |   | $ | 72 |   |   |   | 9 | % |   |

 

| ** ** | ** ** | **Backlog as of** | ** ** | **Increase/**     | ** ** | **Increase/** | ** ** |
|------------|------------|-----------------------------|------------|-------------------|------------|---------------|------------|
| ** ** | ** ** | **March 31,**          | ** ** | **June 30,** | ** ** | **Decrease**  | ** ** | **Decrease** | ** ** |
| ** ** | ** ** | **2006**                    | ** ** | **2006**          | ** ** | **($)**       | ** ** | **(%)** | ** ** |
| ** ** | ** ** | **(in millions)**      | ** ** |
| ICS        |       |                        | $          | 797               |       |          |       | $ | 782 |   |   |   | $ | (15 | ) |   |   | (2 | )% |   |
| TS         |       |                        | 135        |              |       |          | 134        |   |   |   | (1 | ) |   |   | (1 | )% |   |
| Total      |       |                        | $          | 932               |       |          |       | $ | 916 |   |   |   | $ | (16 | ) |   |   | (2 | )% |   |

 

**Critical AccountingPolicies and Estimates**

The preparation of ourcondensed consolidated financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosures of contingent assets 

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andliabilities known to exist at the date of the condensed consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. We evaluate our estimates on an ongoing basis, based onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Actual results may differ from thoseestimates. Refer to our Annual Report on Form 10-K for our criticalaccounting policies and estimates in addition to Share-Based Compensationpresented below.

***Share-Based Compensation***

Effective January 1, 2006, we adopted SFAS No. 123Rwhich requires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors, including stockoptions, restricted stock and employee stock purchases related to the employeestock purchase plan, based on estimated fair values. We have identified theaccounting of our share-based payments as critical to the accounting for ourbusiness operations and the understanding of our results of operations becausethey involve more significant judgments and estimates used in the preparationof our condensed consolidated financial statements. Prior to the adoption ofSFAS No. 123R, we accounted for share-based awards to employees anddirectors using the intrinsic value method in accordance with AccountingPrinciples Board Opinion (“APB”) No. 25, “Accounting for Stock Issued toEmployees” as allowed under SFAS No. 123.

SFAS No. 123R requires companies to estimate thefair value of share-based payment awards on the grant-date using anoption-pricing model. We value share-based awards using the Black-Scholesoption pricing model. The Black-Scholes model, by its design, is highlycomplex, and dependent upon key data inputs estimated by management. Theprimary data inputs with the greatest degree of subjective judgment are theestimated lives of the stock-based awards and the estimated volatility of ourstock price. Beginning in fiscal year 2006, we calculated the estimated life ofstock options granted using a “simplified” method, which is based on the averageof the vesting term and the term of the option, as a result of guidance fromthe SEC as contained in Staff Accounting Bulletin No. 107 permitting theinitial use of this method. We determined expected volatility for fiscal year2006 using the historical method. Management selected the historical method aswe have not identified a more reliable or appropriate method to predict futurevolatility.

As share-based compensation expense recognized duringthe current period is based on the value of the portion of share-based paymentawards that is ultimately expected to vest, SFAS No. 123R requiresforfeitures to be estimated at the time of grant in order to estimate theamount of share-based awards that will ultimately vest. The forfeiture rate isbased on historical activity. The value of the portion of the award that isultimately expected to vest is expensed on a straight-line basis over therequisite service periods in our consolidated statements of operations.Stock-based compensation expense recognized under SFAS No. 123R for thethree and six months ended June 30, 2006 was $1.0 million and $1.8 million,respectively, related to stock options, restricted stock and the discount onemployee stock purchases. For the three and six months ended June 30,2005, we recorded share-based compensation expense of $4,000 and $20,000,respectively, related to stock options which were granted to employees anddirectors below the fair market value of the underlying stock at the date ofgrant. See Notes 2 and 9 to our condensed consolidated financial statements foradditional information regarding the adoption of SFAS No. 123R.

If factors change and weemploy different assumptions in the application of SFAS No. 123R in futureperiods, the compensation expense that we record under SFAS No. 123R maydiffer significantly.

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**Results ofOperations**

**Seasonality andCyclicality**

The results of operations of our ICS segment aresubject to seasonal variations. During the winter months, demand for newprojects and new maintenance service arrangements is normally lower in somegeographic areas due to reduced construction activity, especially for servicesto natural gas distribution customers. Therefore, our ICS segment typicallyexperiences lower gross and operating margins in the first quarter. However,demand for repair and maintenance services attributable to damage caused byinclement weather may partially offset the loss of revenues from lower demandfor new projects and new MSAs. During the three months ended March 31,2006, we experienced unusually mild weather which contributed to increasedvolume and financial performance in our natural gas, undergroundtelecommunications and electric transmission services.

Our working capital needs are influenced by the seasonalityof our business. We generally experience a need for additional working capitalduring the spring and summer when we increase our level of outdoor constructionin weather-affected regions of the country. Conversely, we typically convertworking capital assets to cash during the winter months. Activity in ourindustry and the available volume of work is affected by the highly cyclicalspending patterns in the telecommunications and independent power producers (“IPP”)sectors. As a result, our volume of business may be adversely affected bydeclines in new projects in various geographic regions or industries in theUnited States.

**Our TSsegment’s leasing of point-to-point telecommunications infrastructure is notsignificantly affected by seasonality.**

**ConsolidatedResults**

***Three months endedJune 30, 2006 compared to the three months ended June 30, 2005***

| ** **                                             | ** ** | **Three Months**       | ** ** | ** **    | ** ** | **Three Months**       | ** ** | ** **    | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|---------------|------------|-----------------------------|------------|---------------|------------|
| ** **                                             | ** ** | **Ended**                   | ** ** | **% of** | ** ** | **Ended**                   | ** ** | **% of** | ** ** |
| ** **                                             | ** ** | **June 30, 2005** | ** ** | **Revenue**   | ** ** | **June 30, 2006** | ** ** | **Revenue**   | ** ** |
| ** **                                             | ** ** | **(in thousands)**     | ** ** |
| Contract revenues                                      |       |                        | $          | 231,670       |       |                        |       | 100.0         | %          |   |   | $ | 258,027 |   |   |   | 100.0 | % |   |
| Gross profit                                           |       |                        | 18,842     |          |       |                        | 8.1        | %             |       |   | 36,384 |   |   |   | 14.1 | % |   |
| Selling, general  and administrative expenses          |       |                        | 17,651     |          |       |                        | 7.6        | %             |       |   | 23,012 |   |   |   | 8.9 | % |   |
| Merger related  costs                                  |       |                        | 76         |          |       |                        | 0.0        | %             |       |   | — |   |   |   | 0.0 | % |   |
| Provision of  uncollectible accounts                   |       |                        | 4          |          |       |                        | 0.0        | %             |       |   | 41 |   |   |   | 0.0 | % |   |
| Amortization of  intangible assets                     |       |                        | 1,698      |          |       |                        | 0.7        | %             |       |   | 237 |   |   |   | 0.1 | % |   |
| Income (loss) from operations                          |       |                        | (587       | )             |       |                        | -0.3       | %             |       |   | 13,094 |   |   |   | 5.1 | % |   |
| Interest income                                        |       |                        | 28         |          |       |                        | 0.0        | %             |       |   | 173 |   |   |   | 0.1 | % |   |
| Interest expense                                       |       |                        | (2,246     | )             |       |                        | -1.0       | %             |       |   | (1,682 | ) |   |   | -0.7 | % |   |
| Write-off of  deferred financing costs                 |       |                        | —     |          |       |                        | 0.0        | %             |       |   | (4,296 | ) |   |   | -1.7 | % |   |
| Other income, net                                      |       |                        | 634        |          |       |                        | 0.3        | %             |       |   | 1,487 |   |   |   | 0.6 | % |   |
| Income from continuing operations before income  taxes |       |                        | (2,171     | )             |       |                        | -0.9       | %             |       |   | 8,776 |   |   |   | 3.4 | % |   |
| Income tax  expense (benefit)                          |       |                        | (808       | )             |       |                        | -0.3       | %             |       |   | 3,551 |   |   |   | 1.4 | % |   |
| Income (loss) from  continuing operations              |       |                        | $          | (1,363        | )          |                        |       | -0.6          | %          |   |   | $ | 5,225 |   |   |   | 2.0 | % |   |

 

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*Revenues:*   Revenuesincreased $26.4 million, or 11%, to $258.0 million for the threemonths ended June 30, 2006 compared to the three months ended June 30,2005 due primarily to the increase in electric contract awards within the pastyear. Electric revenues increased by $28.2 million, or 23%, including$21.3 million from electric transmission services and $17.7 millionfrom electric substation services, offset in part by a $10.9 milliondecrease from utility distribution and industrial electric services. Thedecrease in utility distribution and industrial electric work is primarily dueto fewer IPP projects. Underground natural gas revenues decreased by $3.6 million,or 5%, due primarily to the exiting of certain unprofitable gas contracts andthe decline in new housing construction in certain areas of the country.Telecommunications revenues increased by $4.3 million, or 17%, mostly dueto an increase in demand for underground telecommunications infrastructurework, including “fiber to the premises” initiatives.

*Grossprofit:*   Gross profit increased $17.5 million,or 93%, to $36.4 million for the three months ended June 30, 2006compared to the three months ended June 30, 2005. Gross profit margins forthe same periods increased from 8.1% in 2005 to 14.1% in 2006. The increase ingross profit was due primarily to an increase in the volume of electricsubstation and electric transmission work which generally provides highermargins; the earning of performance bonuses for our strong operatingperformance on certain electric distribution and substation projects; theabsence of certain performance-related pricing concessions we made to a largecustomer in 2005; the exit of certain unprofitable natural gas contracts; andan increase in volume of dark fiber lease revenue. This increase was partiallyoffset by a decrease in the volume of utility distribution and industrialelectric work. Additionally, we incurred a charge of $6.6 million for anelectric transmission contract determined to be in a loss position during thequarter which was less than the $8.5 million charge in the second quarterof 2005 for the loss on one of our underground utility construction projects.

