**UNITEDSTATES 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 March 31, 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** |

 

**Commission File Number 1-13783**

 

**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**

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

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

 

Indicate bycheck mark whether the registrant has filed all documents and reports requiredto be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of1934 subsequent to the distribution of securities under a plan confirmed by acourt. Yes x  No o

 

The number ofshares outstanding as of May 7, 2008 of the issuer’s common stock was15,203,878 (includes 12,838 shares reserved for issuance upon exchange ofpreviously issued shares pursuant to the issuer’s Plan of Reorganizationapproved by the United States Bankruptcy Court for the Northern District ofTexas, Dallas Division which became effective on May 12, 2006).

 

 

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**INTEGRATED ELECTRICAL SERVICES, INC. ANDSUBSIDIARIES**

 

**INDEX**

 
| ** **                                                                                      | **Page**                                                                                                  |
|-------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
| PART I.  FINANCIAL INFORMATION                                                             |                                                                                                      |
| Item 1.                                                                                         | Condensed Consolidated Financial Statements                                                               |   |
|                                                                                            | Condensed  Consolidated Balance Sheets as of March 31, 2008 and September 30,  2007             | 5 |
|                                                                                            | Condensed  Consolidated Statements of Operations for the Three Months ended  March 31, 2008 and 2007 | 6 |
|                                                                                            | Condensed  Consolidated Statements of Operations for the Six Months Ended March 31,  2008 and 2007   | 7 |
|                                                                                            | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended March 31,  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               | 24 |
| Item 3.                                                                                         | Quantitative and Qualitative Disclosures  About Market Risk                                               | 38 |
| Item 4.                                                                                         | Controls and Procedures                                                                                   | 38 |
|                                                                                            |                                                                                                      |   |
| PART II. OTHER INFORMATION                                                                 |                                                                                                      |
| Item 1.                                                                                         | Legal Proceedings                                                                                         | 40 |
| Item 2.                                                                                         | Unregistered Sales of Equity Securities and  Use of Proceeds                                              | 40 |
| Item 3.                                                                                         | Submission of Matters to a Vote of Security  Holders                                                      | 40 |
| Item 6.                                                                                         | Exhibits                                                                                                  | 41 |
| Signatures                                                                                      | 42                                                                                                        |
| Rule 13a-14(a)/15d-14(a) Certification of Michael J.  Caliel, Chief Executive Officer |                                                                                                      |
| Rule 13a-14(a)/15d-14(a) Certification of Raymond K. Guba,  Chief Financial Officer   |                                                                                                      |
| Section 1350 Certification of Michael J. Caliel, Chief Executive  Officer                  |                                                                                                      |
| Section 1350 Certification of Raymond  K. Guba, Chief Financial Officer                    |                                                                                                      |

 

2

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**DEFINITIONS**

 

In this quarterly report on Form 10-Q, the words “IES”, the“Company”, “we”, “our”, “ours”, and “us” refer to Integrated Electrical Services, Inc. and oursubsidiaries, except as otherwise specified herein.

 

**DISCLOSURE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

This quarterlyreport on Form 10-Q includes certain statements that may be deemed“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934, all of which are based upon various estimates and assumptions that webelieve to be reasonable as of the date hereof. These statements involve risksand uncertainties that could cause our actual future outcomes to differmaterially from those set forth in such statements. Such risks anduncertainties include, but are not limited to:

 

·                       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;

 

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

 

·                       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;

 

·                       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, gasoline and certain plastics;

 

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

 

·                       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 divisions;

 

·                       uncertaintiesinherent to estimating future operating results and our ability to generaterevenues, operating income, or cash flow;

 

·                       difficultyincorporating new accounting, control and operating procedures;

 

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

 

3

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·                           unexpectedliabilities or losses associated with warranties from our continuing ordiscontinued operations or other liabilities attributable to the retention ofthe legal structure or retained liabilities of business units where we havesold substantially all of the assets;

 

·                           theresidual effect with customers and vendors from our reorganization leading toless work or less favorable delivery or credit terms;

 

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

 

·                       difficultyin transferring all our electrical and construction licenses after our recentconsolidation of subsidiaries;

 

·                       growthin latent defect litigation in the residential market in California and theexpansion into other states where we provide residential electrical work fornew home builders, and

 

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

 

You shouldunderstand that the foregoing, as well as other risk factors discussed in ourannual report on Form 10-K for the year ended September 30, 2007,could cause future outcomes to differ materially from those expressed in suchforward-looking statements. We undertake no obligation to publicly update orrevise information concerning our restructuring efforts, borrowingavailability, or cash position or any forward-looking statements to reflectevents or circumstances that may arise after the date of this report.Forward-looking statements are provided in this Form 10-Q pursuant to thesafe harbor established under the Private Securities Litigation Reform Act of1995 and should be evaluated in the context of the estimates, assumptions,uncertainties, and risks described herein.

 

Generalinformation about us can be found at www.ies-co.com under “Investor Relations.”Our annual report on Form 10-K, quarterly reports on Form 10-Q andcurrent reports on Form 8-K, as well as any amendments to those reports,are available free of charge through our website as soon as reasonablypracticable after we file them with, or furnish them to, the Securities andExchange Commission. You may also contact our Investor Relations department,and they will provide you with a copy.

