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**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

** **

**FORM 10-Q**

 

| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                                                                     |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       | **For  the Quarterly Period Ended June 30, 2008**                                                                                                                                                                                                                                                                                                                                      |
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                                                                                                                                                                      |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13********OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                             |
|       |       | **For  the transition period from                                to                              ** |

 

**CommissionFile Number 1-1183**

 

**IntegratedElectrical Services, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                     | ** ** | **76-0542208**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer    |
| incorporation or  organization)  |       | Identification No.) |

 
| **1800 West  Loop South, Suite 500, Houston, Texas 77027** |
|----------------------------------------------------------------------|
| (Address of principal  executive offices and ZIP code)               |

 

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

 

----

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer  o |   | Accelerated filer x          |
|----------------------------|--------|------------------------------|
| Non-accelerated filer o    |   | Smaller reporting  company o |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes £  No x

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.Yes x  No £

 

The number of sharesoutstanding as of August 4, 2008 of the issuer’s common stock was14,839,716.

 

 

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**INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES**

** **

**INDEX**

 
| ** **                         | **Page**                                                                                                |
|------------------------------------|---------------------------------------------------------------------------------------------------------|
| PART I. FINANCIAL INFORMATION |                                                                                                    |
| Item 1.                            | Condensed  Consolidated Financial Statements                                                            |   |
|                               | Condensed Consolidated Balance Sheets as of  June 30, 2008 and September 30, 2007             | 5 |
|                               | Condensed Consolidated Statements of Operations for  the Three Months ended June 30, 2008 and 2007 | 6 |
|                               | Condensed Consolidated Statements of Operations for  the Nine Months Ended June 30, 2008 and 2007  | 7 |
|                               | Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended June 30, 2008 and 2007  | 8 |
|                               | Notes to Condensed Consolidated Financial Statements                                                    | 9 |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             | 23 |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                             | 36 |
| Item 4.                            | Controls and  Procedures                                                                                | 36 |
|                               |                                                                                                    |
| PART II.  OTHER INFORMATION   |                                                                                                    |
| Item 1.                            | Legal Proceedings                                                                                       | 39 |
| Item 1A.                           | Risk  Factors                                                                                           | 39 |
| Item 2.                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                            | 39 |
| Item 3.                            | Defaults Upon Senior  Securities                                                                        | 39 |
| Item 4.                            | Submission  of Matters to a Vote of Security Holders                                                    | 39 |
| Item 5.                            | Other Information                                                                                       | 39 |
| Item 6.                            | Exhibits                                                                                                | 40 |
| Signatures                         | 41                                                                                                      |

 

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**DEFINITIONS**

 

Inthis quarterly report on Form 10-Q, the words “IES”, the “Company”, “we”, “our”,“ours”, and “us” refer toIntegrated Electrical Services, Inc. and our subsidiaries, except asotherwise specified herein.

 

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

This quarterly report on Form 10-Qincludes certain statements that may be deemed “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, all of which are based upon variousestimates and assumptions that we believe to be reasonable as of the datehereof. These statements involve risks and uncertainties that could cause ouractual future outcomes to differ materially from those set forth in suchstatements. Such risks and uncertainties include, but are not limited to:

 

·                      generaleconomic and capital markets conditions, including changes in interest ratesthat affect the cost of construction financing and mortgages, and theavailability of such capital to our customers;

 

·                      potentialdifficulty in fulfilling the covenant terms of our credit facilities;

 

·                      limitationson the availability of sufficient credit or cash flow to fund our workingcapital needs;

 

·                      increasedcost of surety bonds affecting margins on work and the ability to obtainadditional bonding;

 

·                      fluctuationsin operating activity due to downturns in levels of construction, seasonality,and differing regional economic conditions;

 

·                      inaccurateestimates used when entering into fixed-priced contracts;

 

·                      potentialerrors when estimating revenue and progress to date on percentage-of-completioncontracts;

 

·                      difficultyin managing the operation of existing entities;

 

·                      fluctuationsin the cost of commodities used in our business, in particular copper,aluminum, steel, and certain plastics;

 

·                      risingfuel costs for our operating vehicle fleet;

 

·                      competitionin the construction industry, both from third parties and former employees,which could result in the loss of one or more customers or lead to lowermargins on new contracts;

 

·                      fluctuationsin financial results due to assumptions made regarding future events used tovalue our stock options and performance-based stock awards;

 

·                      increasein cost of, or limitations on availability of, qualified labor, especiallyelectricians and construction supervisors;

 

·                      accidentsresulting from the physical hazards associated with our work and potential forvehicle accidents;

 

·                      lossof key personnel or transition of new senior management;

 

·                      challengesintegrating new types of work or new processes into business units;

 

·                      uncertaintiesinherent to estimating future operating results, including revenues, operatingincome, or cash flow;

 

·                      difficultyincorporating new accounting, control and operating procedures;

 

·                      difficultyaddressing the material weakness identified by us and our independent auditors;

 

·                      disagreementswith taxing authorities with regard to tax positions we have adopted;

 

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·                          unexpectedliabilities, losses from warranties, or liabilities of business units of whichwe have sold substantially all of the assets;

 

·                          theresidual effect with customers and vendors from our reorganization, resultingin higher costs, lower administrative performance, less work or less favorabledelivery or credit terms;

 

·                      reducedproductivity, either at the corporate office or operating level;

 

·                      difficultyin transferring all of our electrical and construction licenses after ourrecent consolidation of business units;

 

·                      growthin latent defect litigation in the residential market in California and theexpansion of such litigation into other states where we provide residentialelectrical work for home builders not otherwise covered by insurance; and

 

·**                     **thepossibility that our restructuring program will not be successfully executed.

 

You should understandthat the foregoing, as well as other risk factors discussed in our annualreport on Form 10-K for the year ended September 30, 2007, couldcause future outcomes to differ materially from those expressed in this and ouraforementioned 10-K. We undertake no obligation to publicly update or reviseinformation concerning our restructuring efforts, borrowing availability, orcash position or any forward-looking statements to reflect events orcircumstances that may arise after the date of this report. Forward-lookingstatements are provided in this Form 10-Q pursuant to the safe harborestablished under the Private Securities Litigation Reform Act of 1995 andshould be evaluated in the context of the estimates, assumptions,uncertainties, and risks described herein.

 

General information aboutus can be found at www.ies-co.com under “Investor Relations.” Our annual reporton Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,as well as any amendments to those reports, are available free of chargethrough our website as soon as reasonably practicable after we file them with,or furnish them to, the Securities and Exchange Commission. You may alsocontact our Investor Relations department, and they will provide you withcopies of our public reports.

 

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**ITEM 1. FINANCIAL STATEMENTS**

** **

**INTEGRATEDELECTRICAL SERVICES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(INTHOUSANDS, EXCEPT SHARE INFORMATION)**

 
| ** **                                                                                                                                                                     | ** ** | **June 30,  2008** | ** ** | **September 30,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **(Unaudited)**         | ** ** | ** **                   | ** ** |
| **ASSETS**                                                                                                                                                                     |       |                    |       |                         |       |
|                                                                                                                                                                           |       |                    |       |                         |       |
| CURRENT ASSETS:                                                                                                                                                                |       |                    |       |                         |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                       | 56,818     |                         | $          | 69,676 |   |
| Restricted cash                                                                                                                                                                |       | —                  |       | 20,000                       |       |
| Accounts receivable:                                                                                                                                                           |       |                    |       |                         |       |
| Trade, net of allowance of $4,063 and $2,608,  respectively                                                                                                                    |       | 147,717                 |       | 131,767                      |       |
| Retainage                                                                                                                                                                      |       | 30,133                  |       | 29,536                       |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts                                                                                                   |       | 10,747                  |       | 16,121                       |       |
| Inventories                                                                                                                                                                    |       | 16,838                  |       | 15,268                       |       |
| Prepaid expenses and other current assets                                                                                                                                      |       | 5,761                   |       | 4,618                        |       |
| Assets from discontinued operations                                                                                                                                            |       | 1,589                   |       | 6,431                        |       |
| Total current assets                                                                                                                                                           |       | 269,603                 |       | 293,417                      |       |
|                                                                                                                                                                           |       |                    |       |                         |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                                                    |       | 23,700                  |       | 22,095                       |       |
| GOODWILL                                                                                                                                                                       |       | 5,713                   |       | 14,574                       |       |
| OTHER NON-CURRENT ASSETS, net                                                                                                                                                  |       | 22,232                  |       | 23,336                       |       |
| Total assets                                                                                                                                                                   |       | $                       | 321,248    |                         | $          | 353,422 |   |
|                                                                                                                                                                           |       |                    |       |                         |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                  |       |                    |       |                         |       |
| ** **                                                                                                                                                                     |       |                    |       |                         |       |
| CURRENT LIABILITIES:                                                                                                                                                           |       |                    |       |                         |       |
| Current maturities of long-term debt                                                                                                                                           |       | $                       | 150        |                         | $          | 78 |   |
| Accounts payable and accrued expenses                                                                                                                                          |       | 93,358                  |       | 98,452                       |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts                                                                                                   |       | 40,334                  |       | 35,277                       |       |
| Liabilities from discontinued operations                                                                                                                                       |       | 589                     |       | 1,920                        |       |
| Total current liabilities                                                                                                                                                      |       | 134,431                 |       | 135,727                      |       |
| LONG-TERM DEBT, net of current maturities                                                                                                                                      |       | 25,127                  |       | 45,698                       |       |
| OTHER NON-CURRENT LIABILITIES                                                                                                                                                  |       | 10,155                  |       | 18,072                       |       |
| Total liabilities                                                                                                                                                              |       | 169,713                 |       | 199,497                      |       |
|                                                                                                                                                                           |       |                    |       |                         |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                  |       |                    |       |                         |       |
|                                                                                                                                                                           |       |                    |       |                         |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                     |       |                    |       |                         |       |
| Preferred stock, $0.01 par value,  10,000,000 shares authorized, none issued and outstanding                                                                         |       | —                  |       | —                       |       |
| Common stock, $0.01 par value,  100,000,000 shares authorized; 15,407,802 and 15,418,357 shares  issued and 15,002,724 and 15,339,086 outstanding, respectively |       | 154                     |       | 154                          |       |
| Treasury stock, at cost, 405,078 and  79,271 shares, respectively                                                                                                         |       | (7,206                  | )          | (1,716                       | )          |
| Additional paid-in capital                                                                                                                                                     |       | 169,470                 |       | 168,070                      |       |
| Retained deficit                                                                                                                                                               |       | (10,883                 | )          | (12,583                      | )          |
| Total stockholders’ equity                                                                                                                                                |       | 151,535                 |       | 153,925                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                |       | $                       | 321,248    |                         | $          | 353,422 |   |

 

The accompanyingNotes to condensed consolidated financial statements are an integral part ofthese financial statements.

 

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**INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(INTHOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)**

 
| ** **                                                                                                             | ** ** | **Three Months Ended  June 30, 2008** | ** ** | **Three Months Ended  June 30, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **(Unaudited)**                                           | ** ** | **(Unaudited)**                                           | ** ** |
| ** **                                                                                                             | ** ** | ** **                                                | ** ** | ** **                                                | ** ** |
| Revenues                                                                                                               |       | $                                                         | 214,485    |                                                      | $          | 222,631 |   |
| Cost of services                                                                                                       |       | 180,587                                                   |       | 184,322                                                   |       |
| Gross profit                                                                                                           |       | 33,898                                                    |       | 38,309                                                    |       |
| Selling, general and administrative expenses                                                                           |       | 28,052                                                    |       | 34,113                                                    |       |
| (Gain) on sale of assets                                                                                               |       | (115                                                      | )          | (91                                                       | )          |
| Restructuring charges                                                                                                  |       | 1,038                                                     |       | —                                                    |       |
| Income from operations                                                                                                 |       | 4,923                                                     |       | 4,287                                                     |       |
| Other (income) expense:                                                                                                |       |                                                      |       |                                                      |       |
| Interest expense                                                                                                       |       | 1,356                                                     |       | 2,846                                                     |       |
| Interest income                                                                                                        |       | (284                                                      | )          | (1,076                                                    | )          |
| Other (income) expense, net                                                                                            |       | 67                                                        |       | (209                                                      | )          |
| Interest and other expense, net                                                                                        |       | 1,139                                                     |       | 1,561                                                     |       |
| Income from continuing operations before income  taxes                                                                 |       | 3,784                                                     |       | 2,726                                                     |       |
| Provision for income taxes                                                                                             |       | 1,758                                                     |       | 1,693                                                     |       |
| Net income from continuing operations                                                                                  |       | 2,026                                                     |       | 1,033                                                     |       |
| Discontinued operations (Note 2):                                                                                 |       |                                                      |       |                                                      |       |
| Income (loss) from discontinued operations,  including gain (loss) on disposal of assets of $0 and $(12), respectively |       | 49                                                        |       | (29                                                       | )          |
| Provision (benefit) for income taxes                                                                                   |       | 37                                                        |       | (203                                                      | )          |
| Net income from discontinued operations                                                                                |       | 12                                                        |       | 174                                                       |       |
| Net income                                                                                                             |       | $                                                         | 2,038      |                                                      | $          | 1,207 |   |
|                                                                                                                   |       |                                                      |       |                                                      |       |
| Basic earnings per share:                                                                                              |       |                                                      |       |                                                      |       |
| Continuing operations                                                                                                  |       | $                                                         | 0.14       |                                                      | $          | 0.07 |   |
| Discontinued operations                                                                                                |       | $                                                         | 0.00       |                                                      | $          | 0.01 |   |
| Total                                                                                                                  |       | $                                                         | 0.14       |                                                      | $          | 0.08 |   |
|                                                                                                                   |       |                                                      |       |                                                      |       |
| Diluted earnings per share:                                                                                            |       |                                                      |       |                                                      |       |
| Continuing operations                                                                                                  |       | $                                                         | 0.14       |                                                      | $          | 0.07 |   |
| Discontinued operations                                                                                                |       | $                                                         | 0.00       |                                                      | $          | 0.01 |   |
| Total                                                                                                                  |       | $                                                         | 0.14       |                                                      | $          | 0.08 |   |
|                                                                                                                   |       |                                                      |       |                                                      |       |
| Shares used in the computation of earnings per share  (Note 4):                                                   |       |                                                      |       |                                                      |       |
| Basic                                                                                                                  |       | 14,969,008                                                |       | 15,086,156                                                |       |
| Diluted                                                                                                                |       | 15,003,131                                                |       | 15,163,387                                                |       |

 

The accompanyingNotes to condensed consolidated financial statements are an integral part ofthese financial statements.

 

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| ** **                                                                                                   | ** ** | **Nine Months Ended  June 30, 2008** | ** ** | **Nine Months Ended  June 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **(Unaudited)**                                          | ** ** | **(Unaudited)**                                          | ** ** |
| ** **                                                                                                   | ** ** | ** **                                               | ** ** | ** **                                               | ** ** |
| Revenues                                                                                                     |       | $                                                        | 608,957    |                                                     | $          | 665,977 |   |
| Cost of services                                                                                             |       | 511,297                                                  |       | 553,969                                                  |       |
| Gross profit                                                                                                 |       | 97,660                                                   |       | 112,008                                                  |       |
| Selling, general and administrative expenses                                                                 |       | 86,283                                                   |       | 104,774                                                  |       |
| (Gain) on sale of assets                                                                                     |       | (139                                                     | )          | (117                                                     | )          |
| Restructuring charges                                                                                        |       | 4,431                                                    |       | —                                                   |       |
| Income from operations                                                                                       |       | 7,085                                                    |       | 7,351                                                    |       |
| Other (income) expense:                                                                                      |       |                                                     |       |                                                     |       |
| Interest expense                                                                                             |       | 7,507                                                    |       | 7,884                                                    |       |
| Interest income                                                                                              |       | (1,829                                                   | )          | (3,028                                                   | )          |
| Other (income) expense, net                                                                                  |       | (1,256                                                   | )          | (113                                                     | )          |
| Interest and other expense, net                                                                              |       | 4,422                                                    |       | 4,743                                                    |       |
| Income from continuing operations before income  taxes                                                       |       | 2,663                                                    |       | 2,608                                                    |       |
| Provision for income taxes                                                                                   |       | 1,572                                                    |       | 2,077                                                    |       |
| Net income from continuing operations                                                                        |       | 1,091                                                    |       | 531                                                      |       |
| Discontinued operations (Note 2):                                                                       |       |                                                     |       |                                                     |       |
| Income (loss) from discontinued operations,  including gain on disposal of assets of $7 and $1, respectively |       | 387                                                      |       | (2,204                                                   | )          |
| Provision (benefit) for income taxes                                                                         |       | 198                                                      |       | (1,340                                                   | )          |
| Net income (loss) from discontinued operations                                                               |       | 189                                                      |       | (864                                                     | )          |
| Net income (loss)                                                                                            |       | $                                                        | 1,280      |                                                     | $          | (333 | ) |
|                                                                                                         |       |                                                     |       |                                                     |       |
| Basic earnings (loss) per share:                                                                             |       |                                                     |       |                                                     |       |
| Continuing operations                                                                                        |       | $                                                        | 0.07       |                                                     | $          | 0.04 |   |
| Discontinued operations                                                                                      |       | $                                                        | 0.01       |                                                     | $          | (0.06 | ) |
| Total                                                                                                        |       | $                                                        | 0.09       |                                                     | $          | (0.02 | ) |
|                                                                                                         |       |                                                     |       |                                                     |       |
| Diluted earnings (loss) per share:                                                                           |       |                                                     |       |                                                     |       |
| Continuing operations                                                                                        |       | $                                                        | 0.07       |                                                     | $          | 0.04 |   |
| Discontinued operations                                                                                      |       | $                                                        | 0.01       |                                                     | $          | (0.06 | ) |
| Total                                                                                                        |       | $                                                        | 0.08       |                                                     | $          | (0.02 | ) |
|                                                                                                         |       |                                                     |       |                                                     |       |
| Shares used in the computation of earnings (loss)  per share (Note 4):                                  |       |                                                     |       |                                                     |       |
| Basic                                                                                                        |       | 15,026,675                                               |       | 15,047,956                                               |       |
| Diluted                                                                                                      |       | 15,109,335                                               |       | 15,063,922                                               |       |

 

The accompanyingNotes to condensed consolidated financial statements are an integral part ofthese financial statements.