*Selling,general and administrative expenses:*   Secondquarter 2006 selling, general and administrative expenses were $23.0 million,an increase of $5.4 million, or 30%, compared to the three months ended June 30,2005. The increase was due primarily to an increase in salaries and benefits of$4.0 million for additional personnel hired to manage business growth anda $1.0 million charge for share-based compensation. Selling, general andadministrative expenses increased as a percentage of revenue from 7.6% for thethree months ended June 30, 2005 to 8.9% for the three months ended June 30,2006.

*Amortizationof intangible assets:*   Amortization of intangibleassets decreased $1.5 million, or 86%, to $0.2 million during thethree months ended June 30, 2006 compared to $1.7 million for threemonths ended June 30, 2005. The decrease was due to a lesser amount ofintangible amortization related to acquired construction backlog, due to thecompletion of most of the acquired contracts during 2005.

*Interestexpense:*   We incurred $1.7 million ofinterest expense for the three months ended June 30, 2006, a decrease of$0.6 million from the three months ended June 30, 2005, principallydue to the reclassification of other comprehensive income related to benefitsfrom our interest rate swap and interest rate cap in the period, which reduced interestexpense. We expect that this benefit (approximately $0.5 million) will bereversed in the second half of 2006. These derivative instruments no longerqualified as cash flow hedges under SFAS No. 133 “Accounting forDerivatives and Hedging Activities,” as amended by SFAS Nos. 137, 138 and 149,due to the debt refinancing on June 30, 2006. Additionally, interest expensedecreased due to the lack of line of credit borrowings in 2006 compared to thesecond quarter of 2005.

*Write-offof deferred financing costs:*   In the secondquarter of 2006 we refinanced our existing credit facility which resulted in a$4.3 million charge for the write-off of deferred financing costs (SeeNote 7 to our condensed consolidated financial statements).

*Otherincome (expenses), net:*   Other income increasedby $0.9 million for the three months ended June 30, 2006 compared tothe three months ended June 30, 2005. The increase was due primarily togains 

27

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on equipment sales. Thesegains occur periodically in the ordinary course of business as we sell ownedequipment being replaced or retired.

*Provision(benefit) for income taxes:*   The provision forincome taxes for the three months ended June 30, 2006 was $3.6 million,compared to the benefit of $(0.8) million for the three months ended June 30,2005. The increase was due to higher taxable income in the three months ended June 30,2006.

*Discontinued operations,net of tax:*   The loss from discontinuedoperations for the three months ended June 30, 2005 was less then $0.1 andincluded the results of operations of ULMS and ESI. The income fromdiscontinued operations for the three months ended June 30, 2006 relatesto the resolution of an existing ULMS liability, as well as, an earn outarrangement that will continue through December 2006.

***Six months ended June 30,2006 compared to the six months ended June 30, 2005***

| ** **                                             | ** ** | **Six Months**         | ** ** | ** **    | ** ** | **Six Months**         | ** ** | ** **    | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|---------------|------------|-----------------------------|------------|---------------|------------|
| ** **                                             | ** ** | **Ended**                   | ** ** | **% of** | ** ** | **Ended**                   | ** ** | **% of** | ** ** |
| ** **                                             | ** ** | **June 30, 2005** | ** ** | **Revenue**   | ** ** | **June 30, 2006** | ** ** | **Revenue**   | ** ** |
| ** **                                             | ** ** | **(in thousands)**     | ** ** |
| Contract revenues                                      |       |                        | $          | 412,300       |       |                        |       | 100.0         | %          |   |   | $ | 475,267 |   |   |   | 100.0 | % |   |
| Gross profit                                           |       |                        | 39,106     |          |       |                        | 9.5        | %             |       |   | 65,580 |   |   |   | 13.8 | % |   |
| Selling, general  and administrative expenses          |       |                        | 34,159     |          |       |                        | 8.3        | %             |       |   | 46,083 |   |   |   | 9.7 | % |   |
| Merger related  costs                                  |       |                        | 152        |          |       |                        | 0.0        | %             |       |   | — |   |   |   | 0.0 | % |   |
| Provision of  uncollectible accounts                   |       |                        | 84         |          |       |                        | 0.0        | %             |       |   | 31 |   |   |   | 0.0 | % |   |
| Amortization of  intangible assets                     |       |                        | 3,310      |          |       |                        | 0.8        | %             |       |   | 494 |   |   |   | 0.1 | % |   |
| Income from operations                                 |       |                        | 1,401      |          |       |                        | 0.3        | %             |       |   | 18,972 |   |   |   | 4.0 | % |   |
| Interest income                                        |       |                        | 222        |          |       |                        | 0.1        | %             |       |   | 409 |   |   |   | 0.1 | % |   |
| Interest expense                                       |       |                        | (3,703     | )             |       |                        | -0.9       | %             |       |   | (3,793 | ) |   |   | -0.8 | % |   |
| Write-off of  deferred financing costs                 |       |                        | —     |          |       |                        | 0.0        | %             |       |   | (4,296 | ) |   |   | -0.9 | % |   |
| Other income                                           |       |                        | 5,015      |          |       |                        | 1.2        | %             |       |   | 1,563 |   |   |   | 0.3 | % |   |
| Income from continuing operations before income  taxes |       |                        | 2,935      |          |       |                        | 0.7        | %             |       |   | 12,855 |   |   |   | 2.7 | % |   |
| Income tax  expense                                    |       |                        | 1,234      |          |       |                        | 0.3        | %             |       |   | 5,196 |   |   |   | 1.1 | % |   |
| Income from  continuing operations                     |       |                        | $          | 1,701         |       |                        |       | 0.4           | %          |   |   | $ | 7,659 |   |   |   | 1.6 | % |   |

 

*Revenues:*   Revenuesincreased $63.0 million, or 15%, to $475.3 million for the six monthsended June 30, 2006 compared to the six months ended June 30, 2005due primarily to the increase in electric contract awards within the past year.Electric revenues increased by $48.2 million, or 20%, including $39.6 millionfrom electric transmission services and $23.9 million from electricsubstation services, offset in part by a $15.3 million decrease fromutility distribution and industrial electric services. The decrease in utilitydistribution and industrial electric work is primarily due to fewer IPPprojects. Underground natural gas revenues increased by $7.2 million, or6%, due primarily to unusually mild weather in the first quarter of 2006 which enabledan increased volume of work to be performed. Telecommunications revenuesincreased by $9.3 million, or 21%, mostly due to an increase in demand forunderground telecommunications infrastructure work, including “fiber to thepremises” initiatives.

*Grossprofit:*   Gross profit increased $26.5 million,or 68%, to $65.6 million for the six months ended June 30, 2006compared to the six months ended June 30, 2005. Gross profit margins forthe same periods increased from 9.5% in 2005 to 13.8% in 2006. The increase ingross profit was due primarily to an increase in the volume of electricsubstation and electric transmission work which generally provides highermargins; the earning of performance bonuses for our strong operatingperformance on certain electric distribution and substation projects; the absenceof certain performance-related pricing concessions we made to a large customer in2005; the exit of certain unprofitable natural gas contracts; and an increasein 

28

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volume of dark fiber leaserevenue. This increase was partially offset by a decrease in the volume ofutility distribution and industrial electric work. Additionally, we incurred acharge of $6.6 million for an electric transmission contract determined tobe in a loss position during the quarter which was less than the $8.5 millioncharge in the second quarter of 2005 for the loss on one of our undergroundutility construction projects.

*Selling,general and administrative expenses:*   For the sixmonths ended June 30, 2006, selling, general and administrative expenseswere $46.1, an increase of $11.9 million, or 35%, compared to the sixmonths ended June 30, 2005. The increase was due primarily to an increasein salaries and benefits of $7.2 million for additional personnel hired tomanage business growth, a $1.8 million charge for share-based compensationand $0.7 million incurred for the secondary offering completed in thefirst half of 2006. Selling, general and administrative expenses increased as apercentage of revenue from 8.3% for the six months ended June 30, 2005 to9.7% for the six months ended June 30, 2006.

*Amortizationof intangible assets:*   Amortization of intangibleassets decreased $2.8 million, or 85%, to $0.5 million during the sixmonths ended June 30, 2006 compared to $3.3 million for six monthsended June 30, 2005. The decrease was due to a lesser amount of intangibleamortization related to acquired construction backlog, due to the completion ofmost of the acquired contracts during 2005.

*Write-offof deferred financing costs:*   In the secondquarter of 2006, we refinanced our existing credit facility which resulted in a$4.3 million charge for the write-off of deferred financing costs (See Note 7to our condensed consolidated financial statements).

*Otherincome, net:*   Other income decreased by $3.5 millionfor the six months ended June 30, 2006 compared to the six months ended June 30,2005. The decrease was due primarily to the 2005 reversal of a $3.8 millioncharge related to a litigation judgment settled in our favor during the threemonths ended March 31, 2005, offset in part by $0.2 million increasein gains on sale of equipment in 2006 compared to 2005.

*Provisionfor income taxes:*   The provision for income taxesfor the six months ended June 30, 2006 was $5.2 million, compared to$1.2 million for the six months ended June 30, 2005. The increase wasdue to higher taxable income in the six months ended June 30, 2006.

*Discontinued operations,net of tax:*   The loss of $(0.4) from discontinuedoperations for the six months ended June 30, 2005 included the results ofoperations of ULMS and ESI. The income from discontinued operations for the sixmonths ended June 30, 2006 relates to the resolution of an existing ULMSliability, as well as, an earn out arrangement that will continue through December 2006.

**Segment Results**

We manage our operations in two segments, ICS and TS.The primary financial measures we use to evaluate our segment operations arecontract revenues and income from operations as adjusted, a non-GAAP financialmeasure. Income (loss) from operations as adjusted excludes expenses forthe amortization of intangibles related to our acquisitions and share-basedcompensation. Amortization and share-based compensation expenses are excludedbecause we believe these expenses do not reflect the core performance of ourbusiness segments operations**.**Areconciliation of income from operations as adjusted to the nearest GAAP equivalent,income (loss) from operations, is provided in Note 13 to our condensedconsolidated financial statements, included elsewhere in this report on Form 10-Q.

Our corporate overheadexpenses have not been allocated to our segments because we evaluate segmentperformance prior to the allocation of corporate expenses.