 

4

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**ITEM1.  FINANCIAL STATEMENTS**

 

**INTEGRATED ELECTRICAL SERVICES, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(IN THOUSANDS, EXCEPT SHARE INFORMATION)**

 
| ** **                                                                                                                                                                     | ** ** | **March 31,  2008** | ** ** | **September 30,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                     |       | **(Unaudited)**          |       |                         |       |
| **ASSETS**                                                                                                                                                                     |       |                     |       |                         |       |
| CURRENT ASSETS:                                                                                                                                                                |       |                     |       |                         |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                        | 31,867     |                         | $          | 69,676 |   |
| Restricted cash                                                                                                                                                                |       | 20,000                   |       | 20,000                       |       |
| Accounts receivable:                                                                                                                                                           |       |                     |       |                         |       |
| Trade, net of allowance of $3,166 and  $2,608 respectively                                                                                                                     |       | 144,546                  |       | 131,767                      |       |
| Retainage                                                                                                                                                                      |       | 27,915                   |       | 29,536                       |       |
| Costs and estimated earnings in excess of  billings on uncompleted contracts                                                                                                   |       | 15,422                   |       | 16,121                       |       |
| Inventories                                                                                                                                                                    |       | 18,363                   |       | 15,268                       |       |
| Prepaid expenses and other current assets                                                                                                                                      |       | 6,409                    |       | 4,618                        |       |
| Assets from discontinued operations                                                                                                                                            |       | 1,809                    |       | 6,431                        |       |
| Total current assets                                                                                                                                                           |       | 266,331                  |       | 293,417                      |       |
|                                                                                                                                                                           |       |                     |       |                         |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                                                    |       | 22,133                   |       | 22,095                       |       |
| GOODWILL                                                                                                                                                                       |       | 6,770                    |       | 14,574                       |       |
| OTHER NON-CURRENT ASSETS, net                                                                                                                                                  |       | 22,611                   |       | 23,336                       |       |
| Total assets                                                                                                                                                                   |       | $                        | 317,845    |                         | $          | 353,422 |   |
|                                                                                                                                                                           |       |                     |       |                         |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                 |       |                     |       |                         |       |
| ** **                                                                                                                                                                     |       |                     |       |                         |       |
| CURRENT LIABILITIES:                                                                                                                                                           |       |                     |       |                         |       |
| Current maturities of long-term debt                                                                                                                                           |       | $                        | 173        |                         | $          | 78 |   |
| Accounts payable and accrued expenses                                                                                                                                          |       | 91,597                   |       | 98,452                       |       |
| Billings in excess of costs and estimated  earnings on uncompleted contracts                                                                                                   |       | 37,935                   |       | 35,277                       |       |
| Liabilities from discontinued operations                                                                                                                                       |       | 847                      |       | 1,920                        |       |
| Total current liabilities                                                                                                                                                      |       | 130,552                  |       | 135,727                      |       |
| LONG-TERM DEBT, net of current maturities                                                                                                                                      |       | 25,136                   |       | 45,698                       |       |
| OTHER NON-CURRENT LIABILITIES                                                                                                                                                  |       | 10,124                   |       | 18,072                       |       |
| Total liabilities                                                                                                                                                              |       | 165,812                  |       | 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; 15,418,357 and 15,418,357 shares  issued and 15,214,074 and 15,339,086 outstanding, respectively |       | 154                      |       | 154                          |       |
| Treasury stock, at cost, 204,283 and  79,271 shares, respectively                                                                                                         |       | (3,677                   | )          | (1,716                       | )          |
| Additional paid-in capital                                                                                                                                                     |       | 168,477                  |       | 168,070                      |       |
| Retained deficit                                                                                                                                                               |       | (12,921                  | )          | (12,583                      | )          |
| Total stockholders’ equity                                                                                                                                                |       | 152,033                  |       | 153,925                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                |       | $                        | 317,845    |                         | $          | 353,422 |   |

 

Theaccompanying Notes to condensed consolidated financial statements are anintegral part of these financial statements.

 