 

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**INTEGRATED ELECTRICAL SERVICES, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(INTHOUSANDS)**

 
| ** **                                                                              | ** ** | **Nine Months Ended  June 30, 2008** | ** ** | **Nine Months Ended  June 30, 2007** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **(Unaudited)**                                          | ** ** | **(Unaudited)**                                          | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |       |                                                     |       |                                                     |       |
| Net income (loss)                                                                       |       | $                                                        | 1,280      |                                                     | $          | (333 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities:        |       |                                                     |       |                                                     |       |
| Net (income) loss from discontinued operations                                          |       | (189                                                     | )          | 864                                                      |       |
| Bad debt expense                                                                        |       | 2,179                                                    |       | 735                                                      |       |
| Deferred financing cost amortization                                                    |       | 1,714                                                    |       | 937                                                      |       |
| Depreciation and amortization                                                           |       | 6,434                                                    |       | 7,507                                                    |       |
| (Gain) on sale of property and equipment                                                |       | (139                                                     | )          | (117                                                     | )          |
| Non-cash paid-in-kind interest added to term loan                                       |       | —                                                   |       | 5,012                                                    |       |
| Non-cash compensation expense                                                           |       | 2,702                                                    |       | 3,364                                                    |       |
| Non-cash restructuring write-offs                                                       |       | 131                                                      |       | —                                                   |       |
| Equity in gains of investment                                                           |       | (424                                                     | )          | (58                                                      | )          |
| Goodwill adjustment-utilization of deferred tax  assets under SOP 90-7                  |       | 1,057                                                    |       | —                                                   |       |
| Changes in operating assets and liabilities, net of  effect of discontinued operations: |       |                                                     |       |                                                     |       |
| Accounts receivable                                                                     |       | (18,831                                                  | )          | 17,398                                                   |       |
| Inventories                                                                             |       | (1,570                                                   | )          | 3,580                                                    |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts            |       | 5,374                                                    |       | 1,251                                                    |       |
| Prepaid expenses and other current assets                                               |       | 1,487                                                    |       | 5,840                                                    |       |
| Other non-current assets                                                                |       | (1,262                                                   | )          | 4,433                                                    |       |
| Accounts payable and accrued expenses                                                   |       | (6,091                                                   | )          | (8,308                                                   | )          |
| Billings in excess of costs and estimated earnings  on uncompleted contracts            |       | 5,053                                                    |       | 7,075                                                    |       |
| Other non-current liabilities                                                           |       | 258                                                      |       | 288                                                      |       |
| Net cash provided by (used in) continuing operations                                    |       | (837                                                     | )          | 49,468                                                   |       |
| Net cash provided by discontinued operations                                            |       | 3,892                                                    |       | 7,172                                                    |       |
| Net cash provided by operating activities                                               |       | 3,055                                                    |       | 56,640                                                   |       |
|                                                                                    |       |                                                     |       |                                                     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |       |                                                     |       |                                                     |       |
| Purchases of property and equipment                                                     |       | (9,613                                                   | )          | (1,626                                                   | )          |
| Proceeds from sales of property and equipment                                           |       | 335                                                      |       | 516                                                      |       |
| Distribution from unconsolidated affiliate                                              |       | 488                                                      |       | 240                                                      |       |
| Change in restricted cash                                                               |       | 20,000                                                   |       | —                                                   |       |
| Net cash provided by (used in) continuing operations                                    |       | 11,210                                                   |       | (870                                                     | )          |
| Net cash provided by (used in) discontinued  operations                                 |       | 7                                                        |       | (25                                                      | )          |
| Net cash provided by (used in) investing activities                                     |       | 11,217                                                   |       | (895                                                     | )          |
|                                                                                    |       |                                                     |       |                                                     |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |       |                                                     |       |                                                     |       |
| Borrowings of debt                                                                      |       | 25,193                                                   |       | 72                                                       |       |
| Repayments of debt                                                                      |       | (45,692                                                  | )          | (15,040                                                  | )          |
| Payments for debt issuance costs                                                        |       | (575                                                     | )          | —                                                   |       |
| Acquisition of treasury stock                                                           |       | (6,056                                                   | )          | —                                                   |       |
| Net cash used in financing activities                                                   |       | (27,130                                                  | )          | (14,968                                                  | )          |
|                                                                                    |       |                                                     |       |                                                     |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    |       | (12,858                                                  | )          | 40,777                                                   |       |
| CASH AND CASH EQUIVALENTS, beginning of period                                          |       | 69,676                                                   |       | 28,166                                                   |       |
| CASH AND CASH EQUIVALENTS, end of period                                                |       | $                                                        | 56,818     |                                                     | $          | 68,943 |   |
|                                                                                    |       |                                                     |       |                                                     |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                       |       |                                                     |       |                                                     |       |
| Cash paid for interest                                                                  |       | $                                                        | 3,690      |                                                     | $          | 2,081 |   |
| Cash paid for income taxes                                                              |       | $                                                        | 663        |                                                     | $          | 1,282 |   |

 

Non-cashactivities:  During the nine months endedJune 30, 2008, we financed $2.0 million of prepaid insurance through anaccount payable to the insurance provider, paid a $2.1 million account payablefor property and equipment that was purchased and accrued during the year endedSeptember 30, 2007, recorded a $0.1 million accrued liability for thepurchase of property and equipment that was unpaid as of June 30, 2008, andacquired $0.7 million of treasury stock through a payable to our broker.

 

Theaccompanying Notes to condensed consolidated finance statements are an integralpart of these financial statements.

 

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**INTEGRATED ELECTRICAL SERVICES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE30, 2008**

 

**(UNAUDITED)**

 

**1.  BUSINESS**

 

IntegratedElectrical Services, Inc. (the “Company” or “IES”), a Delawarecorporation, was founded in June 1997 to create a leading nationalprovider of electrical contracting services, focusing primarily on thecommercial, industrial, residential, low voltage and service and maintenancemarkets.

 

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

These unaudited condensed consolidated financial statements reflect, inthe opinion of management, all adjustments necessary to present fairly thefinancial position as of, and the results of operations for, the periodspresented.  All adjustments areconsidered to be normal and recurring. Interim period results are notnecessarily indicative of results of operations or cash flows for the fullyear.  During interim periods, we followthe same accounting policies disclosed in our Annual Report on Form 10-Kfor the year ended September 30, 2007, with the exception of the adoptionof Financial Accounting Standards Board (“FASB”) Financial Interpretation No. 48,“*Accounting for Uncertainty in IncomeTaxes—an Interpretation of FASB 109”* as described in the paragraphthat follows. Please refer to the Notes of our 2007 Form 10-K whenreviewing interim financial results.

 

On October 1,2007, we adopted the provisions of FASB Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement 109”* (“FIN 48”). FIN 48 created a single model to address accounting for uncertain incometax positions and established a minimum recognition threshold a tax positionmust meet before being recognized in the financial statements.

 

The evaluation ofa tax position under FIN 48 is a two-step process. The first step is therecognition process to determine if it is more likely than not that a taxposition will be sustained upon examination by the appropriate taxingauthority, based on the technical merits of the position. The second step is ameasurement process whereby a tax position that meets the more likely than notrecognition threshold is calculated to determine the amount of benefit/expenseto recognize in the financial statements. The tax position is measured at thelargest amount of benefit/expense that is more likely than not of beingrealized upon ultimate settlement.

 

As the result of the adoption of FIN 48 and recognition of thecumulative effect of the adoption of the new accounting principal, we recordedan $8.2 million decrease in contingent tax liabilities.  The reduction of the contingent taxliabilities resulted in a $7.8 million decrease in goodwill as prescribed byStatement of Position 90-7, *“FinancialReporting by**Entities inReorganization Under the Bankruptcy Code”* (“SOP 90-7”) and a $0.4 million increase in retainedearnings.  Upon the adoption of FIN 48,the total liability for unrecognized tax benefits was $6.2 million, excludingaccrued interest and penalties, which are discussed below.  The liabilities for unrecognized tax benefitsare a component of “Other non-current liabilities” in our consolidated balancesheet.  The reversal of the liabilitiesfor unrecognized tax benefits would result in a $6.1 million adjustment thatwould first go to reduce goodwill, then intangible assets and then additionalpaid-in capital as prescribed by SOP 90-7. The remaining $0.1 million would result in a decrease in the provisionfor income tax expense.

 

We recognize interest and penalties related to unrecognized taxbenefits as part of the provision for income taxes.  Upon the adoption of FIN 48, we hadapproximately $0.4 million in accrued interest and penalties included inliabilities for unrecognized tax benefits. The accrued interest and penalties are a component of “Other non-currentliabilities” in our consolidated balance sheet. The reversal of the accrued interest and penalties would result in a$0.2 million adjustment that would first go to reduce goodwill, then intangibleassets and then additional paid-in capital as prescribed by SOP 90-7.  The remaining $0.2 million would result in adecrease in the provision for income tax expense.

 

We are currently not under federal audit by the Internal RevenueService.  The tax years ended September 30,2004 and forward are subject to audit as are tax years prior to September 30,2004, to the extent of unutilized net operating losses generated in those years.  Currently, one of our business units is undera state audit for the tax years ended September 30, 2002 and 2003.

 

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We anticipate that approximately $0.3 million of liabilities forunrecognized tax benefits, including accrued interest, may be reversed in thenext twelve months.  This reversal ispredominately due to the expiration of the statues of limitation forunrecognized tax benefits and the settlement of a state audit.

 

**RECLASSIFICATIONS**

 

Certain priorperiod balances have been reclassified to conform to current year presentation,including the income statement line items interest expense and interest income,which were previously shown as a single net amount.

 

**USE OF ESTIMATES AND ASSUMPTIONS**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires the use of estimates andassumptions by management in determining the reported amounts of assets andliabilities, disclosures of contingent liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates. Estimates areprimarily used in our revenue recognition for construction in progress.  Other estimates consist of allowances fordoubtful accounts receivable, inventory obsolescence reserves, fair valueassumptions in analyzing goodwill and long-lived asset impairments andadjustments from fresh-start accounting, realizability of deferred tax assets,self-insured claims liabilities, and estimated forfeiture rates and projectedearnings used to measure stock-based compensation awards.

 

**SEASONALITY AND QUARTERLY FLUCTUATIONS**

 

Our results ofoperations are seasonal, depending on weather trends, with higher revenuestypically generated during spring and summer months and lower revenuestypically generated during fall and winter months. In addition, theconstruction industry has historically been highly cyclical. Our volume ofbusiness may be adversely affected by declines in construction projectsresulting from adverse regional or national economic conditions. Quarterlyresults may also be materially affected by the timing of new constructionprojects. Accordingly, operating results for any fiscal period are notnecessarily indicative of results that may be achieved for any subsequentfiscal period.

 

**RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

 

In September 2006,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,*“Fair**Value Measurements*” (“SFAS 157”). SFAS 157 enhances theguidance for using fair value to measure assets and liabilities. In addition,SFAS 157 expands information about the extent to which companies measure assetsand liabilities at fair value, the information used to measure fair value andthe effect of fair value measurements on earnings.  This statement applies whenever otherstandards require (or permit) assets or liabilities to be measured at fairvalue, but it does not expand the use of fair value in any new circumstances.  We are currently evaluating the potentialimpact, if any, SFAS 157 will have on our financial results for our fiscalyear beginning on October 1, 2008.

 

SFAS 157 wasoriginally to be effective for fiscal years beginning after November 15,2007.  However, on February 12,2008, the FASB issued FASB Staff Position No. 157-2, “*EffectiveDate of FASB Statement No. 157*” (“FSP 157-2”) which amends SFAS157 to delay the effective date for all non-financial assets and non-financialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (that is, at least annually) tofiscal years beginning after November 15, 2008.  We currently do not have any assets that aremeasured at fair value. We are currently evaluating the potential impact, ifany, FSP 157-2 will have on our financial results for our fiscal yearbeginning on October 1, 2009.  Webelieve we will likely be required to provide additional disclosures in futurefinancial statements beginning after the effective date of the new standard.

 

In February 2007,the FASB issued SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities*” (“SFAS 159”) whichpermits companies to measure certain financial instruments and certain otheritems at fair value that are not currently required to be measured at fairvalue. The objective is to improve financial reporting by providing companiesthe opportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. SFAS 159 is effective for fiscal years beginningafter November 15, 2007. We are currently evaluating the potential impact,if any, SFAS 159 will have on our financial results for our fiscal yearbeginning on October 1, 2008; however, as we do not intend to elect fairvalue for any of our assets and liabilities, there should be no impact.

 

In December 2007,the FASB issued Statement No. 141 (revised 2007), “*BusinessCombinations*” (“SFAS 141(R)”) which changes the accounting foracquisitions. SFAS 141(R) requires an acquiring entity to recognize allthe assets acquired and liabilities assumed in a transaction at theacquisition-date fair value with limited exceptions. SFAS 141(R) eliminatesthe step acquisition model, changes the 

 

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recognition ofcontingent consideration from being recognized when it is probable to beingrecognized at the time of acquisition, disallows the capitalization oftransaction costs, and changes when restructuring charges related toacquisitions can be recognized. The standard is effective for fiscal yearsbeginning on or after December 15, 2008 and will only impact theaccounting for acquisitions that are made after adoption.

 

**STOCK-BASED COMPENSATION**

 

Stock-based compensation consists ofexpenses related to employee stock option awards, restricted stock grants andperformance-based restricted stock grants (see Note 6).  We recognize stock-based compensation expensein a pro-rata manner based on the value of stock-based payment awards that areexpected to vest, reduced for estimated forfeitures. SFAS 123(R), “*Share-Based Payment”*(“SFAS 123(R)”)requires forfeitures to be estimated at the time of grant and revised insubsequent periods if actual forfeitures differ from those estimates.  We used the modified prospective applicationmethod at the time SFAS 123(R) was adopted.

 

SFAS 123(R) does not require aspecific valuation model to measure the value of stock options, and either abinomial or the Black-Scholes model may be used. We used a binomial option pricing model tomeasure the fair value of stock options awarded in our 2007 and 2008 fiscalyears. We believe the binomial pricing model is a more precise measure of thevalue of our stock options; however, the difference in the values between thetwo methods was not material for the options that we granted.

 

The assumptions used in the binomialpricing model calculation for the nine months ended June 30, 2008 and 2007are as follows:

 
| ** **                                                       | ** ** | **Nine Months Ended  June 30, 2008** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** **                                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Weighted average value per option granted during the  period (1) |       | $                                                        | 8.49       |   | $ | 13.34 |   |
| Assumptions:                                                     |       |                                                     |       |   |   |
| Stock price volatility                                           |       | 51.6                                                     | %          | 43.6 | % |
| Risk free rate of return                                         |       | 3.3                                                      | %          | 4.8 | % |
| Future forfeiture rate (2)                                       |       | 0.0                                                      | %          | 0.0 | % |
| Expected term                                                    |       | 6.0 years                                                |       | 6.0 years |   |
|                                                                  |            |                                                          |            |  |  |  |  |

 

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(1) We do not pay dividends on our common stock.

(2) The forfeiture rate is assumed to be zero based on the limitednumber of employees who have been awarded stock options.

 

**2. STRATEGIC ACTIONS**

 

*RestructuringProgram*

 

We have restructured our operations from our previous geographicstructure into three major lines of business: Industrial, Commercial andResidential.  This operational restructuringis part of our long-term strategic plan to reduce our cost structure,reposition our business to better serve our customers, strengthen financialcontrols and, as a result, position the Company to implement a market-basedgrowth strategy in the future.  Therestructuring program has consolidated administrative support functions,eliminating redundant functions that were previously performed at our 27business units. We expect to incur pre-tax restructuring charges, includingseverance benefits and consulting charges, of approximately $5 million to $10million over the course of the restructuring process, which will besubstantially complete by September 30, 2008.

 

The first component of our restructuring program was initiated in ourIndustrial segment in June 2007. Under this portion of the planned restructuring, 5 of our business unitswere integrated under the IES Industrial segment, and the support andadministrative functions of those businesses were combined at an operatinglocation in Houston, Texas.  Inconnection with this realignment, we approved a transition and severancebenefits program for 25 employees who were separated from the Company on orbefore June 30, 2008 through the elimination of redundant positions.  During the nine months ended June 30,2008, we have recognized approximately $0.3 million in severance charges forthe value of cash compensation and payroll taxes that will be paid out through November 2008in the form of salary continuation. Since the inception of this program, we have recorded $0.5 million inseverance charges for our Industrial segment. These charges have been included in the caption “Restructuring Charges”in the consolidated statement of operations, and we have a remaining liabilityof $0.1 million included as an accrued expense.

 

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The second component of our restructuring program was initiated in ourCommercial segment in September 2007. Under this portion of the restructuring, 17 of our business units wereintegrated under the IES Commercial segment, and the support and administrativefunctions of those businesses were combined at an operating location in Tempe,Arizona.  In connection with thisrealignment, we approved a transition and severance benefits plan forapproximately 100 employees who have been or will be separated through theelimination of redundant positions. The affected employees will continue towork for the Company for up to six months. During the nine months ended June 30,2008, we recognized approximately $1.9 million in severance charges for cashcompensation and payroll taxes that will be paid out through December 2008in the form of salary continuation. Since the inception of this program, we have recorded $2.0 million inseverance charges for our Commercial segment. These charges have beenidentified within the “Restructuring Charges” caption in the consolidatedstatement of operations, and we have a remaining liability of $0.7 millionincluded in accrued expenses.  We expectto recognize an additional $0.1 million in severance liabilities for the valueof cash compensation for Commercial employees who have already been included inthe transition and severance program, which we expect to incur in the forthquarter of our 2008 fiscal year.