29

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***Three months ended June 30,2006 compared to the three months ended June 30, 2005***

| ** **                           | ** ** | **Three Months**       | ** ** | **Three Months**       | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                           | ** ** | **(in thousands)**     | ** ** |
| Revenue:                             |       |                        |       |                        |       |       |       |       |       |   |   |   |   |
| Infrastructure Construction Services |       |                        | $          | 221,179                     |       |       |       | $          | 244,993    |   |   | $ | 23,814 |   | 11 | % |
| Telecommunication Services           |       |                        | 9,570      |                        |       |       | 9,503      |       |       | (67 | ) | (1 | )% |
| Total segment  revenues              |       |                        | 230,749    |                        |       |       | 254,496    |       |       | 23,747 |   | 10 | % |
| Corporate and eliminations           |       |                        | 921        |                        |       |       | 3,531      |       |       | 2,610 |   | 283 | % |
| **Total revenue**                    |       |                        | $          | 231,670                     |       |       |       | $          | 258,027    |   |   | $ | 26,357 |   | 11 | % |

 

| ** **                                        | ** ** | **Three Months**       | ** ** | **Three Months**       | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                        | ** ** | **(in thousands)**     | ** ** |
| Income from operations  as adjusted:              |       |                        |       |                        |       |       |       |       |       |   |   |   |   |
| Infrastructure Construction Services              |       |                        | $          | 586                         |       |       |       | $          | 13,382     |   |   | $ | 12,796 |   | 2,184 | % |
| Telecommunication Services                        |       |                        | 3,859      |                        |       |       | 4,743      |       |       | 884 |   | 23 | % |
| Total segment  income from operations as adjusted |       |                        | 4,445      |                        |       |       | 18,125     |       |       | 13,680 |   | 308 | % |
| Corporate and eliminations                        |       |                        | (3,334     | )                           |       |       | (3,839     | )          |       | (505 | ) | 15 | % |
| **Total income from operations as  adjusted**     |       |                        | $          | 1,111                       |       |       |       | $          | 14,286     |   |   | $ | 13,175 |   | 1,186 | % |

 

**ICS**

*Revenues:*   ICSrevenues for the three months ended June 30, 2006 were $245.0 million,an increase of $23.8 million, or 11%, compared to the three months ended June 30,2005. The increase was due primarily to the increase in electric contractawards within the past year. Electric revenues increased by $28.2 million,or 23%, including $21.3 million from electric transmission services and$17.7 million from electric substation services, offset in part by a $10.9 milliondecrease from utility distribution and industrial electric services. Thedecrease in utility distribution and industrial electric work is primarily dueto fewer IPP projects. Underground natural gas revenues decreased by $3.6 million,or 5%, due primarily to the exiting of certain unprofitable gas contracts andthe decline in new housing construction in certain areas of the country.Telecommunications revenues increased by $4.4 million, or 28%, mostly dueto an increase in demand for underground telecommunications infrastructurework, including “fiber to the premises” initiatives.

*Income from operations asadjusted:*   Income from operations as adjusted forthe three months ended June 30, 2006 was $13.4 million, an increaseof $12.8 million, or 2,184%, compared to the three months ended June 30,2005. The increase was due primarily to a $16.5 million increase in grossprofit, partially offset by a $4.0 million increase in selling, generaland administrative expenses. The increase in gross profit was due primarilyto an increase in the volume of electric substation and electrictransmission work which generally provides higher margins; the earning ofperformance bonuses for our strong operating performance on certain electricdistribution and substation projects; the absence of certain performance-relatedpricing concessions we made to a large customer in 2005; and the exit ofcertain unprofitable natural gas contracts. This increase was partially offsetby a decrease in the volume of utility distribution and industrial electricwork. Additionally, we incurred a charge of $6.6 million for an electrictransmission contract determined to be in a loss position during the quarterwhich was less than the $8.5 million charge in the second quarter of 2005for the loss on one of our underground utility construction projects. Selling,general and administrative expenses increased primarily as a result of $2.9 millionfor additional personnel hired to meet the business growth.

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**TS**

*Revenues:*   TSrevenues decreased $0.1 million, or 1%, to $9.5 million for the threemonths ended June 30, 2006 compared to the three months ended June 30,2005 due to a decrease in outside plant construction, offset in part by anincrease in dark fiber leases.

*Income from operations asadjusted:*   Income from operations as adjusted forthe three months ended June 30, 2006 were $4.7 million, an increaseof $0.9 million, or 23%, compared to the three months ended June 30,2005. The increase was due primarily to an increase in dark fiber lease revenuewhich is more profitable than construction work.

**Corporate**

The loss from operationsas adjusted for corporate and eliminations increased by $0.5 million forthe three months ended June 30, 2006 compared to the three months endedJune 30, 2005 due to an increase in corporate expenses, offset in part byan increase of $2.6 million for revenue related to administrative serviceswe provide to one of our customers. Corporate expenses increased as a result ofan increase in salaries and benefits of $1.0 million for additionalpersonnel hired to manage business growth.

***Six months endedJune 30, 2006 compared to the six months ended June 30, 2005***

| ** **                           | ** ** | **Six Months**         | ** ** | **Six Months**         | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                           | ** ** | **(in thousands)**     | ** ** |
| Revenue:                             |       |                        |       |                        |       |       |       |       |       |   |   |   |   |
| Infrastructure Construction Services |       |                        | $          | 390,535                     |       |       |       | $          | 450,500    |   |   | $ | 59,965 |   | 15 | % |
| Telecommunication Services           |       |                        | 20,084     |                        |       |       | 19,576     |       |       | (508 | ) | (3 | )% |
| Total segment  revenues              |       |                        | 410,619    |                        |       |       | 470,076    |       |       | 59,457 |   | 14 | % |
| Corporate and eliminations           |       |                        | 1,681      |                        |       |       | 5,191      |       |       | 3,510 |   | 209 | % |
| **Total revenue**                    |       |                        | $          | 412,300                     |       |       |       | $          | 475,267    |   |   | $ | 62,967 |   | 15 | % |

 

| ** **                                        | ** ** | **Six Months**         | ** ** | **Six Months**         | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                        | ** ** | **(in thousands)**     | ** ** |
| Income from operations  as adjusted:              |       |                        |       |                        |       |       |       |       |       |   |   |   |   |
| Infrastructure Construction Services              |       |                        | $          | 3,878                       |       |       |       | $          | 21,766     |   |   | $ | 17,888 |   | 461 | % |
| Telecommunication Services                        |       |                        | 8,052      |                        |       |       | 9,222      |       |       | 1,170 |   | 15 | % |
| Total segment  income from operations as adjusted |       |                        | 11,930     |                        |       |       | 30,988     |       |       | 19,058 |   | 160 | % |
| Corporate and eliminations                        |       |                        | (7,219     | )                           |       |       | (9,697     | )          |       | (2,478 | ) | 34 | % |
| **Total income from operations as  adjusted**     |       |                        | $          | 4,711                       |       |       |       | $          | 21,291     |   |   | $ | 16,580 |   | 352 | % |

 

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**ICS**

*Revenues:*   ICS revenues for the six months endedJune 30, 2006 were $450.5 million, an increase of $60.0 million,or 15%, compared to the six months ended June 30, 2005. The increase wasdue primarily to the increase in electric contract awards within the past year.Electric revenues increased by $46.9 million, or 20%, including $38.3 millionfrom electric transmission services and $23.9 million from electricsubstation services, offset in part by a $15.3 million decrease fromutility distribution and industrial electric services. The decrease in utilitydistribution and industrial electric work is primarily due to fewer IPPprojects. Underground natural gas revenues increased by $7.2 million, or6%, due primarily to unusually mild weather in the first quarter of 2006 whichenabled an increased volume of work to be performed. Telecommunicationsrevenues increased by $9.8 million, or 40%, mostly due to an increase indemand for underground telecommunications infrastructure work, including “fiberto the premises” initiatives.

*Income from operations asadjusted:*   Income fromoperations as adjusted for the six months ended June 30, 2006 was $21.8 million,an increase of $16.9 million, or 461%, compared to the six months endedJune 30, 2005. The increase was due primarily to a $25.5 millionincrease in gross profit, partially offset by a $7.9 million increase inselling, general and administrative expenses. The increase in gross profit wasdue primarily to an increase in the volume of electric substation andelectric transmission work which generally provides higher margins; the earningof performance bonuses for our strong operating performance on certain electricdistribution and substation projects; the absence of certain performance-relatedpricing concessions we made to a large customer in 2005; and the exit ofcertain unprofitable natural gas contracts. This increase was partially offsetby a decrease in the volume of utility distribution and industrial electricwork. Additionally, we incurred a charge of $6.6 million for an electrictransmission contract determined to be in a loss position during the quarterwhich was less than the $8.5 million charge in the second quarter of 2005for the loss on one of our underground utility construction projects. Selling,general and administrative expenses increased primarily as a result of $5.4 millionfor additional personnel hired to meet the business growth.

**TS**

*Revenues:*   TSrevenues decreased $0.5 million, or 3%, to $19.6 million for the sixmonths ended June 30, 2006 compared to the six months ended June 30,2005 due to a decrease in outside plant construction, offset in part by anincrease in dark fiber leases which is more profitable than construction work.

*Income from operations asadjusted:*   Income fromoperations as adjusted for the six months ended June 30, 2006 was $9.2 million,an increase of $1.2 million, or 15%, compared to the six months endedJune 30, 2005. The increase was due primarily to an increase in dark fiberlease revenue.

**Corporate**

**Theloss from operations as adjusted for corporate and eliminations increased by$2.5 million for the six months ended June 30, 2006 compared to thesix months ended June 30, 2005 due to an increase in corporate expenses,offset in part by an increase of $3.6 million for revenue related toadministrative services we provide to one of our customers. Corporate expensesincreased as a result of $0.7 million incurred for the secondary offering completedin the first half of 2006 and an increase in salaries and benefits of$1.4 million for additional personnel hired to manage business growth.**

**Liquidity andCapital Resources**

***Cash, Working Capital Requirements and CapitalExpenditures***

Our working capital needsare influenced by the seasonality of our business. We generally experience aneed for additional working capital during the spring season when we increaseour level of outdoor 

32

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constructionin weather-affected regions of the country. Conversely, we typically convertworking capital assets to cash during the winter months. We expect capitalexpenditures to range from $18.0 million to $20.0 million during thesecond half of 2006, which could vary depending on the timing of awards of darkfiber and electric transmission contracts. More than 50% of the expectedcapital expenditures are for dark fiber expansion. We intend to fund theseexpenditures primarily with operating cash flows. We have reduced our capitalexpenditures as a percentage of revenue over the past two years as a result ofan increase in the use of equipment leasing arrangements and improved equipmentutilization.