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** **

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

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)**

 
| ** **                                                                                          | ** ** | **Three Months Ended  March 31, 2008** | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **(Unaudited)**                                            | ** ** | **(Unaudited)**                                            | ** ** |
| ** **                                                                                          | ** ** | ** **                                                 | ** ** | ** **                                                 | ** ** |
| Revenues                                                                                            |       | $                                                          | 196,499    |                                                       | $          | 215,101 |   |
| Cost of services                                                                                    |       | 165,730                                                    |       | 179,532                                                    |       |
| Gross profit                                                                                        |       | 30,769                                                     |       | 35,569                                                     |       |
| Selling, general and administrative  expenses                                                       |       | 27,674                                                     |       | 35,310                                                     |       |
| (Gain) loss on sale of assets                                                                       |       | (7                                                         | )          | 35                                                         |       |
| Restructuring charges                                                                               |       | 2,098                                                      |       | —                                                     |       |
| Income from operations                                                                              |       | 1,004                                                      |       | 224                                                        |       |
| Other (income) expense:                                                                             |       |                                                       |       |                                                       |       |
| Interest expense                                                                                    |       | 1,918                                                      |       | 2,494                                                      |       |
| Interest income                                                                                     |       | (441                                                       | )          | (973                                                       | )          |
| Other (income) expense, net                                                                         |       | (896                                                       | )          | (2                                                         | )          |
| Interest and other expense, net                                                                     |       | 581                                                        |       | 1,519                                                      |       |
| Income (loss) from continuing operations  before income taxes                                       |       | 423                                                        |       | (1,295                                                     | )          |
| Provision (benefit) for income taxes                                                                |       | 330                                                        |       | (415                                                       | )          |
| Net income (loss) from continuing  operations                                                       |       | 93                                                         |       | (880                                                       | )          |
| Discontinued operations (Note 2)                                                               |       |                                                       |       |                                                       |       |
| Loss from discontinued operations,  including gain on disposal of assets of $7 and $3, respectively |       | (110                                                       | )          | (126                                                       | )          |
| Benefit for income taxes                                                                            |       | (56                                                        | )          | (266                                                       | )          |
| Net income (loss) from discontinued  operations                                                     |       | (54                                                        | )          | 140                                                        |       |
| Net income (loss)                                                                                   |       | $                                                          | 39         |                                                       | $          | (740 | ) |
|                                                                                                |       |                                                       |       |                                                       |       |
| Basic earnings (loss) per share:                                                                    |       |                                                       |       |                                                       |       |
| Continuing operations                                                                               |       | $                                                          | 0.01       |                                                       | $          | (0.06 | ) |
| Discontinued operations                                                                             |       | $                                                          | (0.00      | )                                                          | $          | 0.01 |   |
| Total                                                                                               |       | $                                                          | 0.00       |                                                       | $          | (0.05 | ) |
|                                                                                                |       |                                                       |       |                                                       |       |
| Diluted earnings (loss) per share:                                                                  |       |                                                       |       |                                                       |       |
| Continuing operations                                                                               |       | $                                                          | 0.01       |                                                       | $          | (0.06 | ) |
| Discontinued operations                                                                             |       | $                                                          | (0.00      | )                                                          | $          | 0.01 |   |
| Total                                                                                               |       | $                                                          | 0.00       |                                                       | $          | (0.05 | ) |
|                                                                                                |       |                                                       |       |                                                       |       |
| Shares used in the computation of earnings  (loss) per share (Note 4):                         |       |                                                       |       |                                                       |       |
| Basic                                                                                               |       | 15,015,717                                                 |       | 15,081,537                                                 |       |
| Diluted                                                                                             |       | 15,021,520                                                 |       | 15,081,537                                                 |       |

 

Theaccompanying Notes to condensed consolidated financial statements are anintegral part of these financial statements.

 

6

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**INTEGRATED ELECTRICAL SERVICES, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(IN THOUSANDS, EXCEPT SHARE AND PER SHAREINFORMATION)**

** **
| ** **                                                                                                    | ** ** | **Six Months Ended  March 31, 2008** | ** ** | **Six Months Ended  March 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **(Unaudited)**                                          | ** ** | **(Unaudited)**                                          | ** ** |
| ** **                                                                                                    | ** ** | ** **                                               | ** ** | ** **                                               | ** ** |
| Revenues                                                                                                      |       | $                                                        | 394,472    |                                                     | $          | 443,346 |   |
| Cost of services                                                                                              |       | 330,710                                                  |       | 369,647                                                  |       |
| Gross profit                                                                                                  |       | 63,762                                                   |       | 73,699                                                   |       |
| Selling, general and administrative  expenses                                                                 |       | 58,231                                                   |       | 70,662                                                   |       |
| Gain on sale of assets                                                                                        |       | (24                                                      | )          | (26                                                      | )          |
| Restructuring charges                                                                                         |       | 3,393                                                    |       | —                                                   |       |
| Income from operations                                                                                        |       | 2,162                                                    |       | 3,063                                                    |       |
| Other (income) expense:                                                                                       |       |                                                     |       |                                                     |       |
| Interest expense                                                                                              |       | 6,151                                                    |       | 5,069                                                    |       |
| Interest income                                                                                               |       | (1,545                                                   | )          | (1,983                                                   | )          |
| Other (income) expense, net                                                                                   |       | (1,323                                                   | )          | 95                                                       |       |
| Interest and other expense, net                                                                               |       | 3,283                                                    |       | 3,181                                                    |       |
| Loss from continuing operations before  income taxes                                                          |       | (1,121                                                   | )          | (118                                                     | )          |
| Provision (benefit) for income taxes                                                                          |       | (186                                                     | )          | 383                                                      |       |
| Net loss from continuing operations                                                                           |       | (935                                                     | )          | (501                                                     | )          |
| Discontinued operations (Note 2)                                                                         |       |                                                     |       |                                                     |       |
| Income (loss) from discontinued operations,  including gain on disposal of assets of $7 and $13, respectively |       | 338                                                      |       | (2,174                                                   | )          |
| Provision (benefit) for income taxes                                                                          |       | 161                                                      |       | (1,136                                                   | )          |
| Net income (loss) from discontinued  operations                                                               |       | 177                                                      |       | (1,038                                                   | )          |
| Net loss                                                                                                      |       | $                                                        | (758       | )                                                        | $          | (1,539 | ) |
|                                                                                                          |       |                                                     |       |                                                     |       |
| Basic earnings (loss) per share:                                                                              |       |                                                     |       |                                                     |       |
| Continuing operations                                                                                         |       | $                                                        | (0.06      | )                                                        | $          | (0.03 | ) |
| Discontinued operations                                                                                       |       | $                                                        | 0.01       |                                                     | $          | (0.07 | ) |
| Total                                                                                                         |       | $                                                        | (0.05      | )                                                        | $          | (0.10 | ) |
|                                                                                                          |       |                                                     |       |                                                     |       |
| Diluted earnings (loss) per share:                                                                            |       |                                                     |       |                                                     |       |
| Continuing operations                                                                                         |       | $                                                        | (0.06      | )                                                        | $          | (0.03 | ) |
| Discontinued operations                                                                                       |       | $                                                        | 0.01       |                                                     | $          | (0.07 | ) |
| Total                                                                                                         |       | $                                                        | (0.05      | )                                                        | $          | (0.10 | ) |
|                                                                                                          |       |                                                     |       |                                                     |       |
| Shares used in the computation of earnings  (loss) per share (Note 4):                                   |       |                                                     |       |                                                     |       |
| Basic                                                                                                         |       | 15,054,431                                               |       | 15,040,375                                               |       |
| Diluted                                                                                                       |       | 15,054,431                                               |       | 15,040,375                                               |       |