 

The third component of our restructuring program was initiated in ourResidential segment in September 2007. Under this portion of the restructuring, 5 of our business units wereintegrated under the IES Residential segment during our 2008 fiscal year, andthe support and administrative functions of those businesses has been combinedat an operating location near Houston, Texas. In connection with this realignment, we approved a transition andseverance benefits plan for 17 employees who have been separated through theelimination of redundant positions. During the nine months ended June 30, 2008, we recognizedapproximately $0.2 million in severance liabilities for cash compensation andpayroll taxes. These charges have been identified within the “RestructuringCharges caption in the consolidated statement of operations.

 

In addition to theseverance costs described above, we incurred charges of approximately $0.4million and $2.0 million, respectively, for consulting services associated withour restructuring program during the three months and nine months ended June 30,2008.  During the nine months ended June 30,2008, we also wrote off $0.1 million of leasehold improvements at a location weclosed.  Since we began the program in June 2007,we have recorded a total of $5.3 million of restructuring charges.

 

The followingtable summarizes the activities related to our restructuring activities bycomponent (in thousands):

 
| ** **                                                                      | ** ** | **Severance  Charges** | ** ** | **Consulting /  Other Charges** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------------------------|------------|-----------|------------|
| Restructuring liability at September 30, 2007                              |       | $                      | 208        |                                      | $          | 180       |       | $ | 388 |   |
| Restructuring charges incurred during the nine  months ended June 30, 2008 |       | 2,434                  |       | 1,997                                     |       | 4,431     |       |
| Less - cash payments during the nine months ended  June 30, 2008           |       | (1,759                 | )          | (1,993                                    | )          | (3,752    | )          |
| Less - non-cash expenses / write-offs                                           |       | —                 |       | (131                                      | )          | (131      | )          |
| Restructuring liability at June 30, 2008                                   |       | $                      | 883        |                                      | $          | 53        |       | $ | 936 |   |

 

*Exit or Disposal Activities*

 

In March 2006,based on the recommendation of our Board of Directors, we committed to an exitplan with respect to certain underperforming business units in our Commercialand Industrial segments. The exit plan committed to a shut-down orconsolidation of the operations of these business units, or the sale or otherdisposition of the business units, whichever came sooner.  In our assessment of the estimated netrealizable value of the accounts receivable at these business units, weincreased our general allowance for doubtful accounts having considered variousfactors, including the risk of collection and the age of the receivables.

 

In June 2007,we shut down our Mid-States Electric business unit, located in Jackson,Tennessee.  Mid-States’ operatingequipment was either transferred to other IES business units or sold to thirdparties. All project work was completed prior to the business unit beingclosed, and legacy projects were completed by other IES business units.Mid-States’ assets, liabilities and operating results for both the current andprior periods have been reclassified to discontinued operations.  Mid-States was part of our Commercial segmentprior to being classified as discontinued.

 

Remaining networking capital related to these business units was $0.8 million and $4.3million at June 30, 2008 and September 30, 2007, respectively. As aresult of inherent uncertainty in the exit plan and the monetization of thesebusiness units’ working capital, we could experience additional losses ofworking capital. As of June 30, 2008, we believe we have recorded adequatereserves to reflect the net realizable value of the working capital; however,subsequent events may impact our ability to collect these receivables.

 

The exit plan issubstantially complete for the business units that we selected to exit in March 2006,with the operations of these business units having substantially ceased as of September 30,2006. Mid-States’ operations were shut down as of June 30, 2007.  

 

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We have included theresults of operations related to these business units in discontinuedoperations for the three months and nine months ended June 30, 2008, andall prior periods presented have been reclassified accordingly.

 

Summarizedfinancial data for all discontinued operations are outlined below (inthousands):

 
| ** **                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Revenues                                                                     |       | $                                               | 92         |   | $ | 1,660 |   |
| Gross profit                                                                 |       | $                                               | 68         |   | $ | 13 |   |
| Pre-tax income (loss)                                                        |       | $                                               | 48         |   | $ | (29 | ) |
|                                                                         |       |                                            |       |   |   |
| ** **                                                                   | ** ** | **Nine Months Ended  June 30,**  | ** ** |
| ** **                                                                   | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Revenues                                                                     |       | $                                               | 1,025      |   | $ | 7,885 |   |
| Gross profit (loss)                                                          |       | $                                               | 464        |   | $ | (1,635 | ) |
| Pre-tax income (loss)                                                        |       | $                                               | 386        |   | $ | (2,204 | ) |
|                                                                         |       |                                            |       |   |   |
| ** **                                                                   | ** ** | **June 30,  2008**                         | ** ** | **September 30,  2007** | ** ** |
| Accounts receivable, net                                                     |       | $                                               | 1,374      |   | $ | 6,184 |   |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | 5                                               |       | 8 |   |
| Property and equipment, net                                                  |       | 210                                             |       | 239 |   |
| Total assets                                                                 |       | $                                               | 1,589      |   | $ | 6,431 |   |
|                                                                         |       |                                            |       |   |   |
| Accounts payable                                                             |       | $                                               | 167        |   | $ | 600 |   |
| Accrued liabilities                                                          |       | 336                                             |       | 522 |   |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 86                                              |       | 798 |   |
| Total liabilities                                                            |       | 589                                             |       | 1,920 |   |
| Net assets                                                                   |       | $                                               | 1,000      |   | $ | 4,511 |   |

 

**3. DEBT AND LIQUIDITY**

 

Debt consists ofthe following (in thousands):

 
| ** **                                                                        | ** ** | **June 30,  2008** | ** ** | **September 30,  2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| Term Loan, due May 15, 2013, bearing interest  at 11.0%                      |       | $                       | 25,000     |                         | $          | — |   |
| Term Loan, due May 12, 2013, bearing interest  at an adjusted rate of 10.75% |       | —                  |       | 45,598                       |       |
| Capital lease and other                                                           |       | 277                     |       | 178                          |       |
| Total debt                                                                        |       | 25,277                  |       | 45,776                       |       |
| Less — Short-term debt and current maturities  of long-term debt        |       | (150                    | )          | (78                          | )          |
| Total long-term debt                                                              |       | $                       | 25,127     |                         | $          | 45,698 |   |

 

Futurepayments on debt at June 30, 2008 are as follows (in thousands):

 
| 2008       |   | 40     |   |
|------------|--------|--------|--------|
| 2009       |   | 140    |   |
| 2010       |   | 90     |   |
| 2011       |   | 7      |   |
| 2012       |   | — |   |
| Thereafter |   | 25,000 |   |
| Total      |   | $      | 25,277 |   |
|            |        |        |        |  |

 

For the three months ended June 30, 2008and 2007, we incurred interest expense of $1.3 million and $2.8 million,respectively.  These interest expensesinclude amortization of deferred financing charges of $0.3 million and $0.4million for the three months ended June 30, 2008 and 2007,respectively.  For the nine months ended June 30,2008 and 2007, we incurred interest expense of $7.6 million and $7.9 million,respectively.   These interest expensesinclude deferred financing charges of $1.7 million and $0.9 million, 

 

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for the nine months ended June 30, 2008and 2007, respectively, and prepayment penalties of $2.1 million and $0.7million incurred during December 2007 and May 2007, respectively.

 

*The Tontine Capital Partners Term Loan*

 

On December 12, 2007, we entered into a $25.0 million seniorsubordinated loan agreement (the “Tontine Term Loan”) with Tontine CapitalPartners, L.P., a related party.  Theproceeds of the Tontine Term Loan, together with cash on hand, were used tofund the repayment of the Eton Park Term Loan (discussed below).

 

The Tontine Term Loan bears interest at 11.0% per annum and is due on May 15,2013.  Interest is payable quarterly,beginning on December 31, 2007, in cash or in-kind at our option. Any interestpaid in-kind will bear interest at the same rate (11.0%) as the Tontine TermLoan.  We may repay the Tontine Term Loanat any time prior to the maturity date at par, plus accrued interest withoutpenalty.  The Tontine Term Loan issubordinated to our existing Revolving Credit Facility (as defined below). TheTontine Term Loan is an unsecured obligation of the Company and its subsidiaryborrowers. The Tontine Term Loan contains no financial covenants orrestrictions on dividends or distributions to stockholders.

 

*The Revolving Credit Facility*

 

On May 12,2006, we entered into an agreement (the “Loan and Security Agreement”) for arevolving credit facility (the “Revolving Credit Facility”) with Bank ofAmerica and certain other lenders.  On May 9,2008, we renegotiated the terms of our Revolving Credit Facility and enteredinto an amended agreement with the same financial institutions.

 

The RevolvingCredit Facility provides access to revolving borrowings in the aggregate amountof up to $60.0 million. At June 30, 2008, we had $37.6 million in lettersof credit issued against the Revolving Credit Facility and $14.4 millionavailable under the Revolving Credit Facility.

 

The Revolving Credit Facility is guaranteed by our subsidiaries andsecured by first priority liens on substantially all of our and oursubsidiaries’ existing and future acquired assets, exclusive of collateralprovided to sureties. The Revolving Credit Facility contains customaryaffirmative, negative and financial covenants that were modified in conjunctionwith its renewal and amendment on May 9, 2008. The financial covenants aredescribed below in the section titled “Financial Covenants”. The RevolvingCredit Facility also restricts us from paying cash dividends and placeslimitations on our ability to repurchase our common stock.  The maturity date of the Revolving CreditFacility is May 12, 2010.

 

Under therenegotiated terms of our Revolving Credit Facility interest is calculated atLIBOR plus 3.0%, or the lender’s prime rate (the “Base Rate”) plus 1.0% throughSeptember 30, 2008.  Thereafter,interest is based on our total liquidity, which is calculated as cash on handplus availability under the revolving credit facility, as shown in thefollowing table.

 
| **Total Liquidity**        | ** ** | **Interest Rate**                    | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| Greater than $60 million        |       | LIBOR plus 2.75% or Base  Rate plus 0.75% |       |
| From $40 million to $60 million |       | LIBOR plus 3.00% or Base Rate plus 1.00%  |       |
| Less than $40 million           |       | LIBOR plus 3.25% or Base  Rate plus 1.25% |       |

 

The letter ofcredit fee under the revised agreement is 3.25% through September 30,2008, after which the letter of credit fee will be based on the same factor asloans outstanding.

 

In addition, wewill be charged monthly in arrears (1) an unused line fee of either 0.5%or 0.375%, depending on the utilization of the credit line, and (2) certainother fees and charges as specified in the revolving credit agreement.  Finally, the Revolving Credit Facility issubject to a prepayment fee of 0.5% until May 2009 and 0.25% until May 2010.  We incurred a $275,000 charge from Bank ofAmerica as a result of the amendment, of which $200,000 is classified as aprepaid expense and is being amortized over 12 months and $75,000 is classifiedas a deferred financing fee and is being amortized over 24 months.

 

Through May 9,2008, loans under the Revolving Credit Facility bore interest at LIBOR plus3.5% or the base rate plus 1.5% on the terms set in the credit agreement. Inaddition, we were charged monthly in arrears (1) an unused line fee ofeither 0.5% or 0.375%, depending on the utilization of the credit line, (2) aletter of credit fee equal to the applicable per annum LIBOR margin times theamount of all outstanding letters of credit, and (3) certain other feesand charges as specified in the revolving credit agreement.

 

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*Financial Covenants*

 

The financialcovenants for the Revolving Credit Facility as in effect on June 30, 2008,are described in the table that follows. As of June 30, 2008, we are incompliance with each of the following amended financial covenants under theRevolving Credit Facility:

 
| **Covenant**                                              | ** ** | **Requirement**                            | ** ** | **Actual**                      | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|
| Shutdown Subsidiaries  Earnings Before Interest and Taxes |       | Cumulative loss not to exceed $2.0 million |       | Cumulative loss of $1.0 million |       |
| Fixed Charge Coverage Ratio                               |       | Minimum of 1.25:1.00                       |       | N/A (1)                         |       |
| Leverage Ratio                                            |       | Maximum of 3.50:1.00                       |       | N/A (1)                         |       |

 

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(1)              Thiscovenant requirement will not be in effect at any time our total liquidity, asdefined in the Loan and Security Agreement, exceeds $50 million.

 

As of September 30,2007, we were also in compliance with all of our financial covenants under theRevolving Credit Facility.

 

*The Eton Park / Flagg Street Term Loan*

 

Immediately preceding our emergence from bankruptcy, we had $51.9million in senior convertible notes (the “Senior Convertible Notes”). On thedate we emerged from bankruptcy, May 12, 2006, we entered into a $53.0million senior secured term loan (the “Eton Park Term Loan”) with Eton ParkFund L.P. and its affiliate and Flagg Street Partners LP and certain of itsaffiliates to refinance the Senior Convertible Notes.  On December 12, 2007, we repaid the EtonPark Term Loan using cash on hand and the proceeds from a new seniorsubordinated note.  Along with aprepayment penalty of $2.1 million that was included in interest expense andaccrued interest of $1.0 million, the payoff amount was $48.7 million.  Finally, we wrote off previously unamortizeddebt issuance costs of $0.3 million on the Eton Park Term Loan.

 

The Eton Park TermLoan bore interest at 10.75% per annum, subject to adjustment as set forth inthe loan agreement governing the Eton Park Term Loan, and was to mature on May 12,2013. Interest was payable in cash, quarterly in arrears, provided that, at oursole discretion, until the third anniversary of the closing date, we had theoption to direct that interest be paid by capitalizing the interest asadditional loans under the Eton Park Term Loan. We capitalized interest asadditional loans of $1.7 million and $5.0 million, respectively, during thethree months and nine months ended June 30, 2007. We did not capitalizeany interest expense during the period from October 1, 2007 to December 12,2007, the date the Eton Park Term Loan was repaid. Through the life of the EtonPark Term Loan, we capitalized interest as additional loans of $7.6 million.The Eton Park Term Loan was guaranteed by our subsidiaries and was secured bysubstantially the same collateral as the Revolving Credit Facility, and wassecond in priority to the liens securing the Revolving Credit Facility.  The interest rate on the Eton Park Term Loanwas adjusted at the end of each quarter based on our performance for the periodfrom January 1, 2006 through the end of the quarter.  Based on this criterion, the adjustedinterest rate on the Eton Park Term Loan was as follows:

 
| **Quarter ended / Period ended:** | ** ** | **Interest Rate** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| December 31, 2006                                |       | 12.60                  | %          |
|                                                  |       |                   |       |
| March 31, 2007                                   |       | 12.00                  | %          |
|                                                  |       |                   |       |
| June 30, 2007                                    |       | 11.55                  | %          |
|                                                  |       |                   |       |
| September 30, 2007                               |       | 10.75                  | %          |
|                                                  |       |                   |       |
| December 12, 2007                                |       | 10.75                  | %          |

 

Our weighted average interest rate under the Eton Park Term Loan was10.75% for the period from October 1, 2007 to December 12, 2007.

 

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**4.EARNINGS PER SHARE**

 

Our restricted shares granted under the 2006 EquityIncentive Plan participate in any dividends declared on our common stock.  Accordingly, the restricted shares areconsidered participating securities under the two-class method as required byEmerging Issues Task Force Issue No. 03-6, “*ParticipatingSecurities and the Two-class method under FASB Statement No. 128*.”  The two-class method is an earningsallocation formula that determines earnings for each class of common stock andparticipating securities according to dividends declared or accumulated andparticipation rights in undistributed earnings. Under the two-class method, netincome is reduced by the amount of dividends declared in the current period foreach class of stock and by the contractual amounts of dividends that must bepaid for the current period. The remaining earnings are then allocated tocommon stock and participating securities to the extent that each security mayshare in earnings as if all of the earnings for the period had beendistributed. Diluted earnings per share is calculated using the treasury stockand “if converted” methods for potential common stock.  Basic earnings per share is calculated asincome (loss) available to common stockholders, divided by the weighted averagenumber of common shares outstanding during the period. If the effect isdilutive, participating securities are included in the computation of basicearnings per share. Our participating securities do not have a contractualobligation to share in the losses in any given period. As a result, theseparticipating securities will not be allocated any losses in the periods of netlosses, but will be allocated income in the periods of net income using thetwo-class method.