***Financing***

On June 30, 2006, we entered into a new creditagreement which provides for a secured revolving credit facility of $225.0 millionwhich may be used for revolving credit borrowings, swing loans, not to exceed$10.0 million, and the issuance of standby letters of credit, not toexceed $100.0 million. We also have the right to seek additionalcommitments to increase the aggregate commitments up to $350.0 million,subject to compliance with applicable covenants. The new credit agreementreplaces our previous secured credit facility, which included an $85.0 millionrevolving credit commitment and $84.0 million in term loan commitments.

The proceeds from borrowings under the new creditagreement were used to repay $83.6 million of outstanding debt existing asof June 30, 2006 under our previous amended and restated credit facilitywhich was terminated upon repayment. As of June 30, 2006, we have a $75.0 millionoutstanding revolving credit borrowing and $34.0 million in letters ofcredit outstanding. As a result of the entry into the new credit agreement andrefinancing of the previous credit facilities, we recorded a charge in thesecond quarter of 2006 of $4.3 million related to the write-off ofdeferred financing costs. For a discussion of fees and covenants related to ournew credit facility, see Note 7 to our condensed consolidated financialstatements.

We anticipate that ourcash on hand of $20.5 million as of June 30, 2006, our new creditfacility and our future cash flow from operations will provide sufficient cashto enable us to meet our operating needs for the next twelve months, based onexpected levels of business, debt service requirements and planned capitalexpenditures. However, we may find it necessary or desirable to seek additionalfinancing to support our capital needs, which may include additional financingto support our expected growth, and to provide funds for strategic initiatives,such as acquisitions. Accordingly, this may require us to increase our credit facilityor complete equity-based financing, such as the issuance of common stock orpreferred stock, which would be dilutive to our existing shareholders. Ourfuture working capital needs may also be affected by any increases in demandfor our services, including any spending generated as a result of the EnergyPolicy Act of 2005.

***Sources and Uses of Cash***

As of June 30, 2006, we had cash and cashequivalents of $20.5 million, working capital of $120.7 million andlong-term debt of $75.0 million under our revolving credit facility. As ofJune 30, 2006 we had $34.0 million in letters of credit outstandingthereunder, leaving $116.0 million available for additional borrowings. Asof December 31, 2005, we had cash and cash equivalents of $24.3 million,working capital of $117.2 million and long-term debt of $83.9 million.As of December 31, 2005, we had $52.7 million available foradditional borrowings.

*Cashfrom operating activities from continuing operations.* Duringthe six months ended June 30, 2006 net cash provided by operatingactivities from continuing operations was $31.0 million compared to cashused of $27.6 million for the six months ended June 30, 2005. Thisincrease in net cash provided from operating activities from continuingoperations is due to cash provided from accounts receivable and costs in excessof billings, net (including $5.8 million in claims amounts existing atDecember 31, 2005 which were collected during the first half of 2006),primarily due to a lower increase in contract revenues growth in the periodended June 30, 2006 versus June 30, 2005. The increase in contractrevenues was $63.0 or 

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15.3% as compared to$124.0 or 43.0% for the six months ended June 30, 2006 and 2005,respectively. In addition, the age of accounts receivable and costs in excessof billings, net decreased in the period ended June 30, 2006 versus June 30,2005, respectively. We incurred a charge of $6.6 million for an electrictransmission contract determined to be in a loss position during the quarterwhich was less than the $8.5 million charge in the second quarter of 2005for the loss on one of our underground utility construction projects.

*Cashfrom investing activities from continuing operations.* Duringthe six months ended June 30, 2006, net cash used by investing activitiesfor continuing operations was $27.2 million compared to $8.2 million usedduring the six months ended June 30, 2005. The primary use of cash for thesix months ended June 30, 2006 was $18.9 million for purchases ofequipment, a $3.5 million payment of the remaining holdback plus interestto the sellers of the Maslonka business (renamed “InfraSource TransmissionServices”) and a $7.1 million payment to the former owners of Blair Parkfor additional purchase price consideration, offset in part by cash proceedsfrom the sale of equipment of $2.3 million. The primary use of cash forthe six months ended June 30, 2005 was $16.0 million for purchases ofequipment, offset in part by cash proceeds from the sale of equipment of $2.9 millionand the release of $5.0 million from restricted cash.

*Cashfrom financing activities from continuing operations.* Duringthe six months ended June 30, 2006, net cash used by financing activitiesfor continuing operations was $7.6 million compared to net cash providedof $18.6 million for the six months ended June 30, 2005. The sourcesof cash from financing activities for the six months ended June 30, 2006were proceeds from our debt refinancing of $75.0 million, $1.9 millionfrom the exercise of stock options and employee stock purchase plan stockpurchases and $0.4 million from excess tax benefits from share-basedcompensation, more than offset by $83.8 million long-term debt repaymentsand $1.1 million of debt issuance costs paid. The sources of cash fromfinancing activities for the six months ended June 30, 2005 were a $18.0 millionborrowing under our revolving credit facility and proceeds of $1.0 millionfrom the exercise of stock options and employee stock purchase plan stockpurchases, offset by $0.5 million long-term debt repayments.

During the six monthsended June 30, 2005, net cash reclassified from discontinued operationswas $0.5 million. For the six months ended June 30, 2005, cash usedby operating activities from discontinued operations was $0.3 million andcash used in investing activities from discontinued operations was $0.2 million.The investing activities related to purchases of equipment.

**ContractualObligations and Other Commitments**

As of June 30,2006, our future contractual obligations were as follows (in thousands):

| ** **                                        | ** ** | **Payments due by period** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                | ** ** | **Less** | ** ** | ** ** | ** ** | ** ** | ** ** | **More** | ** ** |
| ** **                                        | ** ** | ** **                                | ** ** | **than** | ** ** | ** ** | ** ** | ** ** | ** ** | **than** | ** ** |
| **Contractual Obligations(1)**               | ** ** | ** **                                | ** ** | **Total** | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **5 years** | ** ** |
| Long-term debt  obligations                       |       | 75,074                                    |       | 51 |   | — |   | — |   | 75,023 |   |
| Operating lease  obligations                      |       | 54,431                                    |       | 16,739 |   | 31,623 |   | 861 |   | 5,208 |   |
| Projected interest  payments on long term debt(2) |       | 29,630                                    |       | 4,598 |   | 10,016 |   | 10,002 |   | 5,014 |   |
| Contingent  earnout payments(3)                   |       | 600                                       |       | 600 |   | — |   | — |   | — |   |
| Other long-term liabilities:                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Non-vested  options exercised                     |       | 378                                       |       | 355 |   | 23 |   | — |   | — |   |
| Other(4)                                          |       | 5,029                                     |       | 43 |   | 4,744 |   | 46 |   | 196 |   |
| Total                                             |       | $                                         | 165,142    |   | $ | 22,386 |   | $ | 46,406 |   | $ | 10,909 |   | $ | 85,441 |   |
|                                                   |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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       (1) Trade accounts payable are not included in Contractual Obligations.

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       (2) The total projected interest payments on long-term debt are basedupon borrowings and interest rates as of June 30, 2006. The interest rateon variable rate debt is subject to changes beyond our control and may resultin actual interest expense and payments differing from the amounts above.

       (3) See discussion below in “Contingent Earnout Payments”.

       (4) Approximately $3.6 million of this balancerelates to insurance claims that are expected to be paid by our insurancecarrier. A corresponding receivable is recorded in deferred charges and otherassets on our condensed consolidated balance sheet.

***Contingent Earnout Payments***

Pursuant to the terms ofthe EHV acquisition agreement, $0.6 million of the consideration wassubject to a holdback provision. The holdback is payable in 2007 and payment ofthe holdback is not contingent on future events, with the exception of anyindemnification obligations owed to us.

***Related Party Transactions***

As of June 30, 2006, we had $0.3 million duefrom our Principal Stockholders included in receivables from related party onour condensed consolidated balance sheet. This amount relates to reimbursementsfor certain secondary offering costs.

On June 28, 2006, we entered into a SecondAmendment to Registration Rights Agreement (the “Second Amendment”) to allow thePrincipal Stockholders to request that we file with the Securities and ExchangeCommission a registration statement on Form S-3 within 180 daysfollowing March 20, 2006 for an underwritten public offering (the “Offering”)of shares of our common stock. In connection with the Offering, ourstockholders participating in the Offering must pay their own expenses as wellas their pro rata share of our expenses incurred in connection with theOffering.

In addition, on June 28, 2006, in connection withthe Second Amendment, we entered into an Agreement (the “Agreement”) with ourPrincipal Stockholders and Ian Schapiro and Michael Harmon, two members of theour board of directors, to set forth certain agreements of the partiesfollowing the closing of the Offering. Pursuant to the Agreement, Messrs. Schapiroand Harmon, representatives of the Principal Stockholders, agreed to work withus in good faith to determine a mutually acceptable transition plan for theirboard of directors and committee responsibilities. In addition, the PrincipalStockholders have entered into non-disclosure agreements with us and haveagreed to certain limited restrictive covenant obligations following theclosing of the Offering.

As of December 31, 2005, we had $7.1 milliondue to the former owners of Blair Park accrued in other liabilities—relatedparties on our condensed consolidated balance sheet for additional contingent purchaseprice consideration. Blair Park was acquired by InfraSource Incorporated in2001. The balance was paid in the second quarter of 2006.

As of June 30, 2006, we had $0.8 million dueto the sellers of the Maslonka business, who are also employees, accrued inother liabilities—related parties on our condensed consolidated balance sheet.This balance relates to amounts due upon collection from a third party. In January 2006,we paid the sellers of the Maslonka business $3.5 million of holdbackconsideration, including interest, and released the holdback shares.

We lease our InfraSource Transmission Services (“ITS”)headquarters in Mesa, Arizona and our ITS Texas field office in San Angelo,Texas from EC Source, LLC, which is wholly owned by Martin Maslonka. Our leasesfor these two properties will run through February 2009, subject to afive-year renewal option. Pursuant to these leases, we expect to incur total annuallease payments of $0.2 million.