 

Theaccompanying Notes to condensed consolidated financial statements are anintegral part of these financial statements.

 

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** **

**INTEGRATED ELECTRICAL SERVICES, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

 
| ** **                                                                              | ** ** | **Six Months Ended  March 31, 2008** | ** ** | **Six Months Ended  March 31, 2007** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **(Unaudited)**                                          | ** ** | **(Unaudited)**                                          | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |       |                                                     |       |                                                     |       |
| Net loss                                                                                |       | $                                                        | (758       | )                                                        | $          | (1,539 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities:        |       |                                                     |       |                                                     |       |
| Net (income) loss from discontinued  operations                                         |       | (177                                                     | )          | 1,038                                                    |       |
| Bad debt expense                                                                        |       | 782                                                      |       | 525                                                      |       |
| Deferred financing cost amortization                                                    |       | 1,400                                                    |       | 653                                                      |       |
| Depreciation and amortization                                                           |       | 4,586                                                    |       | 5,007                                                    |       |
| Gain on sale of property and equipment                                                  |       | (24                                                      | )          | (26                                                      | )          |
| Non-cash paid-in-kind interest added to  term loan                                      |       | —                                                   |       | 3,513                                                    |       |
| Non-cash compensation expense                                                           |       | 1,859                                                    |       | 2,634                                                    |       |
| Non-cash restructuring write-offs                                                       |       | 131                                                      |       | —                                                   |       |
| Equity in gains of investment                                                           |       | (550                                                     | )          | —                                                   |       |
| Deferred income tax                                                                     |       | —                                                   |       | (170                                                     | )          |
| Changes in operating assets and  liabilities, net of effect of discontinued operations: |       |                                                     |       |                                                     |       |
| Accounts receivable                                                                     |       | (11,940                                                  | )          | 25,436                                                   |       |
| Inventories                                                                             |       | (3,095                                                   | )          | 3,101                                                    |       |
| Costs and estimated earnings in excess of  billings on uncompleted contracts            |       | 699                                                      |       | (57                                                      | )          |
| Prepaid expenses and other current assets                                               |       | 1,549                                                    |       | 4,903                                                    |       |
| Other non-current assets                                                                |       | (952                                                     | )          | (25                                                      | )          |
| Accounts payable and accrued expenses                                                   |       | (8,121                                                   | )          | (12,029                                                  | )          |
| Billings in excess of costs and estimated  earnings on uncompleted contracts            |       | 2,659                                                    |       | 2,144                                                    |       |
| Other non-current liabilities                                                           |       | 228                                                      |       | 166                                                      |       |
| Net cash provided by (used in) continuing  operations                                   |       | (11,724                                                  | )          | 35,274                                                   |       |
| Net cash provided by discontinued  operations                                           |       | 3,719                                                    |       | 5,012                                                    |       |
| Net cash provided by (used in) operating  activities                                    |       | (8,005                                                   | )          | 40,286                                                   |       |
|                                                                                    |       |                                                     |       |                                                     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |       |                                                     |       |                                                     |       |
| Purchases of property and equipment                                                     |       | (6,138                                                   | )          | (906                                                     | )          |
| Proceeds from sales of property and  equipment                                          |       | 218                                                      |       | 353                                                      |       |
| Distribution from unconsolidated affiliate                                              |       | 488                                                      |       | —                                                   |       |
| Net cash used in continuing operations                                                  |       | (5,432                                                   | )          | (553                                                     | )          |
| Net cash provided by (used in) discontinued  operations                                 |       | 7                                                        |       | (15                                                      | )          |
| Net cash used in investing activities                                                   |       | (5,425                                                   | )          | (568                                                     | )          |
|                                                                                    |       |                                                     |       |                                                     |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |       |                                                     |       |                                                     |       |
| Borrowings of debt                                                                      |       | 25,000                                                   |       | 69                                                       |       |
| Repayments of debt                                                                      |       | (45,467                                                  | )          | (26                                                      | )          |
| Payments for debt issuance costs                                                        |       | (500                                                     | )          | —                                                   |       |
| Acquisition of treasury stock                                                           |       | (3,412                                                   | )          | (637                                                     | )          |
| Net cash used in financing activities                                                   |       | (24,379                                                  | )          | (594                                                     | )          |
|                                                                                    |       |                                                     |       |                                                     |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                   |       | (37,809                                                  | )          | 39,124                                                   |       |
| CASH AND CASH EQUIVALENTS, beginning of  period                                         |       | 69,676                                                   |       | 28,166                                                   |       |
| CASH AND CASH EQUIVALENTS, end of period                                                |       | $                                                        | 31,867     |                                                     | $          | 67,290 |   |
|                                                                                    |       |                                                     |       |                                                     |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                                      |       |                                                     |       |                                                     |       |
| Cash paid for interest                                                                  |       | $                                                        | 1,902      |                                                     | $          | 1,079 |   |
| Cash paid for income taxes                                                              |       | $                                                        | 260        |                                                     | $          | 849 |   |