 

Thetables that follow reconcile the components of the basic and diluted earningsper share for the three months and nine months ended June 30, 2008 and2007 (in thousands, except per share and per share data):

 
| ** **                                                                       | ** ** | **Three Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| Numerator:                                                                       |       |                                            |       |   |   |
| Net income from continuing operations attributable  to common shareholders       |       | $                                               | 2,000      |   | $ | 1,015 |   |
| Net income from continuing operations attributable  to restricted shareholders   |       | 26                                              |       | 18 |   |
| Net income from continuing operations                                            |       | $                                               | 2,026      |   | $ | 1,033 |   |
|                                                                             |       |                                            |       |   |   |
| Net income from discontinued operations attributable  to common shareholders     |       | $                                               | 12         |   | $ | 171 |   |
| Net income from discontinued operations attributable  to restricted shareholders |       | 0                                               |       | 3 |   |
| Net income from discontinued operations                                          |       | $                                               | 12         |   | $ | 174 |   |
|                                                                             |       |                                            |       |   |   |
| Net income attributable to common shareholders                                   |       | $                                               | 2,012      |   | $ | 1,187 |   |
| Net income attributable to restricted shareholders                               |       | 26                                              |       | 20 |   |
| Net income                                                                       |       | $                                               | 2,038      |   | $ | 1,207 |   |
|                                                                             |       |                                            |       |   |   |
| Denominator:                                                                     |       |                                            |       |   |   |
| Weighted average common shares outstanding — basic                          |       | 14,969,008                                      |       | 15,086,156 |   |
| Effect of dilutive stock options and non-vested  restricted stock                |       | 34,123                                          |       | 77,231 |   |
| Weighted average common and common equivalent shares  outstanding — diluted |       | 15,003,131                                      |       | 15,163,387 |   |
|                                                                             |       |                                            |       |   |   |
| Basic income per share:                                                          |       |                                            |       |   |   |
| Basic income per share from continuing operations                                |       | $                                               | 0.14       |   | $ | 0.07 |   |
| Basic income per share from discontinued operations                              |       | $                                               | 0.00       |   | $ | 0.01 |   |
| Basic income per share                                                           |       | $                                               | 0.14       |   | $ | 0.08 |   |
|                                                                             |       |                                            |       |   |   |
| Diluted income per share:                                                        |       |                                            |       |   |   |
| Diluted income per share from continuing operations                              |       | $                                               | 0.14       |   | $ | 0.07 |   |
| Diluted income per share from discontinued  operations                           |       | $                                               | 0.00       |   | $ | 0.01 |   |
| Diluted income per share                                                         |       | $                                               | 0.14       |   | $ | 0.08 |   |

 

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| ** **                                                                          | ** ** | **Nine Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Numerator:                                                                          |       |                                           |       |   |   |
| Net income from continuing operations attributable  to common shareholders          |       | $                                              | 1,075      |   | $ | 521 |   |
| Net income from continuing operations attributable  to restricted shareholders      |       | 16                                             |       | 10 |   |
| Net income from continuing operations                                               |       | $                                              | 1,091      |   | $ | 531 |   |
|                                                                                |       |                                           |       |   |   |
| Net income (loss) from discontinued operations  attributable to common shareholders |       | $                                              | 186        |   | $ | (864 | ) |
| Net income from discontinued operations attributable  to restricted shareholders    |       | 3                                              |       | — |   |
| Net income (loss) from discontinued operations                                      |       | $                                              | 189        |   | $ | (864 | ) |
|                                                                                |       |                                           |       |   |   |
| Net income (loss) attributable to common  shareholders                              |       | $                                              | 1,261      |   | $ | (333 | ) |
| Net income attributable to restricted shareholders                                  |       | 19                                             |       | — |   |
| Net income (loss)                                                                   |       | $                                              | 1,280      |   | $ | (333 | ) |
|                                                                                |       |                                           |       |   |   |
| Denominator:                                                                        |       |                                           |       |   |   |
| Weighted average common shares outstanding — basic                             |       | 15,026,675                                     |       | 15,047,956 |   |
| Effect of dilutive stock options and non-vested  restricted stock                   |       | 82,660                                         |       | 15,966 |   |
| Weighted average common and common equivalent shares  outstanding — diluted    |       | 15,109,335                                     |       | 15,063,922 |   |
|                                                                                |       |                                           |       |   |   |
| Basic income (loss) per share:                                                      |       |                                           |       |   |   |
| Basic income per share from continuing operations                                   |       | $                                              | 0.07       |   | $ | 0.04 |   |
| Basic income (loss) per share from discontinued  operations                         |       | $                                              | 0.01       |   | $ | (0.06 | ) |
| Basic income (loss) per share                                                       |       | $                                              | 0.09       |   | $ | (0.02 | ) |
|                                                                                |       |                                           |       |   |   |
| Diluted income (loss) per share:                                                    |       |                                           |       |   |   |
| Diluted income (loss) per share from continuing  operations                         |       | $                                              | 0.07       |   | $ | 0.04 |   |
| Diluted income (loss) per share from discontinued  operations                       |       | $                                              | 0.01       |   | $ | (0.06 | ) |
| Diluted loss per share                                                              |       | $                                              | 0.08       |   | $ | (0.02 | ) |

 

**5.OPERATING SEGMENTS**

 

In accordance withSFAS No. 131, *“Disclosures aboutSegments of an Enterprise**andRelated Information”*certain information is disclosed based on theway management organizes financial information for making operating decisionsand assessing performance.

 

We manage and measureperformance of our business in three distinct operating segments: Commercial, Industrial,and Residential.  We also have aCorporate segment that provides general and administrative services to ouroperating segments. The Commercial segment provides electrical andcommunications design, installation, renovation, engineering and maintenanceand replacement services in facilities such as office buildings, high-riseapartments and condominiums, theaters, restaurants, hotels, hospitals andcritical-care facilities, school districts, light manufacturing and processingfacilities, military installations, airports, outside plant, networkenterprises and switch network customers. The Industrial segment provideselectrical design, installation, renovation and engineering and maintenance andreplacement services in facilities such as manufacturing and distributioncenters, water treatment facilities, refineries, petrochemical and powerplants, and alternative energy facilities. In addition to these services, our Industrial segment also designs andassembles modular power distribution centers. The Residential segment consists of electrical installation, replacementand renovation services in single-family, condominium, townhouse and low-risemultifamily housing units. The Corporate segment includes expenses associatedwith our home office, which provides support services to the other segments.

 

The accountingpolicies of the segments are the same as those described in the summary ofsignificant accounting policies, see Note 5 to our Consolidated FinancialStatements included in our Annual Report on Form 10-K for the year ended September 30,2007. We evaluate performance based on income from operations of the respectivebusiness units prior to home office expenses. Management allocates costsbetween segments for selling, general and administrative expenses, goodwillimpairment, depreciation expense, capital expenditures and total assets.  In our previous financial statements wemanaged and measured our performance in two operating segments; commercial andindustrial, and residential.  On October 1,2007, in conjunction with our restructuring program described in Note 2, webegan to utilize the three segment approach that we have described above.  Accordingly, we have restated our prior yearsegment results to be consistent with the current year presentation.

 

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Segmentinformation for continuing operations for the three months and nine monthsended June 30, 2008 and 2007 is as follows (in thousands):

 
| ** **                            | ** ** | **Three Months Ended June 30, 2008 (Unaudited)** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Commercial**                                                                 | ** ** | **Industrial** | ** ** | **Residential** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                              |       | $                                                                              | 125,547    |   | $ | 33,676 |   | $ | 55,262 |   | $ | — |   | $ | 214,485 |   |
| Cost of services                      |       | 108,166                                                                        |       | 27,673 |   | 44,748 |   | — |   | 180,587 |   |
| Gross profit                          |       | 17,381                                                                         |       | 6,003 |   | 10,514 |   | — |   | 33,898 |   |
| Selling, general and administrative   |       | 9,934                                                                          |       | 1,932 |   | 8,419 |   | 7,767 |   | 28,052 |   |
| Loss (gain) on sale of assets         |       | (58                                                                            | )          | (12 | ) | (5 | ) | (40 | ) | (115 | ) |
| Restructuring charge                  |       | 898                                                                            |       | 108 |   | 32 |   | — |   | 1,038 |   |
| Income (loss) from operations         |       | $                                                                              | 6,607      |   | $ | 3,975 |   | $ | 2,068 |   | $ | (7,727 | ) | $ | 4,923 |   |
| Other data:                           |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense |       | $                                                                              | 550        |   | $ | 243 |   | $ | 468 |   | $ | 587 |   | $ | 1,848 |   |
| Capital expenditures                  |       | $                                                                              | 41         |   | $ | 34 |   | $ | 58 |   | $ | 2,847 |   | $ | 2,980 |   |
| Total assets                          |       | $                                                                              | 132,488    |   | $ | 31,762 |   | $ | 48,179 |   | $ | 107,230 |   | $ | 319,659 |   |

 
| ** **                            | ** ** | **Three Months Ended June 30, 2007 (Unaudited)** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Commercial**                                                                 | ** ** | **Industrial** | ** ** | **Residential** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                              |       | $                                                                              | 113,201    |   | $ | 29,776 |   | $ | 79,654 |   | $ | — |   | $ | 222,631 |   |
| Cost of services                      |       | 95,417                                                                         |       | 23,998 |   | 64,906 |   | — |   | 184,322 |   |
| Gross profit                          |       | 17,784                                                                         |       | 5,778 |   | 14,748 |   | — |   | 38,309 |   |
| Selling, general and administrative   |       | 11,474                                                                         |       | 2,594 |   | 9,264 |   | 10,781 |   | 34,113 |   |
| Loss (gain) on sale of assets         |       | (88                                                                            | )          | (19 | ) | 12 |   | 4 |   | (91 | ) |
| Income (loss) from operations         |       | $                                                                              | 6,398      |   | $ | 3,203 |   | $ | 5,472 |   | $ | (10,785 | ) | $ | 4,287 |   |
| Other data:                           |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense |       | $                                                                              | 1,313      |   | $ | 5 |   | $ | 326 |   | $ | 933 |   | $ | 2,577 |   |
| Capital expenditures                  |       | $                                                                              | 387        |   | $ | 66 |   | $ | 103 |   | $ | 137 |   | $ | 693 |   |
| Total assets                          |       | $                                                                              | 111,034    |   | $ | 31,494 |   | $ | 82,857 |   | $ | 125,525 |   | $ | 350,910 |   |

 
| ** **                            | ** ** | **Nine Months Ended June 30, 2008 (Unaudited)** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Commercial**                                                                | ** ** | **Industrial** | ** ** | **Residential** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                              |       | $                                                                             | 346,719    |   | $ | 101,362 |   | $ | 160,876 |   | $ | — |   | $ | 608,957 |   |
| Cost of services                      |       | 297,131                                                                       |       | 84,772 |   | 129,394 |   | — |   | 511,297 |   |
| Gross profit                          |       | 49,588                                                                        |       | 16,590 |   | 31,482 |   | — |   | 97,660 |   |
| Selling, general and administrative   |       | 30,533                                                                        |       | 6,465 |   | 25,131 |   | 24,154 |   | 86,283 |   |
| Loss (gain) on sale of assets         |       | (177                                                                          | )          | (13 | ) | 56 |   | (5 | ) | (139 | ) |
| Restructuring charge                  |       | 3,923                                                                         |       | 335 |   | 173 |   | — |   | 4,431 |   |
| Income (loss) from operations         |       | $                                                                             | 15,309     |   | $ | 9,803 |   | $ | 6,122 |   | $ | (24,149 | ) | $ | 7,085 |   |
| Other data:                           |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense |       | $                                                                             | 1,914      |   | $ | 858 |   | $ | 1,801 |   | $ | 1,861 |   | $ | 6,434 |   |
| Capital expenditures                  |       | $                                                                             | 211        |   | $ | 568 |   | $ | 344 |   | $ | 6,352 |   | $ | 7,475 |   |
|                                  |       |                                                                          |       |   |   |   |   |   |   |   |   |
| ** **                            | ** ** | **Nine Months Ended June 30, 2007 (Unaudited)** | ** ** |
| ** **                            | ** ** | **Commercial**                                                                | ** ** | **Industrial** | ** ** | **Residential** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                              |       | $                                                                             | 339,504    |   | $ | 87,614 |   | $ | 238,859 |   | $ | — |   | $ | 665,977 |   |
| Cost of services                      |       | 286,976                                                                       |       | 72,860 |   | 194,133 |   | — |   | 553,969 |   |
| Gross profit                          |       | 52,528                                                                        |       | 14,754 |   | 44,726 |   | — |   | 112,008 |   |
| Selling, general and administrative   |       | 35,935                                                                        |       | 6,944 |   | 27,112 |   | 34,783 |   | 104,774 |   |
| Loss (gain) on sale of assets         |       | (171                                                                          | )          | (46 | ) | 39 |   | 61 |   | (117 | ) |
| Income (loss) from operations         |       | $                                                                             | 16,764     |   | $ | 7,856 |   | $ | 17,575 |   | $ | (34,844 | ) | $ | 7,351 |   |
| Other data:                           |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense |       | $                                                                             | 3,825      |   | $ | 12 |   | $ | 950 |   | $ | 2,720 |   | $ | 7,507 |   |
| Capital expenditures                  |       | $                                                                             | 703        |   | $ | 333 |   | $ | 349 |   | $ | 240 |   | $ | 1,625 |   |

 

Wehave no operations or long-lived assets in countries outside of the UnitedStates.

 

Total assets as ofJune 30, 2008 and 2007 exclude assets from discontinued operations of $1.5million and $10.6 million, respectively.

 

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**6.  STOCKHOLDERS’ EQUITY**

 

On May 12, 2008, 10,555 shares of outstanding common stock thatwere reserved for issuance upon exchange of previously issued shares pursuantto our plan of reorganization were cancelled.

 

The 2006 EquityIncentive Plan (the “2006 Plan”) became effective on May 12, 2006. The2006 Plan, as amended, provides for grants of both stock options and commonstock, including restricted stock and performance-based restricted stock. Wehave approximately 1.5 million shares of common stock authorized forissuance under the 2006 Plan.

 

*Treasury Stock*

 

On December 12,2007, we entered into an amendment to our Loan and Security Agreement.  The amendment permitted us to pay off theEton Park Term Loan and enter into a new subordinated note agreement for areduced principal amount.  Further, theamendment allowed us to implement a stock repurchase program for up to onemillion shares of our common stock over the following 24 months. On December 12, 2007, our Board ofDirectors authorized the repurchase of up to one million shares of our commonstock.  This share repurchase plan is authorized through December 2009,and as of June 30, 2008, we have repurchased 346,594 shares at an averagecost of $17.81.  During the nine months ended June 30, 2008, werepurchased 33,008 shares from our employees to satisfy tax withholdingrequirements upon the vesting of restricted stock issued under the Amended andRestated 2006 Equity Incentive Plan, we issued 101,650 shares of treasury stockunder our share-based compensation programs, and 47,855 unvested shares havebeen forfeited by former employees and returned to treasury stock.

 

*RestrictedStock*

 

We granted 101,650shares of restricted stock to our employees during the first nine months of our2008 fiscal year.  These restrictedshares were granted at prices ranging from $13.38 to $19.98 with a weightedaverage price of $19.17.  7,500 of theseshares vest one-third per year beginning on the first anniversary of the grant,and the remaining 94,150 cliff vest on the third anniversary of the grant.

 

We granted 27,600shares of restricted stock to our employees during the first nine months of our2007 fiscal year. These restricted shares were granted at prices ranging from$23.61 to $26.48 with weighted average price of $25.12 under various vestingterms.

 

During the three months ended June 30, 2008 and 2007, werecognized $0.6 million and $0.6 million, respectively, in compensation expenserelated to these awards.  During the ninemonths ended June 30, 2008 and 2007, we recognized $2.0 million and $3.1million, respectively, in compensation expense related to these awards.  As of June 30, 2008, the unamortizedcompensation cost related to outstanding unvested restricted stock was $2.5million.  We expect to recognize $0.6million related to these awards during the remaining three months of our 2008fiscal year, and $1.9 million thereafter.

 

All the restrictedshares granted under the 2006 Plan (vested or unvested) participate individends issued to common shareholders, if any.

 

*Performance-Based Restricted Stock*

 

During the ninemonths ended June 30, 2008, we granted 15 members of our senior managementteam performance-based phantom stock units (“PSUs”).  Each PSU is convertible into shares ofrestricted common stock that will cliff vest on September 30, 2010,subject to the terms of the award.  Thesize of the award is based on the Company achieving cumulative fully dilutedearnings per share of $2.30 over the course of our 2008 and 2009 fiscalyears.  The potential range of this awardis between 0 and 188,300 shares of restricted stock, depending on the actualcumulative earnings per share for this period.

 

At the time the awards were granted, we forecasted that we willultimately issue 94,150 restricted shares, based on our achieving cumulativefully diluted earnings per share of $2.30 over the course of our 2008 and 2009fiscal years, and we have based our compensation expense on this amount.  The awards vest over three years and arebeing amortized in a straight-line manner throughout that period.  As of June 30, 2008, we believe ourtarget estimate is reasonable; however, any deviation in the cumulative fullydiluted earnings per share that we achieve during our 2008 and 2009 fiscalyears will result in a change in the actual amount of stock based compensationthat we recognize over the vesting period. Under SFAS 123(R), the estimated fair value of these PSUs on the date ofgrant was $1.5 million.

 

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During the three months and nine months ended June 30, 2008, werecognized $0.1 million and $0.3 million, respectively, in compensation expenserelated to these PSU awards.  As of June 30,2008, the unamortized compensation cost related to the PSU awards was $1.2million.  We expect to recognize $0.1million related to these awards during the remaining three months of our 2008fiscal year, and $1.1 million thereafter.

 

*StockOptions*

 

We granted 21,000 stock options during thenine months ended June 30, 2008. These options have exercise prices ranging from $13.38 to $18.79 with aweighted average exercise price of $16.21. These options vest over a three yearperiod at a rate of one-third on the annual anniversary date of the grant andexpire ten years from the grant date if they are not exercised.

 

We granted 40,000 stock options during thenine months ended June 30, 2007. These options have exercise prices ranging from $25.08 to $33.35 with aweighted average exercise price of $27.15. These options vest over a three yearperiod at a rate of one-third on the annual anniversary date of the grant andexpire ten years from the grant date if they are not exercised.

 

During the three months ended June 30, 2008 and 2007, werecognized $0.1 million and $0.1 million, respectively, in compensation expenserelated to these awards.  During the ninemonths ended June 30, 2008 and 2007, we recognized $0.4 million and $0.3million, respectively, in compensation expense related to these awards.  As of June 30, 2008, the unamortizedcompensation cost related to outstanding unvested stock options was $0.8million.  We expect to recognize $0.1million related to these awards during the remaining three months of our 2008fiscal year, and $0.6 million thereafter.

 

The followingtable summarizes activity under our stock option and incentive compensationplans.