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We lease office and warehouse space from ColemanProperties of which three officers of Blair Park are general partners. Thelease for this space continues through October 2008. Our annual paymentsunder this agreement are approximately $0.1 million.

We also lease ducts in two river bores under theDelaware River from Coleman Properties. Our lease commenced on May 1, 2005and has a term of five years, with an option to extend. Our annual leasepayment is $0.02 million for each pair of fiber installed in the conduitup to a maximum of $0.2 million per year if additional ducts are leased.

As of June 30, 2006, we had $0.4 million dueto the EHV stockholders, who are currently our employees, accrued in other liabilities—relatedparties on our condensed consolidated balance sheet. This amount is a portionof the holdback consideration from our acquisition of EHV, which is payable in2007 and not contingent on future events, with the exception of anyindemnification obligations owed to us.

We lease office andwarehouse facilities in Michigan which are owned by an employee and his familymembers. Our leases for these properties are through March 2011 and May 2007.Pursuant to these leases, we expect to incur total annual lease payments of$0.3 million.

***New Accounting Pronouncements***

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109,” which clarifies the accounting for uncertainty intax positions. FIN No. 48 requires that the impact of a tax position berecognized if that position is more likely than not of being sustained onaudit, based on the technical merits of the position. The tax position ismeasured at the largest amount of benefit that is greater than 50% likely ofbeing realized upon the ultimate settlement. The provisions of FIN No. 48are effective for fiscal years beginning after December 15, 2006, with anycumulative effect of the change in accounting principle recorded as anadjustment to opening retained earnings. We currently do not believe FIN No. 48will have a significant impact on our financial results.

**Item 3.**                        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk primarily related topotential adverse changes in interest rates as discussed below. We have nothistorically and do not intend to use derivative financial instruments fortrading or to speculate on changes in interest rates or commodity prices. Weare not exposed to any significant market risks, foreign currency exchange riskor interest rate risk from the use of derivative financial instruments.

The sensitivity analysis below, which illustrates ourhypothetical potential market risk exposure, estimates the effects ofhypothetical sudden and sustained changes in the applicable market conditionson 2006 earnings. The sensitivity analysis presented does not consider anyadditional actions we may take to mitigate our exposure to such changes. Thehypothetical changes and assumptions may be different from what actually occursin the future.

*InterestRates.* As of June 30, 2006, our $75.0 millionborrowing under our revolving credit facility was subject to floating interest rates.We have an interest rate swap on a $30.0 million notional amount where wepay a fixed rate of 2.395% in exchange for three month LIBOR until October 10,2006. We also have a 4.00% interest rate cap that matures October 10, 2006on $40.0 million of the notional amount. Subsequent to the June 30,2006 debt refinancing, our interest rate cap and interest rate swap are nolonger designated 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; however we continue to utilize these derivativeinstruments to hedge the variability of cash flows related to our variable ratedebt. We are exposed to earnings and fair value risk due to changes in interestrates with respect to our long-

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term obligations. Thedetrimental effect on our quarterly pre-tax earnings of a hypothetical 50 basispoint increase in interest rates would be approximately $0.1 million.

*CurrencyRisk.* With our November 2005 acquisition of ourCanadian subsidiary, we may be subject to currency fluctuations in the future.We do not expect any such currency risk to be material.

*Gasoline and Diesel Fuel.*We have market risk for changes in the price of gasoline and diesel fuel. Tothe extent we cannot mitigate increases in fuel prices through surcharges andother contract provisions with our customers, our operating income will beaffected. In April 2006, we entered into fuel hedges to mitigate a portionof our exposure to price fluctuations of gasoline and diesel fuel. The fuelhedges cap our exposure to price fluctuations for approximately one-quarter ofour expected usage for the remainder of 2006. These derivative instruments havenot been designated as cash flow hedges, therefore changes in fair value arerecorded in current period income.

**Item 4.**                        CONTROLSAND PROCEDURES

***Disclosure Controls and Procedures***

The company has designedand maintains a system of disclosure controls and procedures to give reasonableassurance that information required to be disclosed in the company’s reportssubmitted under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC. These controls and procedures also give reasonable assurancethat information required to be disclosed in such reports is accumulated andcommunicated to management to allow timely decisions regarding requireddisclosures. The company’s management, with the participation of the company’sChief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of the company’s disclosure controls and procedures (as such termis 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 effective at a reasonable assurance level.

***Internal Control Over Financial Reporting***

No change in the Company’s internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the Company’s mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**Item 1.  *LEGAL PROCEEDINGS*.**

On September 21,2005, a petition, as amended, was filed against InfraSource, certain of itsofficers and one of its directors and various other defendants in the HarrisCounty, Texas District Court seeking unspecified damages. The plaintiffs allegethat the defendants violated their fiduciary duties and committed constructivefraud by failing to maximize shareholder value in connection with the Mergerand committed other acts of misconduct following the filing of the petition. Atthis time, it is too early to form a definitive opinion concerning the ultimateoutcome of this litigation. Management of InfraSource plans to vigorouslydefend against this claim.

Pursuantto our service contracts, we generally indemnify our customers for the serviceswe provide under such contracts. Furthermore, because our services are integralto the operation and performance of the electric power transmission anddistribution infrastructure, we may become subject to lawsuits or claims forany failure of the systems that we work on, even if our services are not thecause for such failures, and we could be subject to civil and criminalliabilities to the extent that our services contributed to any property damageor blackout. The outcome of these proceedings could result in significant costsand diversion of management’s attention to our business. Payments ofsignificant amounts, even if reserved, could adversely affect our reputationand liquidity position.

From time to time, we area party to various other lawsuits, claims, other legal proceedings and aresubject, due to the nature of our business, to governmental agency oversight,audits, investigations and review. Such actions may seek, among other things,compensation for alleged personal injury, breach of contract, property damage,punitive damages, civil penalties or other losses, or injunctive or declaratoryrelief. Under such governmental audits and investigations, we may becomesubject to fines and penalties or other monetary damages. With respect to suchlawsuits, claims, proceedings and governmental investigations and audits, weaccrue reserves when it is probable a liability has been incurred and theamount of loss can be reasonably estimated. We do not believe any of theseproceedings currently pending, individually or in the aggregate, would beexpected to have a material adverse effect on our results of operations, cashflows or financial condition.

**Item 1A.  *RISK FACTORS*.**

**Risks Relating toOur Business and Industry**

**Our ability to obtain new contracts and the timing ofthe award and performance of any such contracts may result inunpredictable fluctuations in our cash flow and profitability.**

A substantial portion of our revenues is derived fromproject-based work. It is generally very difficult to predict whether and when we will be awardedcontracts for significant projects, resulting in unpredictability in ourcash flow and profitability. We expect to have a higher percentage of revenuesfrom large-scale projects going forward, further exacerbating theunpredictability of our operating results. 

In certain circumstances, customers require us toprovide credit enhancements, including surety bonds, letters of credit and, inrare instances, cash collateral, which we may beunable to satisfactorily obtain or provide, placing us at a competitivedisadvantage compared to providers with more liquidity. In addition, tothe extent such credit enhancements are provided, our liquidity could besignificantly reduced, which may negatively impact our ability to secureadditional contracts.

Even if we are awardedcontracts, we face additional risks that could affect whether, or when, workwill begin. For example, some of our contracts are subject to financing andother contingencies that may delay or result in termination of projects. Theuncertainty of the timing of contract awards and work release can also presentdifficulties in matching workforce size with contract needs. In some cases, we 

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maintainand bear the cost of a ready workforce that is larger than necessary inanticipation of future workforce needs for expected contract awards. If anexpected contract award or the related work release is delayed or not received,we could incur substantial costs without receipt of any corresponding revenues.Delays by our customers in obtaining required approvals for theirinfrastructure projects may delay their awarding contracts for those projectsand, once awarded, the ability to commence construction under those contracts.

**Demand for our services is cyclical and vulnerable todownturns in the industries we serve, which may result in extended periods of lowdemand 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 downturns in theindustries we serve or the U.S. economy in general. A number of other factors, including financial conditions in the industrieswe serve, could adversely affect our customers and their abilityor willingness to fund capital expenditures in thefuture. For example, we have experienced reductions in ourrevenues from independent power producers since2003, which reflect the significant decline in constructionactivity and new construction awards for power generationprojects. The demand for our services to natural gas distributioncustomers is affected by the level of industrial, commercial and residentialconstruction in the geographic areas we serve. For example, the recent downturnin new housing construction in certain regions has had a negative impact ondemand from some of our natural gas distribution customers. In addition, ourpetrochemical customers’ demand has recently been restrained by the impact ofhigh natural gas prices. We are also dependent on the amount of infrastructureservices that our customers outsource. During downturns in the economy, ourcustomers may determine to outsource fewer projects resulting in decreaseddemand for our services. In addition, the historical trend toward outsourcingof infrastructure services may not continue as we expect. As a result, demand for our services could declinesubstantially for extended periods, particularly during economicdownturns, which could decrease our revenues, margins, profits and cash flows.

**Our participation in fixed-price contractsexposes us to declines in profitability and contract losses related to costoverruns.**

We currently generate, and expect to continue togenerate, approximately 50% of our revenues under fixed-price contracts.Under fixed-price contracts, we agree to perform the entire project for afixed price on an agreed upon schedule. We may be unable to recover any costoverruns above the approved contract price. For example, in the past, we haveexperienced delays and additional costs from severe weather conditions and the required replacement of third-partydefective materials, which we were unable to recover. In the secondquarter of 2006, we recorded a $5.0 million loss, after giving effect toassumed claims collections, and a reversal of $1.6 million of income previouslyrecognized relating to one or our electric transmission projects. This loss wasattributable primarily to lower than expected productivity due to ineffectivesupervision, insufficient access to experienced labor, supplier issues andextremely hot weather. In the second quarter of 2005, we recorded an $8.5 millionloss, which subsequently increased to $10.2 million, after giving effectto assumed claims collections, on one of our fixed-price undergroundutility construction projects. This loss resulted from lower than expectedproductivity, higher materials costs and unforeseen delays and was alsopartially a result of a failure to accurately estimate project costs during thebidding phase. These and other factors, such as increased fuel and labor costs,could adversely affect our profitability on fixed price contracts. 