 

Non-cash investingactivities:  During the six months ended March 31,2008, we financed $3.2 million of prepaid insurance through an account payableto the insurance provider, we paid a $2.1 million account payable for propertyand equipment that was purchased and accrued during the year ended September 30,2007, and we recorded a $0.4 million accrued liability for the purchase ofproperty and equipment that was unpaid as of March 31, 2008.

 

The accompanying Notes tocondensed consolidated finance statements are an integral part of thesefinancial statements.

 

8

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

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**March 31, 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.

 

**SUMMARYOF 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 evaluationof a 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 recorded an$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 well as tax years prior to September 30,2004 to the extent of unutilized net operating losses generated in thoseyears.  Currently, one of oursubsidiaries is under a state audit for the tax years ended September 30,2002 and 2003.

 

9

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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 item (gain) loss on sale of assets which waspreviously included in other (income) expense.

 

**USE OF ESTIMATES AND ASSUMPTIONS**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires the use ofestimates and assumptions by management in determining the reported amounts ofassets and liabilities, disclosures of contingent liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.Estimates are primarily used in our revenue recognition for construction inprogress billings.  Other estimatesconsist of allowances for doubtful accounts receivable, inventory obsolescencereserves, fair value assumptions in analyzing goodwill and long-lived assetimpairments and adjustments from fresh-start accounting, realizability ofdeferred tax assets, self-insured claims liabilities, and future forfeiturerates and projected earnings used to measure stock-based compensation awards.

 

**SEASONALITYAND 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.

 

**RECENTLYISSUED 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.

 

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”) that 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, SFAS 157 will have on our financial results for our fiscal year beginningon October 1, 2009.  We believe wewill likely be required to provide additional disclosures in future financialstatements 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”) whichallows companies to choose to measure certain financial instruments and otheritems at fair value. SFAS 159 is effective for fiscal years beginning after November 15,2007. We are currently evaluating the potential impact, if any, SFAS 159 willhave on our financial results for our fiscal year beginning on October 1,2008; however, as we do not intend to elect fair value for any of our assetsand 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) eliminates the step acquisition model, changesthe recognition of contingent consideration from being recognized when it isprobable to being recognized at the time of acquisition, forbids thecapitalization of transaction costs, and changes when restructuring chargesrelated to acquisitions can be recognized. The standard is effective for fiscalyears beginning on or after December 15, 2008 and will only impact theaccounting for acquisitions that are made after adoption.

 

10

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**STOCK-BASEDCOMPENSATION**

 

Stock-based compensation consists of expenses related toemployee stock option awards, restricted stock grants and performance-basedrestricted stock grants (see Note 6).  Wehave adopted SFAS No. 123(R), “*Share-BasedPayment”*(“SFAS 123(R)”) to record our stock-based compensationawards.  SFAS 123(R) revisesSFAS No. 123, “*Accounting forStock-Based Compensation”* and focuses on accounting for share-basedpayments made to employees as compensation.  We recognize stock-based compensation expense in a pro-rata manner basedon the value of stock-based payment awards that are expected to vest, reducedfor estimated forfeitures. SFAS 123(R) requires forfeitures to beestimated at the time of grant and revised in subsequent periods if actualforfeitures differ from those estimates. We used the modified prospective application method at the time SFAS 123(R) wasadopted.

 

SFAS 123(R) does not require a specific valuation modelto measure the value of stock options, and either a binomial or theBlack-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 we granted.

 

The assumptions used in the binomial pricing model calculationfor the six months ended March 31, 2008 and 2007 are disclosed in thefollowing table:

 
| ** **                                                       | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                       | ** ** | **2007 (1)** | ** ** |
| ** **                                                       | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Weighted average value per option granted  during the period (2) |       | $                                              | 8.49       |   | $ | — |   |
| Assumptions:                                                     |       |                                           |       |   |   |
| Stock price volatility                                           |       | 51.6                                           | %          | — |   |
| Risk free rate of return                                         |       | 3.3                                            | %          | — |   |
| Future forfeiture rate (3)                                       |       | 0.0                                            | %          | — |   |
| Expected term                                                    |       | 6.0 years                                      |       | — |   |
|                                                                  |            |                                                |            |  |  |  |  |

 

----

(1) We did not award any stock options during the six month periodended March 31, 2007.