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|--------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Outstanding, September 30, 2007 |       | 191,471    |       | $                                              | 26.66      |   |
| Options granted                      |       | 21,000     |       | 16.21                                          |       |
| Exercised                            |       | —     |       | —                                         |       |
| Expired                              |       | (51,471    | )          | 44.36                                          |       |
| Forfeited                            |       | (5,000     | )          | 13.38                                          |       |
| Outstanding, June 30, 2008      |       | 156,000    |       | $                                              | 19.84      |   |
| Exercisable, June 30, 2008      |       | 33,333     |       | $                                              | 17.36      |   |

 

Thefollowing table summarizes all options outstanding and exercisable at June 30,2008:

 
| **Range of Exercise Prices** | ** ** | **Outstanding as of  June 30, 2008** | ** ** | **Remaining  Contractual Life  in Years** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Exercisable as of  June 30, 2008** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------|------------|
| $13.38 - $18.79                             |       | 116,000                                                  |       | 8.3                                                 |       | $                                         | 17.32      |                                                     | $          | 33,333                                    |       | $ | 17.36 |   |
| $25.08 - $33.55                             |       | 40,000                                                   |       | 8.8                                                 |       | 27.15                                     |       | —                                                   |       | —                                    |       |
|                                        |       | 156,000                                                  |       | 8.4                                                 |       | $                                         | 19.84      |                                                     | $          | 33,333                                    |       | $ | 17.36 |   |
|                                             |            |                                                          |            |                                                     |            |                                           |            |                                                          |            |                                           |            |  |  |  |  |

 

Upon exercise ofstock options, it is our policy to first issue shares from treasury stock, thento issue new shares.  Unexercised optionsexpire between July 2016 and January 2018.

 

**7. COMMITMENTS AND CONTINGENCIES**

 

*Legal Matters*

 

In theconstruction business there are frequently claims and litigation. Latent defectlitigation is a normal course for residential home builders in certain parts ofthe country and it appears that such litigation will continue and expand intoother parts of the country. There is also the inherent claims and litigationrisk of the number of people that work on construction sites and the fleet ofvehicles on the road everyday. Those claims and litigation risks areproactively managed through safety programs, insurance programs, litigationmanagement at the corporate office and the local level, and a network ofattorneys and law firms throughout the country. Nevertheless, claims aresometimes made and lawsuits filed and sometimes for amounts in excess of theirvalue or amounts for which they are eventually resolved. Claims and litigationnormally follow a predictable course of time to resolution. Given our size,with many contracts and employees, there can be periods of time where adisproportionate amount of the claims and litigation may be concluded all inthe same quarter, or year. If these matters resolve near the same time then thecumulative effect can be higher than the ordinary 

 

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level in any onereporting period.  In our opinion, allsuch proceedings are either adequately covered by insurance or, if not socovered, should not ultimately result in any liability which would have a materialadverse effect on our financial position, liquidity or results of operations.We expense routine legal costs related to proceedings as incurred.

 

We are not awareof any litigation or pending litigation that we currently believe will have amaterial impact on our results of operations or our financial position.

 

We are subject tolarge deductibles on our property and casualty insurance policies.  As a result, many or our claims areeffectively self-insured. Many claims against our insurance are in the form oflitigation. At June 30, 2008, we have $12.0 million accrued for selfinsurance liabilities including $3.9 million for general liability coveragelosses. We are also subject to construction defect liabilities, primarilywithin our Residential segment.  Webelieve the likely range of our potential liability for construction defects isfrom $0.5 million to $1.0 million.  As ofJune 30, 2008, we have reserved $0.5 million for these claims, inaccordance with SFAS 5, “*Accounting forContingencies*”.  Finally, forthose legal proceedings not expected to be covered by insurance, we haveaccrued $0.1 million at June 30, 2008.

 

*Surety*

 

Many of our customers require us to postperformance and payment bonds issued by a surety. Those bonds guarantee thecustomer that we will perform under the terms of a contract and that we willpay our subcontractors and vendors. In the event that we fail to perform undera contract or pay subcontractors and vendors, the customer may demand thesurety to pay or perform under our bond. Our relationship with our sureties issuch that we will indemnify the sureties for any expenses they incur inconnection with any of the bonds they issue on our behalf. To date, we have notincurred significant expenses to indemnify our sureties for expenses theyincurred on our behalf. As of June 30, 2008, our cost to complete projectscovered by surety bonds was $128.9 million. As of June 30, 2008, we utilized a combination of cash and lettersof credit totaling $34.1 million, which was comprised of $22.5 million inletters of credit and $11.5 million of cash and accumulated interest (as isincluded in Other Non-Current Assets), to collateralize our bonding programs.

 

We obtain oursurety bonds from three different providers. As is common in the suretyindustry, there is no commitment from these providers to guarantee our abilityto issue bonds for projects as they are required. We believe that ourrelationships with these providers will allow us to provide surety bonds if andwhen they are required, however we cannot guarantee that such bonds will beavailable. If surety bonds are not provided, there are situations in whichclaims or damages may result. Those situations occur when surety bonds arerequired for jobs that have been awarded, contracts are signed, work has begunor bonds may be required in the future by the customer according to terms ofthe contracts. If our subsidiaries are in one of those situations and not ableto obtain a surety bond, then the result can be a claim for damages by thecustomer for the costs of replacing the subsidiary with another contractor.Customers are often reluctant to replace an existing contractor and may bewilling to waive the contractual right or through negotiation be willing tocontinue the work on different payment terms. We evaluate our bonding requirements on a regular basis, including theterms and coverage offered by each provider. We believe we presently have adequate surety coverage.

 

Surety bondcompanies may also provide surety bonds at a cost including (i) payment ofa premium plus (ii) posting cash or letters of credit as collateral. Thecost of cash collateral or letters of credit in addition to the selling,general and administrative costs and the industry practice of the customerretaining a percentage of the contract (5% - 10%) amount as retention until theend of the job, could make certain bonded projects uneconomic to perform.

 

*Other Commitments and Contingencies*

 

Some of theunderwriters of our casualty insurance program require us to post letters ofcredit as collateral. This is common in the insurance industry. To date, wehave not had a situation where an underwriter has had reasonable cause toeffect payment under a letter of credit. At June 30, 2008, $14.7 millionof our outstanding letters of credit were utilized to collateralize ourinsurance program.

 

We sold all orsubstantially all of the assets of certain wholly owned subsidiaries. Thosesales were made to facilitate the business needs and purposes of theorganization as a whole. Since we were a consolidator of electrical contractingbusinesses, often the best candidate to purchase those assets is a previousowner of those assets. That previous owner may still be associated with thesubsidiary as an officer of that subsidiary. To facilitate the desired timing,the sales were being made with more than ordinary reliance on therepresentations of the purchaser who is, in those cases, often the person mostfamiliar with the business sold. There is the potential from selling assets netof liabilities, but retaining the entities from which they were sold, that ifthe purchaser is unwilling or unable to perform the transferred liabilities, wemay be forced to fulfill obligations that were assigned or sold to others. Ifthis were to occur, we 

 

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would seekreimbursement from the purchasers. These potential liabilities will continue todiminish over time. To date, we have not been required to perform any projectssold under this divestiture program.

 

From time to time,we may enter into firm purchase commitments for materials such as copper wireand aluminum wire among others which we expect to use in the ordinary course ofbusiness. These commitments are typically for terms less than one year andrequire us to buy minimum quantities of materials at specific intervals at afixed price over the term. As of June 30, 2008, we had $1.8 million inopen purchase commitments for copper wire which we expect to take delivery onbetween July 2008 and August 2008.

 

As of June 30,2008, one of our business units has received approximately $4.9 million inbackcharges from a customer which we are disputing.  We have performed an evaluation of the meritsof the backcharges and, as a result, recorded $0.4 million as a loss reserve,included in current liabilities, specifically related to these backcharges. Theremaining claim associated with the backcharges is approximately $4.5 millionfor which we have not recorded any liability as we do not believe in thevalidity of the claims or that the payment is probable.  In 2006 we reversed previously recognizedrevenues related to this project of $0.5 million and wrote off a related $0.4million receivable and $0.1 million underbilling because we believed therevenues were uncollectible.   Werecognize that litigation may ensue related to the entire $4.9 million inbackcharges.  While we believe thesecharges are substantially without merit, there can be no assurances that wewill ultimately prevail in this dispute or any litigation that may becommenced.

 

In March 2008 we reached a $1.1 million settlement with a group offormer employees, out of which $0.4 million was recorded as a reduction of ourlegal fees in selling, general and administrative expenses, and the remaining$0.7 million as other income. This settlement was to compensate the Company fordamages associated with these employees’ departure from the Company.  We collected this settlement in full in March 2008.

 

We have committedto invest up to $5.0 million in EnerTech Capital Partners II L.P. (“EnerTech”).EnerTech is a private equity firm specializing in investment opportunitiesemerging from the deregulation and resulting convergence of the energy, utilityand telecommunications industries. Through June 30, 2008, we had invested$4.9 million under our commitment to EnerTech.

 

We are party to anarrangement with a third party to finance certain insurance premiums for whichthat company has rights to receive a refund of amounts paid to the insurancecompanies should we cancel the underlying insurance policies. At June 30,2008, we had $2.0 million in prepaid expenses and a corresponding $1.0 millionaccrued liability related to this arrangement.

 

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**ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

You should readthe following discussion of our financial condition and results of operationswith our audited consolidated financial statements, the related Notes, andmanagement’s discussion and analysis included in our September 30, 2007Annual Report on Form 10-K. This discussion contains forward-lookingstatements and involves numerous risks and uncertainties, including, but notlimited to the risk factors discussed in the “Risk Factors” section of our Form 10-Kand in the “Disclosures Regarding Forward-Looking Statements,” and elsewhere inthis Form 10-Q.  Actual results maydiffer materially from those contained in any forward-looking statements.

 

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

 

Our discussion andanalysis of our financial condition and results of operation are based on ourcondensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. Preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses.

 

We have identified theaccounting principles that we believe are most critical to our reportedfinancial status by considering accounting policies that involve the mostcomplex or subjective decisions or assessments. We identified our most criticalaccounting policies to be those related to revenue recognition, the assessmentof goodwill impairment, our allowance for doubtful accounts receivable, therecording of our self-insurance liabilities and our estimation of the valuationallowance for deferred tax assets. These accounting policies, as well asothers, are described in Note 5 of “*Notes to ConsolidatedFinancial Statements*” in our 2007 Form 10-K.

 

During the firstnine months of our 2008 fiscal year, there has been only one change to ourcritical accounting policies and estimates from those described in our 2007 Form 10-K.On October 1, 2007, we adopted the provisions of FASB Interpretation No. 48,“*Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement 109”* (“FIN 48”).  FIN 48 created a single model to addressaccounting for uncertain income tax positions and established a minimumrecognition threshold a tax position must meet before being recognized in thefinancial statements. For additional analysis of our adoption of FIN 48, seeItem 1*. Condensed ConsolidatedFinancial Statements*— Note 1, *“Business*”of this report.

 

**RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

 

We discussrecently adopted and issued accounting standards in Item 1*. Condensed Consolidated Financial Statements*—Note 1, *“Business”*of this report.

 

**TRANSFORMATION PROGRAM**

 

Throughout the 2008fiscal year, we have undergone a transformation program at our business unitsand at our Corporate office.  We arereinvesting in our business by improving our systems and processes to make usmore efficient and effective.  Inaddition, we are strengthening the overall capabilities of our workforce andacquiring individuals who have the critical skills necessary to advance theCompany.

 

Consistent with thisinitiative, we have hired a director of organizational learning and developmentwho is responsible for our training programs, and we have hired a director oftalent acquisition responsible for establishing new methods and sources of recruitingfor the purpose of improving our workforce.

 

During the year wealso implemented a leadership development program that is designed tofacilitate the effectiveness of our collective decision making and to enable anintegrated culture.  To date, approximately40 of our executives, directors, and managers have attended this trainingcourse, and an additional 50 are scheduled to attend over the next few months.

 

In the third quarter of2008, as part of the transformation program and to support the consolidation ofour businesses, we have rebranded our business units as IES Commercial, IESIndustrial and IES Residential.  Thisrebranding effort has been adopted by all of our business units and willfacilitate our ability to market the Company as a fully-integrated nationalbrand.

 

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Finally, during July 2008,we completed the implementation of a project management software program acrossour business units and at the segment shared service centers.  This project management system willstandardize our cost-to-complete evaluation processes and provide all of ourbusiness units near real-time visibility into project performance. Also in July 2008,we completed the implementation of an accounting consolidation and reportingprogram that will be utilized by all of our finance and accounting personnel,providing management better financial data and transparency.

 

**RESTRUCTURING PROGRAM**

 

As more fully described in Item 1*. Condensed ConsolidatedFinancial Statements*— Note 2, *“Strategic Actions”*ofthis report, we have restructured our operations from our previous geographicstructure into three major lines of business: Industrial, Commercial andResidential.  This operationalrestructuring is part of our long-term strategic plan to reposition ourbusiness to better serve our customers, strengthen financial controls, reduceour cost structure and, as a result, position the Company to implement amarket-based growth strategy in the future. The operational restructuring plan has consolidated administrativesupport functions, eliminating redundant functions that were previouslyperformed at each of our 27 business units. We expect to incur pre-taxrestructuring charges, including severance benefits and consulting charges, ofapproximately $5 million to $10 million over the course of the process, whichis expected to be substantially complete by September 30, 2008.

 

The first component of our restructuring program was initiated at ourIndustrial segment in June 2007. Under this portion of the planned restructuring, 5 of our business unitswere integrated under the IES Industrial segment, and the support andadministrative functions of those businesses were combined at one operatinglocation.  In connection with thisrealignment, we approved a transition and severance benefits program for 25employees who were separated from the Company in or before June 2008through the elimination of redundant positions.

 

The second component of our restructuring program was initiated at ourCommercial segment in September 2007. Under this portion of the restructuring, 17 of our business units wereintegrated under the IES Commercial segment, and the support and administrativefunctions of those businesses were combined at one operating location.  In connection with this realignment, weapproved a transition and severance benefits program for approximately 100employees who have been or will be separated from the Company through theelimination of redundant positions.

 

The third component of our restructuring program was initiated at ourResidential segment in September 2007. Under this portion of the restructuring, 5 of our business units were integratedunder the IES Residential segment during our 2008 fiscal year, and the supportand administrative functions of those businesses has been combined at oneoperating location. In connection with this realignment, we approved atransition and severance benefits plan for 17 employees who have been separatedfrom the Company through the elimination of redundant positions.

 

During the first nine months of our 2008 fiscal year, we have expandedour restructuring efforts in response to the softening market conditions incertain segments of our business and so as to achieve further businessoptimization. During the three months ended June 30, 2008, we have:

 

·                 Acceleratedthe rollout of our employee severance programs, particularly within ourCommercial line of business; and

 

·                 Closedan office location in our Residential segment, bringing the total to four thatwe have closed this year within this segment.

 

**EXIT OR DISPOSAL ACTIVITIES**

 

In March 2006, basedon the recommendation of our Board of Directors, we committed to an exit planwith respect to several underperforming business units. The exit plan committedto a shut-down or consolidation of the operations of these business units, orthe sale or other disposition of the business units, whichever came sooner. In June 2007,we also shut down our Mid-States Electric business unit, located in Jackson,Tennessee. Further information about these closures can be obtained byreferring to Note 4 in the Consolidated Financial Statements of our 2007 Form 10-K.

 

The exit plan issubstantially complete for the business units that we elected to exit in March 2006,and the operations of these business units ceased as of September 30,2006. Mid-States’ operations were shut down as of June 30, 2007. We haveincluded the results of operations related to these business units indiscontinued operations for both the current period and all prior periods.Accordingly, previously reported results of these operations have beenreclassified. Revenue for these discontinued business units 

 

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totaled $1.0 million and$7.9 million for the nine months ended June 30, 2008 and 2007,respectively.  Remaining net workingcapital related to these subsidiaries was $0.8 million and $4.3 million at June 30,2008 and September 30, 2007, respectively.

 

**FINANCING**

 

*The Tontine Capital Partners Term Loan*

 

On December 12,2007, we entered into a $25.0 million senior subordinated loan agreement (the “TontineTerm Loan”) with Tontine Capital Partners, L.P., a related party.  The proceeds of the subordinated note (the “Note”),together with cash on hand, were used to fund the repayment of the Eton ParkTerm Loan (discussed below).

 

The Note bears interest at 11.0% per annum and is due on May 15,2013.  Interest is payable quarterly,beginning on December 31, 2007, in cash or in-kind at our option. Anyinterest paid in-kind will bear interest at the same rate (11.0%) as theNote.  We may repay the Note at any timeprior to the maturity date at par plus accrued interest without penalty.  The Note is subordinated to our RevolvingCredit Facility (as defined below).  TheNote is an unsecured obligation of the Company and its subsidiaryborrowers.  The Note contains nofinancial covenants or restrictions on dividends or distributions tostockholders.

 

*TheRevolving Credit Facility*

 

On May 12, 2006, we entered into an agreement (the “Loan andSecurity Agreement”) for a revolving credit facility (the “Revolving CreditFacility”) with Bank of America and certain other lenders.  On May 9, 2008, we entered into arevised agreement governing the Revolving Credit Facility with the samefinancial institutions.  The terms of therevised agreement are described in Item 1*. Condensed ConsolidatedFinancial Statements*— Note 3, *“Debt and Liquidity”*ofthis report

 

The Revolving CreditFacility provides access to revolving borrowings in the aggregate amount of upto $60.0 million. At June 30, 2008, we had $14.4 million available underthe Revolving Credit Facility and $37.6 million in letters of credit issuedagainst the Revolving Credit Facility. The maturity date of the Revolving Credit Facility is May 12, 2010.

 

**SURETY**

 

*Primary* *Surety Agreement*

 

We are party to an underwriting, continuing indemnity and securityagreement, dated May 12, 2006, as amended, with a major surety providerand its affiliates (collectively, the “Primary Surety Provider”), whichprovides for surety bonds to support our contracts with certain of ourcustomers.  As of June 30, 2008, wehad $126.7 million in bonded costs to complete under this facility.