The claims resolutionprocess is often lengthy, can require legal action to conclude and the ultimateamount to be collected is difficult to estimate. Our actual revenue and profitfor any particular project will usually differ from those we originallyestimated and could result in reduced profitability or losses on the project.Our acquisition of ITS has resulted in an increase in the proportion of ourfixed-price contracts, as 

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most ofITS’s business is performed on a fixed-price basis. We expect that ourmix of work will tend to increase the proportion of our fixed-pricecontracts.

**Our use of percentage-of-completion accounting onfixed-price contracts requires us to record the entire expected loss from acontract during the quarter in which we determine the contract to be a losscontract and could result in a reduction or elimination of previously reported profits andsignificant fluctuations in our results.**

As more fully discussed in our Annual Report onForm 10-K for the year ended December 31, 2005 and ourQuarterly Report on Form 10-Q for the quarterly period endedJune 30, 2006 under “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and “Critical Accounting Policies andEstimates” and in the notes to our consolidated financial statements, all ofwhich are incorporated by reference in this prospectus, a significant portionof our revenues are recognized on a percentage-of-completion method ofaccounting, using primarily the cost-to-cost method. This method is usedbecause management considers expended costs to be the best available measure ofprogress on our fixed-price contracts. The percentage-of-completionaccounting practice we use results in our recognizing contract revenues andearnings over the contract term in proportion to our incurrence of contractcosts. The earnings or losses recognized on individual contracts are based onestimates of contract revenues, costs and profitability. Although we updatethese estimates regularly, they are inherently uncertain, and our ultimateprofitability on a contract is usually not known until completion. Estimatedcontract losses for the full term of the contract are recognized whendetermined, regardless of where we are in the contract cycle, and contractprofit estimates are adjusted based on ongoing reviews of contractprofitability. 

During a period in which a loss on a contract is firstrecognized, or in a period when expected profits become lower than previouslyrecorded profits, income recorded on that contract in prior periods is reversedto the extent necessary to give effect to the current estimate. This couldcause the profit or loss contribution from any given contract to fluctuatesignificantly from quarter to quarter. For example, in the second quarter of2006, we recorded a loss on a project of approximately $5.0 million, aftergiving effect to assumed claims collections, and also reversed approximately$1.6 million of income recorded in the prior three quarters with respectto that project. Further, we recognized a loss of $8.5 million during thesecond quarter of 2005 which subsequently increased to $10.2 million,after giving effect to assumed claims collections, for a project that began inJanuary 2005 and was substantially completed in November 2005. Forany estimated contract loss, the actual final loss is generally based on theamount of claims we submit to, and successfully collect from the customer.Therefore, our ultimate loss may exceed our estimates. We record revenue up tocosts incurred on claims and unapproved change orders when we believe recoveryis probable and the amounts can be reasonably estimated. Profit related tothose costs is recorded in the period such amounts are agreed to with thecustomer. The timing and amount of actual collection of claims and unapprovedchange orders could differ from estimates, could take longer than anticipatedand could result in a reduction or elimination of previously recognizedearnings. In certain circumstances, it is possible that such adjustments couldbe significant. As of June 30, 2006, we had $5.7 million ofunrecovered contract claims booked on our balance sheet under “Costs andestimated earnings in excess of billings.” Claims settlements less than the $5.7 millionbalance would result in a reduction of our profits.

Further, a substantialportion of our contracts contain performance-related provisions, includingliquidated damages provisions. Such provisions may further increase ourperiod-to-period volatility. For example, we received a performance bonus oncertain projects during the first half of 2006, compared to performance-relatedconcessions during 2005. Incentives and penalties are recorded when known orfinalized, which is generally during the latter stages of the contract.

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**We derive a significant portion of our revenue from asmall group of customers. The loss of one or more of these customers couldnegatively impact our revenues.**

Our top ten customersaccounted for approximately 46%, 45% and 47% of our revenues for the yearsended December 31, 2004 and 2005 and the six months ended June 30,2006, respectively, which includes work performed for those customers as asubcontractor through others. Revenues from Exelon accounted for 17%, 18% and17% of our revenues for the years ended December 31, 2004 and 2005 and thesix months ended June 30, 2006, respectively. In September 2003, weentered into a volume agreement with Exelon, pursuant to which Exelon committedto provide us with a level of work roughly equivalent to the amount of workwhich we would have received through 2006 if 2003 work levels remainedconstant. The actual volume of work received from Exelon under the volumeagreement has been significantly higher than 2003 levels; therefore, the volumerequirements set forth in the volume agreement were satisfied in the fourthquarter of 2005. We may be unable to sustain our volume of business with Exelonwithout the benefit of the volume agreement. Exelon has recently indicated itsintent to curtail expenditures to a level below that sustained in recent years.Exelon has also begun to modify its contracting practices and is seeking alternativecommercial arrangements with suppliers like us, including increased use ofcompetitive bidding on certain projects. If we lose significant customers andare not able to replace them or if they reduce their volume of work from us, wecould sustain decreased revenues, margins and profits.

**Our inability to hire or retain key personnel coulddisrupt our business.**

We depend on the continuedefforts of our executive officers and other members of our senior management,including management at each of our subsidiaries. We cannot be certain that anyindividual will continue in such capacity for any particular period of time.Industry-wide competition for managerial talent has increased and the loss ofone or more of our key employees could have an adverse effect on our business.The loss of key personnel, or the inability to hire and retain qualifiedemployees, could negatively impact our ability to manage our business. Wegenerally do not carry key-person life insurance on our employees.

**Skilled labor shortages andincreased labor costs could negatively affect our ability to compete for new projects and ourperformance.**

We have from time-to-timeexperienced shortages of certain types of qualified personnel. For example,there is a shortage of engineers and linemen capable of working on andsupervising the construction of high-voltage electric lines and substations.This shortage can be exacerbated during periods of storm restoration work.Linemen are frequently recruited across geographic regions to satisfy demand,including for storm response work. The supply of experienced engineers, 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. The commencement of new, large-scaleinfrastructure projects or increased demand for infrastructure improvements aswell as the aging utility workforce further depletes the pool of skilled laboravailable to us, even if we are not awarded such projects. As a result, we arebidding selectively in all of our business units. We have recently declined tobid on certain projects that we could not staff adequately with experiencedengineers, and in the future we may not be able to maintain an adequate skilledlabor force necessary to operate efficiently or to pursue new projects weconsider attractive. Furthermore, the limited supply of skilled labor hasnegatively impacted, and in the future may continue to negatively impact, theproductivity and profitability of certain of our projects.

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**The Energy Act may fail to spur the anticipatedincreased investment in electric infrastructure, which could slow our growth.**

Implementation of theEnergy Act is still subject to considerable fiscal and regulatory uncertainty.Many of the regulations implementing the components of the bill have not been finalizedand many others have only recently been finalized, and the effect of theseregulations is accordingly still uncertain. As a result, the legislation maynot increase spending on electric power transmission infrastructure in a mannerthat will increase demand for our services. In addition, the timing of any newinfrastructure investments remains uncertain. Continued uncertainty regardingthe implementation and impact of the Energy Act may result in slower growth indemand for our services.

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

A significant portion ofour business is performed outdoors, subjecting our results of operations toseasonal variations. Less work is performed by us in the winter months, andwork is hindered during other inclement weather events. Our profitability oftendecreases during the winter months and during severe weather conditions becausework performed during these periods is more costly to complete. Our workingcapital needs are influenced by the seasonality of our business. Generally, weexperience a need for additional working capital during the spring when weincrease our level of outdoor construction in weather-affected regions ofthe country, and we convert working capital assets to cash during the wintermonths. In addition, during periods of peak electricity demand, utilitiesgenerally are unable to remove their electric power transmission anddistribution equipment from service, decreasing the demand for our maintenanceservices during these periods. Significant disruptions in our ability toperform services because of these factors could have a material adverse effecton our cash flows and results of operations.

**Our backlog may not be realized or may not result inprofits. Our customers often have no obligation to assign or release work tous and many of our contracts may be terminated on short notice.**

Our backlog may not be realized as revenue or, ifrealized, may not result in profits. Backlog is often difficult to determinewith certainty. In addition, the backlog we obtain in connection with anycompanies we acquire may not be as large as we believed or may not result inthe revenue we expected. Reductions in backlog due to cancellation by acustomer or for other reasons could significantly reduce the revenue and profitwe actually receive from contracts included in backlog. In the event of aproject cancellation, we may be reimbursed for certain costs but typically haveno contractual right to the total revenues reflected in our backlog. In addition,projects may remain in our backlog for extended periods of time. We cannotassure you as to our customers’ requirements or our estimates.

Certain of our customersassign work to us under master service agreements, or MSAs. Under thesearrangements, our customers generally have no obligation to assign work to us.Most of our contracts, including our MSAs, may be terminated by our customerson short notice, typically 30 to 90 days, sometimes less, or may benegatively impacted by the utilities’ inability to recover their costs in therates they are authorized to charge their customers. Moreover, our reportedbacklog includes estimated work to be performed under these agreements. Ourbacklog may not be realized as revenues if these contracts are cancelled. Inaddition, many of our contracts, including our MSAs, are open to competitivebidding at the expiration of their terms. As a result, we have been displacedon contracts by competitors from time to time. Our revenues could materiallydecline if our customers do not assign work to us or if they cancel asignificant number of contracts and we cannot replace them with similarcontracts.

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**Project delays or cancellations may result inadditional costs to us, reductions in revenues or the payment of liquidated damages.**

In certain circumstances, we guarantee projectcompletion by a scheduled acceptance date or achievement of certain acceptanceand performance testing levels. Failure to meet any of these schedules orperformance requirements could result in additional costs or penalties,including liquidated damages, and these amounts could exceed expected projectprofit margins. Many of our projects involve challenging engineering,procurement and construction phases that may occur over extended time periods, sometimesup to two years. We may encounter difficulties in engineering, equipment andmaterial delivery, schedule changes, weather-related delays and otherfactors, some of which are beyond our control, that impact our ability tocomplete the project in accordance with the original delivery schedule. Forexample, the recent increase in demand for transmission services has strainedproduction resources, creating significant lead times for obtainingtransmission towers and poles. As a result, our electric transmission projectrevenues could be significantly reduced or delayed due to the difficulty we orour customers may experience in obtaining required materials. In addition, weoccasionally contract with third-party subcontractors to assist us withthe completion of contracts. Any delay by suppliers or by subcontractors in thecompletion of their portion of the project, or any failure by a subcontractorto satisfactorily complete its portion of the project may result in delays inthe overall progress of the project or may cause us to incur additional costs,or both. We also may encounter project delays due to local public oppositionagainst the siting of transmission lines or other facilities, which may includeinjunctive actions as well as public protests. For example, the construction ofthe Arrowhead to Weston transmission line project between Minnesota andWisconsin was delayed for several years due to such factors.