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

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

 

**2.STRATEGIC ACTIONS**

 

*Restructuring Program*

 

We are restructuring 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 reduce our coststructure, reposition our business to better serve our customers, strengthenfinancial controls and, as a result, position us to implement a market-basedgrowth strategy in the future.  Theoperational restructuring plan has consolidated administrative supportfunctions, eliminating redundant functions that were previously performed atour 27 business units. We expect to incur pre-tax restructuring charges,including severance benefits and consulting charges, of approximately $5.0million to $10.0 million over the course of the restructuring process, whichwill be substantially complete by September 30, 2008.

 

The first component of our restructuring program was initiated in June 2007.  Under this portion of the plannedrestructuring, 5 of our business units were integrated under the IES Industrialdivision, and the support and administrative functions of those businesses werecombined at an operating location in Houston, Texas.  In connection with this realignment, weapproved a transition and severance benefits program for 12 employees who wereseparated from the Company on or before February 29, 2008 through theelimination of redundant positions. During the six months ended March 31, 2008, we have recognizedapproximately $0.2 million in severance charges for the value of cashcompensation and payroll taxes that will be paid out through August 2008in the form of salary continuation. Since the inception of this program, we have recorded $0.4 million inseverance charges at our Industrial segment. These charges have been included in the caption restructuring charges inthe consolidated statement of operations, and we have a remaining liability of$0.1 million included in accounts payable and accrued expenses.

 

The second component of our restructuring program was initiated in September 2007.  Under this portion of the restructuring, 17of our business units were integrated under the IES Commercial division, andthe support and administrative functions of those businesses were combined atan operating location in Tempe, Arizona. In connection with this realignment, we approved a transition 

 

11

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and severance benefits plan for approximately 100 employees who havebeen or will be separated through the elimination of redundant positions. Theaffected employees will continue to work for the Company for up to six months.During the six months ended March 31, 2008, we recognized approximately$1.4 million in severance charges for cash compensation and payroll taxes thatwill be paid out through December 2008 in the form of salary continuation.  Since the inception of this program, we haverecorded $1.5 million in severance charges at our Commercial segment. Thesecharges have been included in the caption restructuring charges in theconsolidated statement of operations, and we have a remaining liability of $0.8million included in accounts payable and accrued expenses.  We expect to recognize an additional $0.1million in severance liabilities for the value of cash compensation forCommercial employees who have already been included in the transition andseverance program, which we expect to incur in our 2008 fiscal year.  We also expect to incur approximately $1.0million in severance charges for Commercial employees who have yet to beincluded in the transition and severance program.  These charges would be recorded over the nextsix months.

 

The third component of our restructuring program was also initiated in September 2007.  Under this portion of the restructuring, 5 ofour business units were integrated under the IES Residential division duringour 2008 fiscal year, and the support and administrative functions of thosebusinesses has been combined at an operating location near Houston, Texas.  In connection with this realignment, weapproved a transition and severance benefits plan for approximately 20employees who have been separated through the elimination of redundantpositions.  During the six months ended March 31,2008, we recognized approximately $0.2 million in severance liabilities forcash compensation and payroll taxes. These charges have been included in thecaption restructuring charges in the consolidated statement of operations, andwe have a remaining liability of $0.1 million included in accounts payable andaccrued expenses.  During the remaining six months of our 2008 fiscalyear, we expect to recognize less than $15,000 in severance liabilities for thevalue of cash compensation for employees who have already been included in theResidential transition and severance program.

 

In addition tothe severance costs described above, we incurred charges of approximately $0.8million and $1.5 million, respectively, for consulting services associated withour restructuring program during the three months and six months ended March 31,2008.  We also wrote off $0.1 million inthe current quarter of leasehold improvements at a location we closed.  Since we began the program in June 2007,we have recorded a total of $4.2 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  six months ended March 31, 2008 |       | 1,768                  |       | 1,625                                           |       | 3,393     |       |
| Less - cash payments during the six months  ended March 31, 2008           |       | (969                   | )          | (1,029                                          | )          | (1,998    | )          |
| Less - non-cash expenses / write-offs                                           |       | —                 |       | (131                                            | )          | (131      | )          |
| Restructuring liability at March 31,  2008                                 |       | $                      | 1,007      |                                            | $          | 645       |       | $ | 1,652 |   |

 

*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 subsidiaries in our Commercial andIndustrial segments. The exit plan committed to a shut-down or consolidation ofthe operations of these subsidiaries or the sale or other disposition of thesubsidiaries, whichever came sooner.  Inour assessment of the estimated net realizable value of the accounts receivableat these subsidiaries, we increased our general allowance for doubtful accountshaving considered various factors including the risk of collection and the ageof the receivables.