 

We are also party to a financing agreement with our Primary SuretyProvider that provides: (1) for the Primary Surety Provider, at its soleand absolute discretion, to issue up to an aggregate of $150.0 million in newsurety bonds, and (2) that the Primary Surety Provider’s consent isrequired for our use of cash collateral in the form of proceeds of allcontracts as to which the Primary Surety Provider has issued surety bonds.  The bond premium is $15.00 per thousanddollars of contract cost.

 

Underthe agreement with our Primary Surety Provider, we may have up to $150.0million in costs to complete on bonded projects at any time.  We maintain $9.5 million in cash collateralplus accrued interest, as well as $21.0 million in letters of credit under theagreement.  The bond premium is $15.00per thousand dollars of contract cost.

 

*OtherBonding Facilities*

 

In addition to ourPrimary Surety Provider we also have additional surety bonding from two otherproviders.

 

We are party to a general agreement of indemnity, dated September 21,2005, as amended, with a national insurance company (the “Secondary SuretyProvider”), which provides for surety bonds to support our contracts withcertain of our customers. This facility provides for the Secondary SuretyProvider, in its sole and absolute discretion, to issue up to an aggregate of$10.0 million in surety bonds. Bonding in excess of $5.0 million is subject tothe Secondary Surety Provider’s receipt of additional collateral in the form ofan additional irrevocable letter of credit from Bank of America in the amountof $1.5 million. As of June 30, 2008, we had no bonded cost to completeunder this facility.

 

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We are also party to a general agreement of indemnity, dated March 21,2006, as amended, with an individual surety (the “Individual Surety Provider”),to supplement the bonding capacity under our facilities with the Primary SuretyProvider and the Secondary Surety Provider. Under this facility, the IndividualSurety Provider has agreed to extend aggregate bonding capacity not to exceed$150.0 million in additional bonding capacity, with a limitation on individualbonds of $15.0 million. The bonds from the Individual Surety Provider are notrated (as opposed to those of our Primary Surety Provider and Secondary SuretyProvider); however, the issuance of these bonds to an obligee/contractor isbacked by an instrument referred to as an irrevocable trust receipt issued byFirst Mountain Bancorp, as trustee, for investors who pledge assets to supportthe receipt and thus the bond. The bonds are also reinsured.

 

The Individual Surety Provider’s obligation to issue new bonds isdiscretionary, and the aggregate bonding is subject to the Individual SuretyProvider’s receipt of $2.0 million in collateral to secure all of ourobligations to them. Bank of America and the Individual Surety Provider haveentered into an inter-creditor agreement. As of June 30, 2008, we had$39.0 million in aggregate face value of bonds issued under this bondingfacility.  As of June 30, 2008, wehad $2.2 million of bonded cost to complete under this facility.

 

**RESULTSOF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THE THREEMONTHS ENDED JUNE 30, 2007**

 

The followingtables present selected historical results of operations of IES and itssubsidiaries with dollar amounts in millions. Percentages are expressed as a percent of revenues.

 
| ** **                                          | ** ** | **Three Months Ended  June 30, 2008**                   | ** ** | **Three Months Ended  June 30, 2007** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                          | ** ** | **$**                                                                       | ** ** | **%**                                                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                          | ** ** | **(Dollars in millions. Percentage of revenues.)** | ** ** |
|                                                |       |                                                                        |       |                                                      |       |   |   |   |   |
| Revenues                                            |       | $                                                                           | 214.5      |                                                      | 100.0      | % | $ | 222.6 |   | 100.0 | % |
| Cost of services (including depreciation)           |       | 180.6                                                                       |       | 84.2                                                      | %          | 184.3 |   | 82.8 | % |
| Gross profit                                        |       | 33.9                                                                        |       | 15.8                                                      | %          | 38.3 |   | 17.2 | % |
| Selling, general & administrative expenses |       | 28.1                                                                        |       | 13.1                                                      | %          | 34.1 |   | 15.3 | % |
| Gain on sale of assets                              |       | (0.1                                                                        | )          | (0.1                                                      | )%         | (0.1 | ) | (0.0 | )% |
| Restructuring charges                               |       | 1.0                                                                         |       | 0.5                                                       | %          | — |   | — |   |
| Income from operations                              |       | 4.9                                                                         |       | 2.3                                                       | %          | 4.3 |   | 1.9 | % |
| Interest and other expense, net                     |       | 1.1                                                                         |       | 0.5                                                       | %          | 1.6 |   | 0.7 | % |
| Income before income taxes                          |       | 3.8                                                                         |       | 1.8                                                       | %          | 2.7 |   | 1.2 | % |
| Provision for income taxes                          |       | 1.8                                                                         |       | 0.8                                                       | %          | 1.7 |   | 0.8 | % |
| Income from continuing operations                   |       | 2.0                                                                         |       | 0.9                                                       | %          | 1.0 |   | 0.5 | % |
| Income from discontinued operations                 |       | 0.0                                                                         |       | 0.0                                                       | %          | 0.2 |   | 0.1 | % |
| Net income                                          |       | $                                                                           | 2.0        |                                                      | 0.9        | % | $ | 1.2 |   | (0.5 | )% |

 

**Revenues**

 
| ** **         | ** ** | **Three Months Ended  June 30, 2008**                   | ** ** | **Three Months Ended  June 30, 2007** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                                       | ** ** | **%**                                                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in millions. Percentage of revenues.)** | ** ** |
|               |       |                                                                        |       |                                                      |       |   |   |   |   |
| Commercial         |       | $                                                                           | 125.5      |                                                      | 58.5       | % | 113.2 |   | 50.8 | % |
| Industrial         |       | 33.7                                                                        |       | 15.7                                                      | %          | 29.8 |   | 13.4 | % |
| Residential        |       | 55.3                                                                        |       | 25.8                                                      | %          | 79.6 |   | 35.8 | % |
| Total Consolidated |       | $                                                                           | 214.5      |                                                      | 100.0      | % | $ | 222.6 |   | 100.0 | % |
|                    |            |                                                                             |            |                                                           |            |  |  |  |  |  |  |

 

Consolidatedrevenues for the three months ended June 30, 2008 were $8.1 million less thanin the three months ended June 30, 2007, a decline of 3.7%.  Thisreduction was a result of the nationwide decline in demand for single-familyhomes which has affected our Residential line of business in markets such asSouthern California, Texas, Arizona and Georgia. Consistent with the slowdownin housing construction, our Residential line of business experienced a $24.3million decrease in revenuesduring the three months ended June 30, 2008, a decline of 30.6%, ascompared to the three months ended June 30, 2007.  This decline was primarily the result oflower housing starts, although we also experienced some pricing pressure fromour customers in response to the present market conditions and due to increasedcompetition in some markets.

 

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Helping to offsetthe overall decrease in revenues, our Commercial segment experienced a $12.3million increase in revenues during the three months ended June 30, 2008,a 10.7% increase compared to the same period in 2007.  Our Commercial segment has benefitted fromseveral significant projects including data centers, hospitals, and universitybuildings.  In conjunction with thedownturn in the housing market, we have also seen reduced demand for lightconstruction projects such as restaurants, movie theaters, grocery stores andlocal shopping centers in our Commercial segment.

 

Our Industrial segment posted an improvement in revenues of $3.9million during the three months ended June 30, 2008, a 13.1% increase, ascompared to three months ended June 30, 2007.  This improvement was primarily a result ofsignificant growth in projects with customers ranging from transmission anddistribution operators, chemical plants, and pulp and paper mills.

 

**Gross Profit**

 
| ** **         | ** ** | **Three Months Ended  June 30, 2008**                   | ** ** | **Three Months Ended  June 30, 2007** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                                       | ** ** | **%**                                                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in millions. Percentage of revenues.)** | ** ** |
|               |       |                                                                        |       |                                                      |       |   |   |   |   |
| Commercial         |       | $                                                                           | 17.4       |                                                      | 13.8       | % | $ | 17.8 |   | 15.7 | % |
| Industrial         |       | 6.0                                                                         |       | 17.8                                                      | %          | 5.8 |   | 19.4 | % |
| Residential        |       | 10.5                                                                        |       | 19.0                                                      | %          | 14.7 |   | 18.5 | % |
| Total Consolidated |       | $                                                                           | 33.9       |                                                      | 15.8       | % | $ | 38.3 |   | 17.2 | % |

 

The decline in ourconsolidated gross profit for the three months ended June 30, 2008 as compared to the three months ended June 30,2007 was the result of lower consolidated revenues, as discussed above, andlower gross margins.  We attribute thedecline in gross margins to the increase in certain operating costs, includingfuel and other input prices, competitive pressures which have led to lowerproject margins in some markets and a change in project mix as some highermargin work has been completed. Additional details regarding this gross profit change are discussedbelow.

 

During the three months ended June 30,2008, the most significant decline in gross profit occurred in our Residentialsegment, which experienced a $4.2 million decline, as compared to the threemonths ended June 30, 2007.  Thisdecline was principally the result of the aforementioned $24.3 million decreasein revenues during the three months ended June 30, 2008, resulting fromreduced construction of single-family homes. During the three months ended June 30, 2008, the gross marginpercentage in the Residential segment rose 40 basis points, as compared to thethree months ended June 30, 2007, in spite of the decline in the number ofhousing starts.  We attribute thestrength of our Residential segment’s gross margin percentage to improvedproject execution during the current year, and the ability to increase anddecrease labor to meet project demands. We have also added several new multi-family housing projects, which havehigher profit margins than some of our single-family housing projects.

 

Industrial gross profit increased by $0.2 million during the threemonths ended June 30, 2008, as compared to the three months ended June 30,2007.  During the three months ended June 30,2008, revenues increased $3.9 million; however, the gross profit percentagefell 160 basis points, as compared to the three months ended June 30,2007.  The decrease in our gross marginpercentage was primarily the result of increase in certain operating costs,notably increases in transportation and travel expenses.  We have also experienced some gross margindecline as we completed certain low margin projects prior to phasing in moreprofitable ones.

 

Our Commercial segment’s gross marginpercentage declined approximately 190 basis points to 13.8% of revenues duringthe three months ended June 30, 2008, as compared to 15.7% of revenuesduring the three months ended June 30, 2007.  This decline was principally the result ofcompetitive pressures that have caused some of our business units to loweroperating margins in response to market conditions.  Also, one of our business units has recentlycompleted several under performing legacy projects and another continues towork off these projects.

 

In the thirdquarter of 2008, we reduced our medical costs by $1.1 million as a result oflower claims and expenses for the first nine months of 2008, reflecting lowermedical claims and the success of our wellness-oriented medical plan.  Of this $1.1 million cost reduction, $1.0million was applied to our cost of services and $0.1 million was applied to ourselling, general and administrative costs. As a result of this cost reduction, cost of services was reduced by $0.6million at our IES Commercial segment, $0.3 million at our IES Industrialsegment, and $0.1 million at our IES Residential segment.  These reductions applied to costs reflectedin the first half of our operations.

 

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**Selling, General and AdministrativeExpenses**

 
| ** **         | ** ** | **Three Months Ended  June 30, 2008**                   | ** ** | **Three Months Ended  June 30, 2007** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                                       | ** ** | **%**                                                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in millions. Percentage of revenues.)** | ** ** |
|               |       |                                                                        |       |                                                      |       |   |   |   |   |
| Commercial         |       | $                                                                           | 10.0       |                                                      | 7.9        | % | $ | 11.5 |   | 10.1 | % |
| Industrial         |       | 1.9                                                                         |       | 5.7                                                       | %          | 2.6 |   | 8.7 | % |
| Residential        |       | 8.4                                                                         |       | 15.2                                                      | %          | 9.2 |   | 11.6 | % |
| Corporate          |       | 7.8                                                                         |       | —                                                    |       | 10.8 |   | — |   |
| Total Consolidated |       | $                                                                           | 28.1       |                                                      | 13.1       | % | $ | 34.1 |   | 15.3 | % |

 

Selling, generaland administrative expenses include costs not directly associated withperforming work for our customers. These costs consist primarily ofcompensation and benefits related to corporate and business unit management,occupancy and utilities, training, professional services, consulting fees,travel, and certain types of depreciation and amortization.

 

During the three months ended June 30, 2008, our selling, generaland administrative expenses decreased to $6.0 million, as compared to the threemonths ended June 30, 2007.  Thisdecrease was in part due to our strategic efforts to restructure our operationsand to eliminate redundant positions and facilities.  The greatest impact of these cost reductionmeasures was in our Commercial line of business, where approximately 100positions have been eliminated.  Notabledeclines in our selling, general and administrative costs during the threemonths ended June 30, 2008 include: (1) a $2.0 million reduction inprofessional fees, including legal, consulting, and accounting fees, (2) a$2.2 million decrease in target incentives for our business unit leadership,and (3) a $1.2 million reduction in other general business expenses at ourbusiness units and a $0.9 million reduction in salaries and wages due to ourheadcount reductions, which are both based in part on our restructuringefforts.

 

**RestructuringCharges**

 

As previously discussed in this report, we have restructuredour operations from our previously decentralized structure into three majorlines of business: Commercial, Industrial and Residential.  Each of these lines of business is nowsupported by its own dedicated administrative shared services center which hasconsolidated many of the back office functions into a centralizedlocation.  This integration has enabledus to eliminate a number of redundant functions.

 

In conjunction with our restructuring program, we recognizedthe following costs during the three months ended June 30, 2008 (inthousands):

 
| Severance compensation       |   | $   | 666    |   |
|------------------------------|--------|-----|--------|--------|
| Consulting and other charges |   | 372 |   |
| Total restructuring charges  |   | $   | 1,038  |   |

 

We did not haveany restructuring charges during the three months ended June 30, 2007.

 

**Interest and Other Expense, Net**

 
| ** **                            | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**            | ** ** |
|                                  |       |                                            |       |   |   |
| Interest expense                      |       | $                                               | 1,042      |   | $ | 2,438 |   |
| Deferred financing charges            |       | 314                                             |       | 408 |   |
| Total interest expense                |       | 1,356                                           |       | 2,846 |   |
|                                  |       |                                            |       |   |   |
| Interest income                       |       | 284                                             |       | 1,076 |   |
| Other income (expense)                |       | (67                                             | )          | 209 |   |
| Total interest and other expense, net |       | $                                               | 1,139      |   | $ | 1,561 |   |

 

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During the three months ended June 30, 2008, we incurred interestexpense of $1.0 million on an average debt balance of $25.0 million for theTontine Term Loan, an average letter of credit balance of $37.7 million underthe Revolving Credit Facility and an average unused line of credit balance of$29.0 million.  This compares to interestexpense of $2.4 million for the three months ended June 30, 2007, on anaverage debt balance of $51.4 million for the Eton Park Term Loan, an averageletter of credit balance of $46.5 million under the Revolving Credit Facilityand an average unused line of credit balance of $33.5 million.

 

During the three months ended June 30, 2008, deferred financingfees decreased by $0.1 million, as a result of decreased amortization chargeson the Tontine Term Loan, as compared to the amortization charges on the EtonPark Term Loan during the three months ended June 30, 2007.

 

During the three months ended June 30, 2008, total interestexpense was offset by $0.3 million in interest income on an average cash andcash equivalents balance of $55.4 million, as compared to $1.1 million ininterest income on an average cash and cash equivalents balance of $85.1million during the three months ended June 30, 2007.

 

**Provision for Income Taxes**

 

On May 12, 2006, we had a change in ownership as defined inInternal Revenue Code Section 382. As such, our net operating lossutilization after the change date will be subject to Section 382limitations for federal income taxes and some state income taxes. We haveprovided valuation allowances on all net operating losses where it isdetermined it is more likely than not that they will expire without beingutilized.

 

The provision for income taxes from continuing operations increasedfrom an expense of $1.7 million for the three months ended June 30, 2007,to an expense of $1.8 million for the three months ended June 30, 2008.This increase was attributable to an increase in income from continuingoperations for the three months ended June 30, 2008 and was offset by adecrease in the provision for contingent tax liabilities.

 

For both the three months ended June 30, 2008 and the three monthsended June 30, 2007, no income tax benefit was recorded for net operatinglosses in state tax jurisdictions. In addition, under SOP 90-7, the usage ofdeferred tax assets that were not recorded under fresh-start reporting does notresult in a reduction in the provision for income taxes but rather go to reducegoodwill, then other long-term assets, and then additional paid in capital.

 

**Income (Loss) fromDiscontinued Operations**

 

As discussed earlier in this report, we have shut down sixunderperforming subsidiaries since March 2006.  This exit plan is substantially complete;however, there are still some revenues and expenses associated with the winddown of these subsidiaries.  Such incomestatement amounts are classified as discontinued operations.

 

Revenuesat these subsidiaries were $92,000 and $1.7 million, respectively, for thethree months ended June 30, 2008 and the three months ended June 30,2007; net income at these subsidiaries was $12,000 and $174,000, respectively,during these same periods.