Delays and additional costs may be substantial and, insome cases, we may be required to compensate the project customer for thesedelays. We may not be able to recover all of these costs. In extreme cases, theabove-mentioned factors could cause project cancellations, and we may notbe able to replace such projects with similar projects or at all. Such delaysor cancellations may impact our reputation or our relationships with customers,making it more difficult for us to secure new contracts.

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 may be 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 deliveritems, such as engineering drawings or materials, required to be provided bythe customer. A failure to obtain adequate compensation for these matters couldrequire us to record a reduction to amounts of revenue and gross profit thatwere recognized in prior periods under the percentage-of-completion accountingmethod. Any such adjustments could be substantial.

**Provisions of our credit facility restrict ourbusiness operations and may restrict our access to sufficient funding, including lettersof credit, to finance desired growth.**

We have a credit facility with a group of financialinstitutions secured by substantially all of our assets. The credit facilitycontains customary events of default and covenants that limit us from takingcertain actions without obtaining the consent of the lenders. In addition, ourcredit facility requires us to achieve certain financial ratios as described inour Quarterly Report on Form 10-Q for the quarterly period endedJune 30, 2006. These restrictions and covenants may limit our abilityto respond to changing business and economic conditions and we may be preventedfrom engaging in transactions that might otherwise be 

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considered beneficial tous, including strategic acquisitions. Covenants in our credit facility alsorestrict 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 securedindebtedness incurred to acquire fixed or capital assets, indebtedness withrespect to performance bonds, letters of credit and similar obligationsincurred in the ordinary course of business, and up to $40.0 million ofadditional indebtedness. We had $116.0 million of availability under therevolving credit portion of our credit facility as of June 30, 2006 (aftergiving effect to $34.0 million of outstanding letters of credit under thecredit facility at that date). In the future, we may require substantialadditional working capital to fund our growth. However, there is no assurancethat we will be able expand availability under our credit agreement or obtainother sources of liquidity in a timely manner, at favorable cost or at all.

A breach of our creditfacility, including our inability to comply with the required financial ratios,could result in an event of default. Upon an event of default under our creditfacility, the lenders would be entitled to accelerate the repayment of amountsoutstanding, plus accrued and unpaid interest. Moreover, the lenders would havethe option to terminate any obligation to make further extensions of creditunder our credit facility. Upon the event of a default under any of our securedindebtedness, including our credit facility which is secured by substantiallyall of our assets, the lenders could proceed to foreclose against the assetssecuring such obligations. In the event of a foreclosure on all orsubstantially all of our assets, we may not be able to continue to operate as agoing concern.

**We are subject to acquisition risks. If we are notsuccessful in integrating companies that we acquire or have acquired, we may notachieve the expected benefits and our profitability could suffer. In addition,the cost of evaluating and pursuing acquisitions may not result in acorresponding benefit.**

One of our businessstrategies is to pursue strategic acquisitions. We completed severalacquisitions during 2004 and 2005 and continue to consider strategic acquisitionsnow and plan to in the future, some of which may be larger than thosepreviously completed and could be material acquisitions. Integratingacquisitions is often costly, and delays or other operational or financialproblems may result that interfere with our operations. In addition, ouroperating subsidiaries have generally maintained their own procedures andoperating systems, which make it more difficult for us to evaluate andintegrate systems and controls on a reliable company-wide basis. If we fail toimplement proper overall business controls for companies we acquire or fail tosuccessfully integrate these acquired companies in our processes, our financialcondition and results of operations could be adversely affected. In addition,it is possible that we may incur significant expenses in the evaluation andpursuit of potential acquisitions and that such acquisitions may not besuccessfully completed. In these events, we may incur substantial costs withoutany corresponding benefit. For example, during 2005 we incurred a$1.6 million charge related to due diligence costs for an acquisition thatwe chose not to complete. Other risks inherent in our acquisition strategyinclude diversion of management’s attention and resources, failure to retainkey personnel and risks associated with unanticipated events or liabilities. Inaddition, in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 142, “Goodwill and Other Intangible Assets” we are requiredto test goodwill for impairment at least annually, or more frequently if eventsor circumstances exist which indicate that goodwill may be impaired. As aresult of changes in circumstances after valuing assets in connection withacquisitions, we may be required to take writedowns of intangible assets,including goodwill, which could be significant.

**We cannot be certain of the future effectiveness ofour internal controls over financial reporting or the impact thereof on ouroperations or the market price of our common stock.**

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002, we are required to include in ourannual reports on Form 10-K our assessment of the effectiveness ofour internal controls over financial reporting. We cannot assure you that oursystem of internal controls will be effective in the future as our operations 

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andcontrol environment change. If we cannot adequately maintain the effectivenessof our internal controls over financial reporting, our financial reporting maybe inaccurate. If reporting errors actually occur, we could be subject tosanctions or investigation by regulatory authorities, such as the SEC. Theseresults could adversely affect our financial results or the market price of ourcommon stock.

**We are implementing a company-wide Enterprise ResourcePlanning system which could disruptour day-to-day operations temporarily.**

We are implementing acompany-wide information technology system or Enterprise Resource Planning(“ERP”) system. The ERP system is intended to replace disparate individualinformation systems at our operating subsidiaries for functions such asaccounting and finance, human resources and customer relationships with acommon, uniform information system. Implementation of an ERP system willrequire substantial financial and personnel resources. While the ERP system isintended to improve and enhance our information systems, large scaleimplementation of new information systems across all of our operating companiesexposes us to the risks of start up of the new system and integration of that systemwith our existing systems and processes, including possible disruption of ourfinancial reporting. In addition, if we fail to implement the ERP system orfail to implement the ERP system successfully, we will have to continue to relyon the disparate information systems at our operating subsidiaries.

**A significant portion of our business depends on ourability to obtain surety bonds. We may be unable to compete for or work oncertain projects if we are not able to obtain the necessary surety bonds.**

Surety market conditionsare currently difficult as a result of significant recent losses incurred bymany sureties, both in the construction industry as well as in certain largercorporate bankruptcies. As a result, less bonding capacity is available in themarket and terms have become more expensive and restrictive. We are required topost letters of credit to support our surety bond program. Further, understandard terms in the surety market, sureties issue bonds on aproject-by-project basis and can decline to issue bonds at any time.Historically, approximately 10% to 20% of our annual volume of business,including a number of our fixed-price contracts, has required bonds.These percentages may increase depending on our mix of contracts. Current orfuture market conditions, as well as changes in our surety’s assessment of ouroperating and financial risk, could cause our surety provider to decline toissue, or substantially reduce the amount of, bonds for our work and couldincrease our bonding costs. These actions can be taken on short notice. If oursurety provider were to limit or eliminate our access to bonding, ouralternatives include seeking bonding capacity from other sureties, finding morebusiness that does not require bonds and posting other forms of collateral forproject performance, such as letters of credit or cash. We may be unable toprovide these alternatives in a timely manner, on acceptable terms or at all.Accordingly, if we were to experience an interruption or reduction in theavailability of bonding capacity, we may be unable to compete for or work oncertain projects.

**Higher fuel prices and material costs may increase ourcost of doing business, and we may not be able to pass those added costs toour customers.**

Our spending on fuel has increasedsignificantly over the last 12 months. Under our fixed-pricecontracts, we are limited in our ability to pass these higher fuel costs to ourcustomers. In addition, even if we are able to incorporate the higher cost offuel and materials into new project contracts, higher overall project costs maydepress the market for large-scale infrastructure projects. Therefore,higher fuel and material costs may directly or indirectly negatively impact ourfinancial condition and results of operations.

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

We are from time to time a provider of services togovernment agencies, primarily the DOE’s federal power marketing agencies, suchas our recently completed contract with the Bonneville Power 

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Administration. Therefore,we are exposed to the risks associated with government contracting. Forexample, a reduction in spending by government agencies could limit thecontinued funding of existing contracts with these agencies and could limit ourability to obtain additional contracts, which could result in lower revenuesfrom these customers. The risks of government contracting also include the riskof civil and criminal fines and penalties for violations of applicableregulations and statutes and the risk of public scrutiny of our performance onhigh profile sites. For example, there is a pending investigation by theDepartment of Labor with respect to employee pay and work hours in connectionwith one of our electric transmission projects. In addition, our failure tocomply with the terms of one or more of our government contracts, othergovernment agreements or government regulations and statutes could result inour being suspended or barred from future government contract projects for asignificant period of time.

In addition, governmentcustomers typically can terminate or modify their contracts with us at theirconvenience, and some of these government contracts are subject to renewal orextension annually. If a government customer terminates a contract or fails torenew or extend a contract, our backlog or revenue may be reduced or we mayincur a loss, either of which could impair our financial condition andoperating results. A termination due to our unsatisfactory performance couldexpose us to liability and adversely affect our ability to compete for futurecontracts and orders. In cases where we are a subcontractor, the prime contractcould be terminated, regardless of the quality of our services as asubcontractor or our relationship with the relevant government agency. Ourgovernment customers can also reduce the value of existing contracts, issuemodifications to a contract and control and potentially prohibit the export ofour services and associated materials.