 

In June 2007,we shut down our Mid-States Electric operating company, located in Jackson,Tennessee.  Mid-States’ operating equipmentwas either transferred to other IES companies or sold to third parties. Allproject work was completed prior to the subsidiary being closed, and legacyprojects were completed by other IES companies. Mid-States’ assets, liabilitiesand operating results for both the current and prior periods have beenreclassified to discontinued operations. Mid-States was part of our Commercial segment prior to being classifiedas discontinued.

 

Remaining networking capital related to these subsidiaries was $0.8 million and $4.3 millionat March 31, 2008 and September 30, 2007, respectively. As a resultof inherent uncertainty in the exit plan and the monetization of thesesubsidiaries’ working capital, we could experience additional losses of workingcapital. At March 31, 2008, we believe we have recorded adequate reservesto reflect the net realizable value of the working capital; however, subsequentevents may impact our ability to collect these receivables.

 

12

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The exit planis substantially complete for the subsidiaries that we selected to exit in March 2006,and the operations of these subsidiaries substantially ceased as of September 30,2006. Mid-States’ operations were shut down as of June 30, 2007.  We have included the results of operationsrelated to these subsidiaries in discontinued operations for the three monthsand six months ended March 31, 2008, and all prior periods presented havebeen reclassified accordingly.

 

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

 
| ** **   | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------|------------|--------------------------------------------------|------------|
| ** **   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Revenues     |       | $                                                | 38         |   | $ | 2,806 |   |
| Gross loss   |       | $                                                | (50        | ) | $ | (51 | ) |
| Pre-tax loss |       | $                                                | (110       | ) | $ | (126 | ) |

 
| ** **            | ** ** | **Six Months Ended  March 31,** | ** ** |
|-----------------------|------------|------------------------------------------------|------------|
| ** **            | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| ** **            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Revenues              |       | $                                              | 933        |   | $ | 6,225 |   |
| Gross profit (loss)   |       | $                                              | 396        |   | $ | (1,648 | ) |
| Pre-tax income (loss) |       | $                                              | 338        |   | $ | (2,174 | ) |

 
| ** **                                                                   | ** ** | **March 31,  2008** | ** ** | **September 30,  2007** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Accounts receivable, net                                                     |       | $                        | 1,583      |                         | $          | 6,184 |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |       | 15                       |       | 8                            |       |
| Property and equipment, net                                                  |       | 211                      |       | 239                          |       |
| Total assets                                                                 |       | $                        | 1,809      |                         | $          | 6,431 |   |
|                                                                         |       |                     |       |                         |       |
| Accounts payable                                                             |       | $                        | 201        |                         | $          | 600 |   |
| Accrued liabilities                                                          |       | 477                      |       | 522                          |       |
| Billings in excess of costs and estimated  earnings on uncompleted contracts |       | 169                      |       | 798                          |       |
| Total liabilities                                                            |       | 847                      |       | 1,920                        |       |
| Net assets                                                                   |       | $                        | 962        |                         | $          | 4,511 |   |

 

**3.DEBT AND LIQUIDITY**

 

Debt consistsof the following (in thousands):

 
| ** **                                                                        | ** ** | **March 31,  2007** | ** ** | **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                                                           |       | 309                      |       | 178                          |       |
| Total debt                                                                        |       | 25,309                   |       | 45,776                       |       |
| Less — Short-term debt and current  maturities of long-term debt        |       | (173                     | )          | (78                          | )          |
| Total long-term debt                                                              |       | $                        | 25,136     |                         | $          | 45,698 |   |

 

Futurepayments on debt at March 31, 2008 are as follows (in thousands):

 
| 2008       |   | $      | 81     |   |
|------------|--------|--------|--------|--------|
| 2009       |   | 131    |   |
| 2010       |   | 89     |   |
| 2011       |   | 8      |   |
| 2012       |   | — |   |
| Thereafter |   | 25,000 |   |
| Total      |   | $      | 25,309 |   |

 

For the three months ended March 31, 2008 and 2007, we incurredinterest expense of $1.9 million and $2.5 million, respectively.  This included amortization of deferredfinancing charges of $0.7 million and $0.3 million.  For the six months ended March 31, 2008 

 

13

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and 2007, we incurred interest expense of $6.2 million and $5.1million, respectively.   This includeddeferred financing changes of $1.4 million and $0.5 million, and a prepaymentpenalty of $2.1 million during December 2007.

 

*The Revolving Credit Facility*

 

On the date weemerged from bankruptcy, May 12, 2006, we entered into an agreement (the“Loan and Security Agreement”) for a revolving credit facility (the “RevolvingCredit Facility”) with Bank of America and certain other lenders.  On May 9, 2008 we renegotiated the termsof our Revolving Credit Facility and entered into an amended agreement with thesame financial institutions.  The termsof the amended agreement are described later in this section.

 

As of, and forthe six month period ended March 31, 2008, the Revolving Credit Facilityprovided access to revolving borrowings in the aggregate amount of up to $80.0million, with a $72.0 million sub-limit for letters of credit, for the purposeof refinancing the debtor-in-possession credit facility and to provide lettersof credit and financing subsequent to confirmation of the reorganization plan.At March 31, 2008, we had $35.7 million available under the RevolvingCredit Facility and $37.7 million in letters of credit issued against theRevolving Credit Facility.  We haveremaining availability under the Revolving Credit Facility of $34.3 million forletters of credit.