 

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**RESULTSOF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2008 COMPARED TO THE NINEMONTHS ENDED JUNE 30, 2007**

 

The followingtable presents selected historical results of operations of IES and itssubsidiaries with dollar amounts in millions. Percentages are expressed as a percent of revenues.

 
| ** **                                          | ** ** | **Nine Months Ended  June 30, 2008**                    | ** ** | **Nine Months Ended  June 30, 2007** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                          | ** ** | **$**                                                                       | ** ** | **%**                                                    | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                          | ** ** | **(Dollars in millions. Percentage of revenues.)** | ** ** |
|                                                |       |                                                                        |       |                                                     |       |   |   |   |   |
| Revenues                                            |       | 609.0                                                                       |       | 100.0                                                    | %          | 666.0 |   | 100.0 | % |
| Cost of services (including depreciation)           |       | 511.3                                                                       |       | 84.0                                                     | %          | 554.0 |   | 83.2 | % |
| Gross profit                                        |       | 97.7                                                                        |       | 16.0                                                     | %          | 112.0 |   | 16.8 | % |
| Selling, general & administrative expenses |       | 86.3                                                                        |       | 14.2                                                     | %          | 104.8 |   | 15.7 | % |
| (Gain) on sale of assets                            |       | (0.1                                                                        | )          | (0.0                                                     | )%         | (0.1 | ) | (0.0 | )% |
| Restructuring charges                               |       | 4.4                                                                         |       | 0.7                                                      | %          | — |   | — |   |
| Income from operations                              |       | 7.1                                                                         |       | 1.1                                                      | %          | 7.4 |   | 1.1 | % |
| Interest and other expense, net                     |       | 4.4                                                                         |       | 0.7                                                      | %          | 4.7 |   | 0.7 | % |
| Income (loss) before income taxes                   |       | 2.7                                                                         |       | 0.4                                                      | %          | 2.6 |   | 0.4 | % |
| Provision (benefit) for income taxes                |       | 1.6                                                                         |       | 0.3                                                      | %          | 2.1 |   | 0.3 | % |
| Income from continuing operations                   |       | 1.1                                                                         |       | 0.2                                                      | %          | 0.5 |   | 0.1 | % |
| Income (loss) from discontinued operations          |       | 0.2                                                                         |       | 0.0                                                      | %          | (0.9 | ) | (0.1 | )% |
| Net income (loss)                                   |       | $                                                                           | 1.3        |                                                     | 0.2        | % | $ | (0.3 | ) | (0.1 | )% |
|                                                     |            |                                                                             |            |                                                          |            |  |  |  |  |  |  |

 

**Revenues**

 
| ** **         | ** ** | **Nine Months Ended  June 30, 2008**                    | ** ** | **Nine Months Ended  June 30, 2007** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                                       | ** ** | **%**                                                    | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in millions. Percentage of revenues.)** | ** ** |
|               |       |                                                                        |       |                                                     |       |   |   |   |   |
| Commercial         |       | $                                                                           | 346.7      |                                                     | 56.9       | % | $ | 339.5 |   | 51.0 | % |
| Industrial         |       | 101.4                                                                       |       | 16.7                                                     | %          | 87.6 |   | 13.1 | % |
| Residential        |       | 160.9                                                                       |       | 26.4                                                     | %          | 238.9 |   | 35.9 | % |
| Total Consolidated |       | $                                                                           | 609.0      |                                                     | 100.0      | % | $ | 666.0 |   | 100.0 | % |

 

Consolidated revenues for the nine months ended June 30, 2008 were$57.0 million less than in the nine months ended June 30, 2007, a declineof 8.6%.  This reduction was primarilyattributed to the nationwide decline in demand for single-family homes whichhas affected our Residential line of business, particularly in markets such asSouthern California, Arizona, Georgia, and Texas.  Consistent with the slowdown in housingconstruction, our Residential line of business experienced a $78.0 milliondecrease in revenues during the nine months ended June 30, 2008, a declineof 32.6%, as compared to the nine months ended June 30, 2007.  We attribute approximately three quarters ofthis decrease to reductions in building activity throughout many of the marketswe serve, while the remaining portion of the decrease was due to the effect oflower prices in response to the competitive market conditions.

 

Our Commercial segment experienced a $7.2 million increase in revenuesduring the nine months ended June 30, 2008, a 2.1% improvement, ascompared to the nine months ended June 30, 2007.  Our Commercial segment has benefited fromsignificant projects that we have begun for institutional developers, includinguniversities, high-rise office towers, and data centers. Partially offsettingthe overall increase in revenues was reduced demand for light constructionprojects such as restaurants, movie theaters and local shopping centers, whichwas correlated to the slowdown in the housing sector.  We have also experienced increasedcompetition for low barrier to entry retail work from residential contractorswho have been affected by the housing slowdown.

 

Our Industrial segment posted an increase in revenues of $13.8 millionfor the nine months ended June 30, 2008, an increase of 15.7%, as comparedto the nine months ended June 30, 2007. The Industrial market generally has longer cycles than the rest of theconstruction industry due to the nature of the projects, which are often large-scale,multi-year contracts, financed by large corporations or government agencies.During the nine months ended June 30, 2008, our Industrial segment hasseen growth in utility line service projects, as well as increased constructionat electrical substations, ethanol plants, and pulp and paper mills.

 

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**GrossProfit**

 
| ** **         | ** ** | **Nine Months Ended  June 30, 2008**                          | ** ** | **Nine Months Ended  June 30, 2007** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                                             | ** ** | **%**                                                    | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in millions.  Percentage of revenues.)** | ** ** |
|               |       |                                                                              |       |                                                     |       |   |   |   |   |
| Commercial         |       | $                                                                                 | 49.6       |                                                     | 14.3       | % | $ | 52.5 |   | 15.5 | % |
| Industrial         |       | 16.6                                                                              |       | 16.4                                                     | %          | 14.8 |   | 16.8 | % |
| Residential        |       | 31.5                                                                              |       | 19.6                                                     | %          | 44.7 |   | 18.7 | % |
| Total Consolidated |       | $                                                                                 | 97.7       |                                                     | 16.0       | % | $ | 112.0 |   | 16.8 | % |

 

The decline in ourconsolidated gross profit for the nine months ended June 30, 2008 as compared to the nine months ended June 30,2007 was primarily the result of lower consolidated revenues, as discussedabove.  Also contributing to thereduction in gross profit was decreased margin as a percentage of revenue inour Commercial and Industrial segments, offset somewhat by an improvement ingross margin in our Residential segment. We attribute the decline in overall gross margins to the increase incertain operating costs, including transportation, travel, and other input prices,competitive pressures in some markets and a change in project mix as somehigher margin work has been completed. Additional details regarding this gross profit change are discussedbelow.

 

During the nine months ended June 30,2008, the most significant reduction in gross profit occurred in ourResidential segment, which experienced a $13.2 million decline, as compared tothe nine months ended June 30, 2007. This decline was primarily a result of the aforementioned $78.1 milliondecrease in revenues related to the reduction in demand for single-familyhomes.  However, the gross marginpercentage in the Residential line of business improved approximately 90 basispoints during the nine months ended June 30, 2008, in spite of the declinein the number of housing starts this year. We attribute the improvement in the Residential gross margin percentageto a stabilization of material costs, improved project execution in ourmulti-family division, and the ability to increase and decrease labor to meetproject demands.

 

During the nine months ended June 30,2008, Industrial gross profit improved $1.8 million, as compared to the ninemonths ended June 30, 2007.  Theimproved gross profit in our Industrial sector was correlated to higher projectvolumes which resulted in a $13.8 million increase in revenue during the ninemonths ended June 30, 2008. Although revenues have increased, Industrial’s overall gross marginpercentage declined approximately 40 basis points during the nine months ended June 30,2008, as a result of increases in certain operating costs, notably increases intransportation expenses, and the completion of several low margin jobs that arebeing phased out before more profitable jobs begin.

 

Our Commercial segment’s gross marginpercentage declined approximately 120 basis points to 14.3% of revenues duringthe nine months ended June 30, 2008, as compared to 15.5% of revenuesduring the nine months ended June 30, 2007.  This decline was principally driven by anumber of macroeconomic factors, including higher input and fuel costs, andalso by underperforming legacy projects at one business unit and the completionof low margin contracts at another.

 

In the third quarter of 2008, we reduced our medicalcosts by $1.1 million as a result of lower claims and expenses for the firstnine months of 2008, reflecting lower medical claims and the success of ourwellness-oriented medical plan.  Of this$1.1 million cost reduction, $1.0 million was applied to our cost of servicesand $0.1 million was applied to our selling, general and administrativecosts.  As a result of this costreduction, cost of services was reduced by $0.6 million at our IES Commercialsegment, $0.3 million at our IES Industrial segment, and $0.1 million at ourIES Residential segment.  Thesereductions applied to costs reflected in the first half of our operations.

** **

**Selling, General and AdministrativeExpenses**

 
| ** **         | ** ** | **Nine Months Ended  June 30, 2008**                          | ** ** | **Nine Months Ended  June 30, 2007** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                                             | ** ** | **%**                                                    | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in millions.  Percentage of revenues.)** | ** ** |
|               |       |                                                                              |       |                                                     |       |   |   |   |   |
| Commercial         |       | $                                                                                 | 30.5       |                                                     | 8.8        | % | $ | 36.0 |   | 10.6 | % |
| Industrial         |       | 6.5                                                                               |       | 6.4                                                      | %          | 6.9 |   | 8.0 | % |
| Residential        |       | 25.1                                                                              |       | 15.6                                                     | %          | 27.1 |   | 11.4 | % |
| Corporate          |       | 24.2                                                                              |       | —                                                   | %          | 34.8 |   | — | % |
| Total Consolidated |       | $                                                                                 | 86.3       |                                                     | 14.2       | % | $ | 104.8 |   | 15.7 | % |

 

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Selling, general and administrative expensesinclude costs not directly associated with performing work for our customers.These costs primarily consist of compensation and benefits related to corporateand business unit management, occupancy and utilities, training, professionalservices, consulting fees, travel, and certain types of depreciation andamortization.

 

During the nine months ended June 30,2008, our selling, general and administrative expenses were $86.3 million, adecrease of $18.5 million as compared to the nine months ended June 30,2007.  This decrease was in part due toour strategic efforts to restructure our operations and to eliminate redundantpositions and facilities.  The greatestimpact of these cost reduction measures was in our Commercial segment, whereapproximately 100 positions have been eliminated.  Notable declines in our selling, general andadministrative costs during the nine months ended June 30, 2008 include: (1) an$8.6 million reduction in professional fees, including legal, consulting, andaccounting fees, (2) a $6.2 million decrease in target incentives for ourbusiness unit leadership, and (3) a $2.9 million reduction in other generalbusiness expenses at our business units and a $1.1 million reduction inoccupancy costs, which are both based in part on our restructuring efforts.

 

**RestructuringCharges**

** **

As discussed previously in this report,we have restructured our operations from our previously decentralized structureinto three major lines of business: Commercial, Industrial andResidential.  Each of these lines ofbusiness is now supported by its own dedicated administrative shared servicescenter which has consolidated many of the back office functions into acentralized location.  This integrationhas enabled us to eliminate a number of redundant functions.

 

In conjunction with our restructuringprogram we recognized the following costs during the nine months ended June 30,2008 (in thousands)

 
| Severance compensation       |   | $     | 2,434  |   |
|------------------------------|--------|-------|--------|--------|
| Consulting and other charges |   | 1,866 |   |
| Non-cash asset write offs    |   | 131   |   |
| Total restructuring charges  |   | $     | 4,431  |   |

 

We did not have any restructuring charges during thenine months ended June 30, 2007.

 

**Interestand Other Expense, Net**

 
| ** **                            | ** ** | **Nine Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**           | ** ** |
|                                  |       |                                           |       |   |   |
| Interest expense                      |       | $                                              | 3,741      |   | $ | 6,938 |   |
| Deferred financing charges            |       | 1,714                                          |       | 946 |   |
| Debt prepayment penalty               |       | 2,052                                          |       | — |   |
| Total interest expense                |       | 7,507                                          |       | 7,884 |   |
|                                  |       |                                           |       |   |   |
| Interest income                       |       | 1,829                                          |       | 3,028 |   |
| Other income                          |       | 1,256                                          |       | 113 |   |
| Total interest and other expense, net |       | $                                              | 4,422      |   | $ | 4,743 |   |

 

During the nine months ended June 30,2008, we incurred interest expense of $3.8 million on an average debt balanceof $31.9 million for the Eton Park Term Loan and the Tontine Term Loan, anaverage letter of credit balance of $38.7 million under the Revolving CreditFacility and an average unused line of credit balance of $36.8 million.  This compares to interest expense of $6.9million for the nine months ended June 30, 2007, on an average debtbalance of $54.8 million for the Eton Park Term Loan, an average letter ofcredit balance of $46.1 million under the Revolving Credit Facility and anaverage unused line of credit balance of $33.9 million.

 

As mentionedearlier in this report, on December 12, 2007, we repaid our Eton Park TermLoan using cash on hand and the proceeds from the Tontine Term Loan.  We incurred a prepayment penalty of $2.1million on the Eton Park Term Loan, and we recognized previously unamortizeddebt issuance costs of $0.3 million. During the nine months ended June 30, 2008, we also had deferredfinancing charges of $1.4 million, which reflect the amortization of feesincurred on the Tontine Term Loan and the Eton Park Term 

 

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Loan before itwas repaid.  During the nine months endedJune 30, 2007, we had deferred financing charges of $0.9 million, whichreflect the amortization of fees incurred only on the Eton Park Term Loan.

 

During the nine months ended June 30,2008, total interest expense was offset by $1.8 million in interest income onan average cash and cash equivalents balance of $61.5 million, as compared to$3.0 million in interest income on an average cash and cash equivalents balanceof $75.3 million during the nine months ended June 30, 2007.

 

During the nine months ended June 30,2008, other income of $1.3 million included a gain of $0.5 million associatedwith cash distributions from our investment in Enertech and a $1.1 millionsettlement with a group of former employees, out of which $0.4 million wasrecorded as a reduction against legal fees and the remainder as other income.This settlement was to compensate the Company for damages associated with theseemployees’ departure from the Company. We collected this settlement in full in March 2008.

 

**Provision for Income Taxes**

** **

On May 12, 2006, we had a change inownership as defined in Internal Revenue Code Section 382. As such, ournet operating loss utilization after the change date will be subject to Section 382limitations for federal income taxes and some state income taxes. We haveprovided valuation allowances on all net operating losses where it isdetermined it is more likely than not that they will expire without beingutilized.

 

The provision for income taxes fromcontinuing operations decreased from an expense of $2.1 million for the ninemonths ended June 30, 2007, to an expense of $1.6 million for the ninemonths ended June 30, 2008. This decrease was attributable to a decreasein federal income tax expense and a decrease in the provision for contingenttax liabilities during the nine months ended June 30, 2008.

 

For both the three months ended June 30,2008 and the three months ended June 30, 2007, no income tax benefit wasrecorded for net operating losses in state tax jurisdictions. In addition,under SOP 90-7, the usage of deferred tax assets that were not recorded underfresh-start reporting does not result in a reduction in the provision forincome taxes but rather go to reduce goodwill, then other long-term assets, andthen additional paid in capital.

** **

**Income(Loss) from Discontinued Operations**

 

As discussed earlier in this report, we haveshut down six underperforming subsidiaries since March 2006.  This exit plan is substantially complete;however, there are still some revenues and expenses associated with the winddown of these subsidiaries.  Such incomestatement amounts are classified as discontinued operations.

 

Revenues at these subsidiaries were $1.0million and $7.9 million, respectively, for the nine months ended June 30,2008 and the nine months ended June 30, 2007; net income (loss) at thesesubsidiaries was $0.2 million and $(0.9) million, respectively, during thesesame periods.

 

**WorkingCapital**

 
| ** **                                                                   | ** ** | **June 30,  2008**             | ** ** | **September 30,  2007** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **(Dollars in millions)** | ** ** |
| CURRENT ASSETS:                                                              |       |                                |       |                         |       |
| Cash and cash equivalents                                                    |       | $                                   | 56.8       |                         | 69.7       |   |
| Restricted cash                                                              |       | —                              |       | 20.0                         |       |
| Accounts receivable                                                          |       |                                |       |                         |       |
| Trade, net of allowance of $4.1 and $2.6  respectively                       |       | 147.7                               |       | 131.8                        |       |
| Retainage                                                                    |       | 30.1                                |       | 29.5                         |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | 10.9                                |       | 16.1                         |       |
| Inventories                                                                  |       | 16.8                                |       | 15.3                         |       |
| Prepaid expenses and other current assets                                    |       | 5.7                                 |       | 4.6                          |       |
| Assets from discontinued operations                                          |       | 1.6                                 |       | 6.4                          |       |
| Total current assets                                                         |       | $                                   | 269.6      |                         | $          | 293.4 |   |
|                                                                         |       |                                |       |                         |       |
| CURRENT LIABILITIES:                                                         |       |                                |       |                         |       |
| Current maturities of long-term debt                                         |       | $                                   | 0.1        |                         | $          | 0.1 |   |
| Accounts payable and accrued expenses                                        |       | 93.4                                |       | 98.4                         |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 40.3                                |       | 35.3                         |       |
| Liabilities from discontinued operations                                     |       | 0.6                                 |       | 1.9                          |       |
| Total current liabilities                                                    |       | $                                   | 134.4      |                         | $          | 135.7 |   |
| Working capital                                                              |       | $                                   | 135.2      |                         | $          | 157.7 |   |

 

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As of June 30,2008, working capital decreased by $22.5 million, or 14.3%, as compared to September 30,2007, due in large part to our repayment of the Eton Park Term Loan and ourconcurrent entrance into the Tontine Term Loan. On December 12, 2007, we entered into a $25.0 million seniorsubordinated loan agreement with Tontine Capital Partners, L.P., a relatedparty.  The proceeds of the subordinatednotes, together with cash on hand, were used to fund the repayment of the EtonPark Term Loan, which on December 12, 2007, had an outstanding balance of$45.6 million.  With accrued interest anda prepayment penalty of $2.1 million, the total payment amount was $48.7million.