**Our projects are subject to numerous hazards. If we donot maintain an adequate safety record, we may be ineligible to bid oncertain projects, could be terminated from existing projects and could havedifficulty procuring adequate insurance.**

Hazards experienced as aresult of our activities include electrocutions, fires, natural gas explosions,mechanical failure, transportation accidents and damage to equipment we workon. These hazards can cause and have caused personal injury and loss of life,severe damage to or destruction of property and equipment and otherconsequential damages, including blackouts, and may result in suspension ofoperations, large damage claims, and, in extreme cases, criminal liability. Atany given time, we are subject to multipleworkers’ compensation and personal injury claims resulting from such hazards orother workplace accidents. We maintain substantial loss accruals forworkers’ compensation claims. Our insurance does not cover all types or amountsof liabilities. Our third-party insurance is subject to large deductiblesfor which we establish reserves and, accordingly, we effectively self-insurefor much of our exposures. In addition, for a variety of reasons such asincreases in claims, a weak economy, projected significant increases in medicalcosts and wages, lost compensation and reductions in coverage, insurancecarriers may be unwilling to provide the current levels of coverage without asignificant increase in collateral requirements to cover our deductibleobligations. We may not be able to maintain adequate insurance at reasonablerates or meet collateral requirements. Further, regulatory changes implementedby the Occupational Safety and Health Administration (“OSHA”) could imposeadditional costs on us. Our safety record is an important consideration for ourcustomers. If serious accidents or fatalities occur or our safety record wereto deteriorate, we may be ineligible to bid on certain projects and could beterminated from existing projects. In addition, our reputation and ourprospects for future projects could be negatively affected. The OSHA recordablerate of one of our transmission construction subsidiaries has historically beenhigher than the industry average. If we cannot improve on this subsidiary’ssafety record, we may not be able to bid successfully on future projects. As iscommon in our industry, we regularly have been and will continue to be subjectto claims by employees, customers and third parties for property damage andpersonal injuries.

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**Our unionized workforce could cause interruptions inour provision of services. In addition, we contribute to multiemployerplans that could result in liabilities to us if these plans are terminated orwe 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. Alternatively, our non-union workforce couldbe disrupted by union organizing activities and similar actions.

We contribute to severalmultiemployer pension plans for employees covered by collective bargainingagreements. These plans are not administered by us, and contributions aredetermined in accordance with provisions ofnegotiated labor contracts. The Employee Retirement Income Security Act of1974, or ERISA, as amended by the Multiemployer Pension Plan AmendmentsAct of 1980, imposes certain liabilities upon employers who are contributors toa multiemployer plan in the event of the employer’s withdrawal from, or upontermination of, such plan. We do not have information on the net assets andactuarial present value of the multiemployer pension plans’ unfunded vestedbenefits allocable to us, if any, or the amounts, if any, for which we may be contingentlyliable if we were to withdraw from any of these plans.

**Changes in, or interpretations of, existing state orfederal telecommunications regulations or new regulations could adverselyaffect us.**

Many of our telecommunications customers benefit fromthe Universal Service “E-rate” program, which was established by Congress inthe 1996 Telecommunications Act and is administered by the Universal ServiceAdministrative Company, or USAC, under the oversight of the FederalCommunications Commission, or 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 andcertain health-care facilities may receive subsidies for certain approvedtelecommunications services, internet access, and internal connections. Fromtime to time, bills have been introduced in Congress that would eliminate orcurtail the E-rate program. If such a bill were passed, or if the FCC or USACwere to further limit E-rate subsidies, it could result in a decrease in thedemand for our telecommunications infrastructure services by certain customers.

The telecommunications services that we provide aresubject to regulation by the FCC to the extent that they are interstatetelecommunications services and, when wholly within a particular state, aresubject to regulation by such state. We currently contribute to state, but notfederal, universal service funds for the majority of our telecommunicationsservices. Changes in federal or state regulations could reduce theprofitability of our telecommunications business. We could also be subject tofines if the FCC or a state regulatory agency were to determine that any of ouractivities or positions violated its regulations.

One of our subsidiarieswhich is licensed, but not conducting business, is regulated by a state publicutility commission that requires approval prior to the proposed offering ofshares by our principal stockholders, which approval has not been obtained. Weintend to seek  such approval at suchtime, if any, when we expect to begin operations in the applicable state. We donot believe that our failure to obtain such approval prior to the consummationof the offering will have material consequences to us, but there can be noassurance that it will not.

**Newly adopted accounting regulations require us toexpense stock options, which could cause our stock price to decline.**

We recently adopted the provisions of the FinancialAccounting Standards Board (“FASB”) 123R, “Share Based Payment” which willeliminate the ability to account for share-based compensationtransactions using the intrinsic method that we used during 2005. Generally,these new provisions require that such transactions be accounted for using afair-value-based method and recognized as an expense in our consolidatedstatement of operations. The effective date for this change for us was as ofJanuary 1, 

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2006. Previously, we onlydisclosed such expenses on a pro forma basis in the notes to our consolidatedfinancial statements in accordance with generally accepted accountingprinciples (“GAAP”). Accordingly, in any reporting period in which we arerequired to recognize an expense for share-based compensation, ourearnings will be lower than if no expense had been taken. Our stock price coulddecline in response to any perceived decline in our reported earnings.

**Item 2.  *UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS*.**

None.

**Item 3.  *DEFAULTS UPON SENIORSECURITIES*.**

**None**

**Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

(a)          The2006 Annual Meeting of stockholders of the registrant was held on May 9,2006.

(b)         At the 2006 AnnualMeeting, the following were elected as directors:

| **Director**      | ** ** | ** ** | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|-------------------|------------|------------|------------|-----------|------------|--------------|------------|
| John A. Brayman   |       | 35,372,247 |       | 290,732   |       |
| J. Michal Conaway |       | 35,493,636 |       | 169,343   |       |
| Michael P. Harmon |       | 35,305,405 |       | 357,574   |       |
| David R. Helwig   |       | 28,623,000 |       | 7,039,979 |       |
| Ian A. Schapiro   |       | 29,185,053 |       | 6,477,926 |       |
| Richard S. Siudek |       | 35,309,426 |       | 353,553   |       |
| David H. Watts    |       | 35,492,836 |       | 170,143   |       |

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*                    TerryWinter was appointed to the Board of Directors on June 29, 2006.

**Item 5.  *OTHER INFORMATION*.**

None.

**Item 6.  *EXHIBITS*.**

| 3.1   |   | Restated  Certificate of Incorporation of InfraSource Services, Inc.(1)                                                                                                                                                                                                                                                                                                                                          |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1.1 |   | Certificate of Amendment to the Restated Certificate  of Incorporation of InfraSource Services, Inc.(1)                                                                                                                                                                                                                                                                                                          |
| 3.2   |   | Amended and Restated Bylaws of InfraSource  Services, Inc.(1)                                                                                                                                                                                                                                                                                                                                                    |
| 3.3   |   | Specimen of Common Stock certificate of InfraSource  Services Inc.(1)                                                                                                                                                                                                                                                                                                                                                 |
| 4.1   |   | Stockholders Agreement, dated as of  September 24, 2003, by and among InfraSource Services, Inc. (f/k/a  the Dearborn Holdings Corporation) and its Security Holders party thereto.(2)                                                                                                                                                                                                                      |
| 4.2   |   | Registration Rights Agreement, dated as of  April 20, 2004, by and among InfraSource Services, Inc. OCM  Principal Opportunities Fund II, L.P., OCM/GFI Power Opportunities  Funds, L.P., Martin Maslonka, Thomas B. Tilford, Mark C.  Maslonka, Justin Campbell, Joseph Gabbard, Sidney Strauss, Jon Maslonka,  David R. Helwig, Terence R. Montgomery and Paul M. Daily.(1) |

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| 4.2.1 |   | Amendment to Registration Rights Agreement, dated as  of December 7, 2005, by and among InfraSource Services, Inc. and  OCM Principal Opportunities Fund II, L.P., OCM/GFI Power Opportunities  Funds, L.P., Tontine Capital Partners, L.P., Martin Maslonka,  Thomas B. Tilford, Mark C. Maslonka, Justin Campbell, Joseph  Gabbard, Sidney Strauss, Jon Maslonka, David R. Helwig, Terence R. Montgomery  and Paul M. Daily.(3) |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2.2 |   | Second Amendment to Registration Rights Agreement,  dated as of June 28, 2006, by and among InfraSource Services, Inc.,  OCM Principal Opportunities Fund II, L.P., OCM/GFI Power Opportunities Fund,  L.P., Tontine Capital Partners, L.P., Martin Maslonka, Thomas B. Tilford,  Mark C. Maslonka, Justin Campbell, Joseph Gabbard, Sidney N. Strauss, Jon  Maslonka, David R. Helwig, Terence R. Montgomery and Paul M. Daily.(4)                             |
| 10.1  |   | Agreement, dated as of June 28, 2006, by and  among InfraSource Services, Inc., OCM Principal Opportunities Fund II,  L.P., OCM/GFI Power Opportunities Fund, L.P., Ian Schapiro and Michael  Harmon.(4)                                                                                                                                                                                                                                                        |
| 10.2  |   | Credit Agreement, dated as of June 30, 2006,  among InfraSource Incorporated, as borrower, InfraSource Services, Inc.,  Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C  Issuer, JPMorgan Chase Bank, N.A., as Syndication Agent, Lasalle Bank  National Association and National City Bank as Co-Documentation Agents, and  other lenders party thereto.*                                                                            |
| 10.3  |   | Guaranty, dated as of June 30, 2006 among the  Guarantors identified on the signature page, in favor of Bank of America,  N.A., as administrative agent for itself and the other lenders under the  Credit Agreement.*                                                                                                                                                                                                                                               |
| 31.1  |   | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Executive Officer.*                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2  |   | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Financial Officer.*                                                                                                                                                                                                                                                                                                                                                                                  |
| 32.1  |   | Certification pursuant to Section 1350 of  Chapter 63 of Title 18 of the United States Code.*                                                                                                                                                                                                                                                                                                                                                                        |

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*                  Filedherewith

(1)          Filedas an exhibit to the Registrant’s Registration Statement on Form S-8(Registration No. 333-115648) filed with the Commission on May 19,2004.

(2)          Filedas an exhibit to the Registrant’s Registration Statement on Form S-1(Registration No. 333-112375) filed with the Commission on January 30,2004.

(3)          Filedas an exhibit to the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 2005.

(4)          Filedas an exhibit to the Registrant’s Current Report on Form 8-K dated June 28,2006.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

|                           |     |     |     | INFRASOURCE  SERVICES, INC.                         |
|---------------------------|----------|----------|----------|-----------------------------------------------------|
|                      |     |     |     | (Registrant)                                        |
| Date: August 3, 2006 |     | By:      |     | /s/ TERENCE R. MONTGOMERY                           |
|                      |     |     |     | Terence  R. Montgomery                              |
|                      | * * | * * | * * | *Senior Vice President and Chief Financial Officer* |

 

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