 

As of June 30, 2008, our currentassets decreased by $23.8million, or 8.1%, to $269.6 million,as compared to $293.4 million asof September 30, 2007.  As of June 30, 2008, cash andcash equivalents (including restricted cash), decreased by $32.9 million, as compared to September 30, 2007,of which amount, $23.7 millionwas related to the refinancing of our term loan agreements.  As ofJune 30, 2008, our trade accounts receivables, net, rose by $15.9 million, as compared to September 30, 2007.  Days sales outstanding increased to 66 daysas of June 30, 2008 from 60 days as of September 30, 2007. We attributethe increase in days sales outstanding to three factors:  (1) revenuesin the quarter ended June 30, 2008 increased 9.2 percent compared to thequarter ended March 31, 2008, (2) we have generated a higherpercentage of our revenues from the Industrial and Commercial segments in thecurrent year, and projects in these areas tend to bring more complexity and cansometimes result in slower payments than the jobs within the Residentialsegment, and (3) softening economic conditions for the construction industryas a whole has resulted in some companies aggressively managing their cashflow, leading to somewhat slower payment of invoices. Within the currentfinancial environment we continue to monitor the collectability of ourreceivables closely. As of June 30,2008, there was also a$0.6 million increase in retainage and a $5.2 million decrease in costs inexcess of billings, as compared to September 30,2007. We had a $4.8 million decrease in assets from discontinuedoperations, between September 30,2007 and June 30, 2008, due in large part to the collection of anearly $3.0 million receivable from one of our divested subsidiaries during the nine months ended June 30,2008. As of June 30, 2008, inventories, prepaid expenses and othercurrent assets increased by a total of $2.6 million, as compared to September 30, 2007, due primarily to therenewal of an insurance policy.

 

Our totalcurrent liabilities decreased by $1.3 million, or 1.0%, to $134.4 million, asof June 30, 2008, as compared to $135.7 million as of September 30,2007. As of June 30, 2008, we also reduced liabilities at our discontinuedoperations by $1.3 million, as compared to September 30, 2007, as theseunits wound down their operations. Partially offsetting the decrease in current liabilities, as of June 30,2008, we experienced a $5.0 million increase in billings in excess of costs, ascompared to September 30, 2007.

 

**Liquidityand Capital Resources**

* *

As of June 30,2008, we had cash and cash equivalents of $56.8 million, working capital of$135.2 million, $25.0 million in outstanding borrowings under our Tontine TermLoan, $37.6 million of letters of credit outstanding and available capacityunder our Revolving Credit Facility of $14.4 million.

 

During the nine months ended June 30,2008, we generated $3.1 million in cash in our operating activities principallydue to the timing of our account payables and payment of year-end accruedbonuses in December 2007. We also had combined cash outflow of $15.9million for our investing and financing activities during the nine months endedJune 30, 2008.  This included $9.6million in capital expenditures primarily for computer equipment used in ournew operating, management and financial reporting systems, $20.5 million inpayments, net of borrowings, of long term debt, the release of $20.0 million inrestricted cash into cash and cash equivalents, and $6.1 million for theacquisition of treasury stock.

 

On May 9, 2008, we renegotiated theterms of our Revolving Credit Facility, extending the maturity date to May 12,2010, reducing the facility size to $60.0 million, and eliminating therestricted cash requirement.  The reducedfacility size eliminated unnecessary capacity. The terms of the revisedagreement are described in Item 1*. Condensed ConsolidatedFinancial Statements*— Note 3, *“Debt and Liquidity”*ofthis report*.*

 

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*Bonding Capacity*

 

At June 30, 2008, we have adequatesurety bonding capacity under our surety agreements. Our ability to access thisbonding capacity is at the sole discretion of our surety providers and issubject to certain other limitations such as limits on the size of anyindividual bond.  The limitations on thesize of an individual bond from our Primary Surety Provider were removed as of October 2007,and our bonding capacity has been raised to $150.0 million.  In aggregate, we have $310.0 millionavailable bonding capacity through our three surety providers.  As of June 30, 2008, the expectedcumulative cost to complete for projects covered by three surety providers was$128.9 million. We also had $39.0 million in aggregate face value of bondsissued by our Individual Surety Provider. We believe we have adequate remainingavailable bonding capacity to meet our current needs, subject to the solediscretion of our surety providers. To access the remaining available bondingcapacity, we may be required to post additional collateral. For moreinformation, please refer to Item 2. *“Surety”* ofthis report.

* *

**Off-BalanceSheet Arrangements and Contractual Obligations**

** **

As is common inour industry, we have entered into certain off-balance sheet arrangements thatexpose us to increased risk. Our significant off-balance sheet transactionsinclude commitments associated with non-cancelable operating leases, letter ofcredit obligations, firm commitments for materials and surety guarantees.

 

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

 

Some of ourcustomers and vendors require us to post letters of credit as a means ofguaranteeing performance under our contracts and ensuring payment by us tosubcontractors and vendors. If our customer has reasonable cause to effectpayment under a letter of credit, we would be required to reimburse ourcreditor for the letter of credit. Depending on the circumstances surrounding areimbursement to our creditor, we may have a charge to earnings in that period.At June 30, 2008, $22.5 million of our outstanding letters of creditwere to collateralize our customers and vendors.

 

Some of theunderwriters of our casualty insurance program require us to post letters ofcredit as collateral. This is common in the insurance industry. To date, wehave not had a situation where an underwriter has had reasonable cause toeffect payment under a letter of credit. At June 30, 2008, an additional$14.7 million of our outstanding letters of credit were to collateralizeour insurance programs.

 

From time to time,we may enter into firm purchase commitments for materials such as copper wireand aluminum wire, among others, which we expect to use in the ordinary courseof business. These commitments are typically for terms less than one year andrequire us to buy minimum quantities of materials at specified intervals at afixed price over the term. As of June 30, 2008, we had $1.8 million inopen purchase commitments for copper wire which we expect to take delivery onbetween July 2008 and August 2008.

 

Many of ourcustomers require us to post performance and payment bonds issued by a surety.Those bonds guarantee the customer that we will perform under the terms of acontract and that we will pay subcontractors and vendors. In the event that wefail to perform under a contract or pay subcontractors and vendors, thecustomer may demand the surety to pay or perform under our bond. Ourrelationship with our sureties is such that we will indemnify the sureties forany expenses they incur in connection with any of the bonds they issues on ourbehalf. To date, we have not incurred significant costs to indemnify oursureties for expenses they incurred on our behalf. As of June 30, 2008,our expected costs to complete on projects covered by surety bonds was$128.9 million and we utilized a combination of cash, accumulated interestthereon and letters of credit totaling $34.1 million to collateralize ourbonding programs.

 

In April 2000,we committed to invest up to $5.0 million in EnerTech. EnerTech is aprivate equity firm specializing in investment opportunities emerging from thederegulation and resulting convergence of the energy, utility andtelecommunications industries. Through June 30, 2008, we had invested$4.9 million under our commitment to EnerTech. The carrying value of thisEnerTech investment at June 30, 2008 and September 30, 2007 was$2.9 million and $2.9 million, respectively. This investment isaccounted for on the cost basis of accounting and, accordingly, we do notrecord unrealized gains or losses for the EnerTech investment that we believeare temporary in nature. As of June 30, 2008, there were no unrealizedlosses related to our share of the EnerTech fund. If facts arise that lead usto determine that any unrealized losses are not temporary, we would write downour investment in EnerTech through a charge to other expense during the periodof such determination.

 

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As of June 30,2008, our future contractual obligations due by September 30 of each ofthe following fiscal years include (in thousands) (1):

 
| ** **                  | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Long-term debt obligations  |       | $        | —     |     | $          | —   |       | $        | —     |     | $          | —         |       | $         | —     |   | $ | 25,000 |   | $ | 25,000 |   |
| Operating lease obligations |       | $        | 4,281      |     | $          | 5,790    |       | $        | 3,741      |     | $          | 2,202          |       | $         | 1,238      |   | $ | 544 |   | $ | 17,796 |   |
| Capital lease obligations   |       | $        | 51         |     | $          | 129      |       | $        | 90         |     | $          | 7              |       | $         | —     |   | $ | — |   | $ | 277 |   |
| Purchase obligations (2)    |       | $        | 1,777      |     | $          | —   |       | $        | —     |     | $          | —         |       | $         | —     |   | $ | — |   | $ | 1,777 |   |

 

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(1)                 Thetabular amounts exclude the interest obligations that will be created if thedebt and capital lease obligations are outstanding for the periods presented.

(2)                 Purchaseobligation for copper wire to be settled by September 2008.

 

Ourother commercial commitments expire by September 30 of each of thefollowing fiscal years (in thousands):

 
| ** **                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Letters of credit                |       | $        | —     |     | $          | —   |       | $        | —     |     | $          | —         |       | $         | —     |   | $ | — |   | $ | — |   |
| Other commercial commitments (3) |       | $        | —     |     | $          | —   |       | $        | 150        |     | $          | —         |       | $         | —     |   | $ | — |   | $ | 150 |   |

 

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(3)                 Balanceof investment commitment in EnerTech.

 

**Outlook**

** **

We anticipate thatthe combination of cash on hand, cash flows and available capacity under ourRevolving Credit Facility will provide sufficient cash to enable us to meet ourworking capital needs, debt service requirements, capital expenditures forproperty and equipment, and our announced share buy back through the nexttwelve months. We expect capital expenditures to be approximately $10.0 millionto $15.0 million for the fiscal year ending on September 30, 2008, as weinvest in our infrastructure to improve management information and projectmanagement systems. Our ability to generate cash flow is dependent on oursuccessful completion of our restructuring efforts and many other factors,including demand for our products and services, the availability of projects atmargins acceptable to us, the ultimate collectability of our receivables, andour ability to borrow on our Revolving Credit Facility.

 

**Inflation**

** **

Throughout thenine months ended June 30, 2008, we experienced steady increases in fuelprices and related travel costs, and we have also been affected by historicallyhigh steel prices and volatile copper prices that impact our input costs .  Due to the current market conditions,especially the slowdown in the housing sector, we have not been able to passall of these price increases on to our customers.  Over the long-term, however, we expect thatwe will be able to adjust our pricing to incorporate these conditions and otherinflationary factors.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

Management isactively involved in monitoring exposure to market risk and continues todevelop and utilize appropriate risk management techniques. Our exposure tosignificant market risks includes fluctuations in commodity prices for copper,aluminum, steel and fuel. Commodity price risks may have an impact on ourresults of operations due to the fixed nature of many of our contracts.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**(a) ****Disclosure controls andprocedures**

 

Disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in reportsfiled or submitted under the Securities Exchange Act of 1934 (“Exchange Act”)is recorded, processed, summarized and reported within the time periodsspecified in the Security and Exchange Commission’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed underthe Exchange Act is accumulated and communicated to management, including theprincipal executive and financial officers, as appropriate to allow timelydecisions 

 

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regarding required disclosure. There areinherent limitations to the effectiveness of any system of disclosure controlsand procedures, including the possibility of human error and the circumventionor overriding of the controls and procedures. Accordingly, even effectivedisclosure controls and procedures can only provide reasonable assurance of achievingtheir control objectives.

 

An evaluation was performed under thesupervision and with the participation of our management, our principalexecutive officer (CEO) and principal financial officer (CFO), of theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation and the material weakness identified in our September 30, 2007Annual Report on Form 10-K, our management, including our CEO and the CFO,concluded that our disclosure controls and procedures remained ineffective, asof June 30, 2008.

 

The conclusion that our disclosure controlsand procedures were not effective as of June 30, 2008, was based on theidentification of a material weakness in internal controls as of September 30,2007, for which remediation is underway.

 

Our management, including our CEO and CFO, isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Rules 13a-15(f) and 15d-15(f) ofthe Exchange Act. Our internal controls were designed to provide reasonableassurance as to the reliability of our financial reporting and the preparationand presentation of the consolidated financial statements for external purposesin accordance with accounting principles generally accepted in the UnitedStates, as well as to safeguard assets from unauthorized use or disposition.

 

**(b)  Remediation ofMaterial Weakness**

** **

We have implemented a remediation plan at thebusiness unit where the material weakness originated.  Our remediation plan included each of thefollowing:

 

·                 Deployed Company financial and operationalexperts to review and validate the business unit’s cost estimates on allcontracts for the fiscal year ended September 30, 2007;

 

·                 Appointed a Chief Accounting Officer withexperience in re-designing accounting and finance processes, realigningdecentralized organizations and improving internal controls, in order to meetthe requirements of our remediation plan;

 

·                 Replaced appropriate management, includingthe General Manager, Financial Manager, VP of Operations and several ProjectManagers at this business unit;

 

·                 Significantly enhanced project reviewprocedures, including a job site walk through process and cost estimate reviewsby appropriate independent experts and management from other Company businessunits;

 

·                 Reinforced the direct reporting relationshipof the Finance team to Corporate Finance personnel;

 

·                 Standardized a best in class cost-to-completeprocess across the Company, with increased scrutiny at this business unit;

 

·                 Implemented a proprietary project managementsoftware system at this business unit;

 

·                 Enhanced accounting controls through theconsolidation of back office processing; and

 

·                 Heightened review, testing and monitoring ofthe internal controls with respect to the operation of our project costsestimation processes at this business unit.

 

Management continues tomonitor the progress being made at this subsidiary and remains committed toeliminating the material weakness during the fiscal year ending September 30,2008.

 

**(c)  Changes in Internal Control Over FinancialReporting**

 

As of June 30,2008, we believe that the steps identified above should eventually remediatethe identified material weakness. This remediation is ongoing, and thisrepresents the only changes to our internal controls over financial reportingthat were identified in connection with the evaluation required by Rules 13a-15(d) or15d-15(d) under the Exchange Act during the three months ended June 30,2008 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. We

 

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cannot be certainthat the material weakness will be remediated by the plan outlined above nor dowe provide assurance that no additional material weaknesses will be identified.

 

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**PART II.OTHER INFORMATION**

** **

**ITEM 1. LEGAL PROCEEDINGS**

 

For additionalinformation, please refer to Note 7 of Notes to Condensed ConsolidatedFinancial Statements which is incorporated herein by reference.  We are not aware of any litigation or pendinglitigation that we believe will have a material impact on our results ofoperations or our financial position.

 

**ITEM 1A. RISK FACTORS**

 

Therehave been no changes to the risk factors described in the Company’s annualreport on Form 10-K for the year ended September 30, 2007.

** **

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

** **

**Purchasesof Equity Securities by the Issuer and Affiliated Purchases**

** **
| **Period**                                | ** ** | **Total number  of shares  purchased** | ** ** | **Average price  paid per share** | ** ** | **Total number of  shares purchased as  part of publically  announced plans or  programs (1)** | ** ** | **Maximum of  shares that may  yet be purchased  under the plans or  programs** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| April 1, 2008 to April 30, 2008 |       | —                                           |       | $                                                | —     |                                                                                                                                        | 156,161    |                                                                                                                    | 843,839    |   |
| May 1, 2008 to May 31, 2008     |       | 54,659                                           |       | $                                                | 17.43      |                                                                                                                                        | 210,820    |                                                                                                                    | 789,180    |   |
| June 1, 2008 to June 30, 2008   |       | 135,774                                          |       | $                                                | 17.65      |                                                                                                                                        | 346,594    |                                                                                                                    | 653,406    |   |
|   Total for period              |       | 190,433                                          |       | $                                                | 17.59      |                                                                                                                                        |       |                                                                                                                    |       |   |

 

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(1)         On December 12, 2007, we announced thatour Board of Directors authorized the repurchase of up to one million shares ofour common stock.  This share repurchaseplan is authorized through December 2009. The table does not include 1,796 shares withheld to satisfy taxwithholding requirements related to restricted stock issued under the Amendedand Restated 2006 Equity Incentive Plan. The average cost of those shares was $16.34.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

None.

** **

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

** **

**ITEM 5. OTHER INFORMATION**

 

None.

 

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**ITEM 6. EXHIBITS**

** **
| 4.1    |   | Specimen  common stock certificate (Incorporated by reference to Exhibit 4.1 to  the Company’s Current Report on Form 8-K filed June 18, 2008). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                |
| 31.1   |   | Certificate of Chief Executive Officer under  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                               |
|   |   |                                                                                                                                                                |
| 31.2   |   | Certificate of Chief Financial Officer under  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                               |
|   |   |                                                                                                                                                                |
| 32.1   |   | Certificate of Chief Executive Officer under  Section 906 of the Sarbanes-Oxley Act of 2002. (1)                                                               |
|   |   |                                                                                                                                                                |
| 32.2   |   | Certificate of Chief Financial Officer under  Section 906 of the Sarbanes-Oxley Act of 2002. (1)                                                               |

 

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(1)    Filed herewith.

 

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**INTEGRATEDELECTRICAL SERVICES, INC. AND SUBSIDIARIES**

** **

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized, who has signed this report on behalf of the registrant and asthe principal financial officer of the registrant.

 
|                        |       | INTEGRATED  ELECTRICAL SERVICES, INC. |
|-----------------------------|------------|---------------------------------------|
|                        |       |                                  |
|                        |       |                                  |
| Date:  August 11, 2008 |       | By:                                   | /s/RAYMOND K.  GUBA |
| ** **                  | ** ** | ** **                            | **Raymond K. Guba** |
| ** **                  | ** ** | ** **                            | **Senior Vice President and** |
| ** **                  | ** ** | ** **                            | **Chief Financial Officer** |

 

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**EXHIBITINDEX**

** **
| 4.1    |   | Specimen  common stock certificate (Incorporated by reference to Exhibit 4.1 to  the Company’s Current Report on Form 8-K filed June 18, 2008). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                |
| 31.1   |   | Certificate of Chief Executive Officer under  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                               |
|   |   |                                                                                                                                                                |
| 31.2   |   | Certificate of Chief Financial Officer under  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                               |
|   |   |                                                                                                                                                                |
| 32.1   |   | Certificate of Chief Executive Officer under  Section 906 of the Sarbanes-Oxley Act of 2002. (1)                                                               |
|   |   |                                                                                                                                                                |
| 32.2   |   | Certificate of Chief Financial Officer under  Section 906 of the Sarbanes-Oxley Act of 2002. (1)                                                               |

 

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(1)    Filed herewith.

 

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