 

As of, and forthe six month period ended March 31, 2008, loans under the RevolvingCredit Facility bore interest at LIBOR plus 3.5% or the base rate plus 1.5% onthe terms set in the credit agreement. In addition, we were charged monthly inarrears (1) an unused line fee of either 0.5% or 0.375%, depending on theutilization of the credit line, (2) a letter of credit fee equal to theapplicable per annum LIBOR margin times the amount of all outstanding lettersof credit, and (3) certain other fees and charges as specified in therevolving credit agreement.

 

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.

 

On December 12,2007, we entered into an amendment to the Loan and Security Agreement.  The amendment allowed for the exclusion fromthe calculation of fixed charges, in determining the fixed charge coverageratio, of certain capital investments made in September 2007 by us as partof our transformation program to implement operational improvements.  The amendment also permitted us to pay offour existing term loan and enter into a new subordinated note agreement for areduced principal amount.  Thistransaction is more fully described later in this Note.  Finally, the amendment allowed us toimplement a stock repurchase program for up to one million shares of our commonstock over the following 24 months (see Note 6).  We incurred a $0.5 million charge from Bankof America as a result of this amendment that was capitalized as a deferredfinancing fee.

 

On May 9,2008 we renegotiated the terms of our Revolving Credit Facility, extending thematurity date to May 12, 2010, reducing the facility size to $60.0million, and eliminating the restricted cash requirement. Interest on the loansunder the amended Revolving Credit Facility will be calculated at LIBOR plus3.0% or the lender’s prime rate (the “Base Rate”) plus 1.0% through September 30,2008.  Thereafter, interest is based onour total liquidity, as defined in the Loan and Security Agreement, at LIBOR orthe Base Rate, as shown in the following 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 will be 3.25% through September 30,2008, after which the letter of credit fee will be based on the same factor asloans outstanding.

 

In addition,we will be charged monthly in arrears (1) an unused line fee of either0.5% 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.

 

14

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*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 $53.0 millionsenior secured term loan (the “Eton Park Term Loan”) with Eton Park Fund L.P.and its affiliate and Flagg Street Partners LP and certain of its affiliates torefinance the Senior Convertible Notes. On December 12, 2007, we repaid the Eton Park Term Loan using cashon hand and the proceeds from a new senior subordinated note.  Along with a prepayment penalty of $2.1million that was included in interest expense and accrued interest of $1.0million, the payoff amount was $48.7 million. Finally, we wrote off previously unamortized debt issuance costs of $0.3million on the Eton Park Term Loan.

 

The Eton ParkTerm Loan bore interest at 10.75% per annum, subject to adjustment as set forthin the 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 as additionalloans under the Eton Park Term Loan. We capitalized interest as additionalloans of $1.7 million and $3.5 million, respectively, during the three monthsand six months ended March 31, 2007. We did not capitalize any interestexpense 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 Eton ParkTerm Loan, we capitalized interest as additional loans of $7.6 million. TheEton 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.

 

*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 subordinated note (the “Note”), together with cash on hand,were used to fund the repayment of the Eton Park Term Loan (discussed in thepreceding section).

 

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.  The Note may be repaid at any timeprior to the maturity date by us at par plus accrued interest withoutpenalty.  The Note is subordinated to ourexisting Revolving Credit Facility. The Note is an unsecured obligation of theCompany and its subsidiary borrowers. The Note contains no financial covenantsor restrictions on dividends or distributions to stockholders.

 

*Financial Covenants*

 

The financialcovenants for the Revolving Credit Facility in effect on March 31, 2008are described in the table that follows. As discussed above, on December 12, 2007, we entered into anamendment to the Loan and Security Agreement. In determining the fixed charge coverage ratio, the amendment allowedfor the exclusion from the calculation of fixed charges of certain capitalinvestments we made in September 2007 as part of our transformationprogram to implement operational improvements. As of March 31, 2008, we are in compliance with all of the amendedfinancial covenants under the Revolving Credit Facility, which are shown in thefollowing table:

 

15

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| **Covenant**                                              | ** ** | **Requirement**                            | ** ** | **Actual as of  March 31, 2008** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------------|------------|
| Shutdown Subsidiaries Earnings Before  Interest and Taxes |       | Cumulative loss not to exceed $2.0 million |       | $1.0 million                                         |       |
| Fixed Charge Coverage Ratio                               |       | Minimum of 1.25:1.00                       |       | 1.52:1.00                                            |       |
| Leverage Ratio                                            |       | Maximum of 4.00:1.00                       |       | 2.09:1.00                                            |       |
| Maintain Cash Collateral                                  |       | Minimum of $20.0 million                   |       | $20.0 million                                        |       |

 

As of September 30,2007, we were also in compliance with all of our amended financial covenantsunder the Revolving Credit Facility.

 

As notedabove, we entered into an amendment to the agreement governing our RevolvingCredit Facility on May 9, 2008 which also modified the financialcovenants.  The revised covenants areindicated below.

 

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

 

----

| (1)  | This  covenant requirement will not be in effect at any time our total liquidity,  as defined in the Loan and Security Agreement, exceeds $50 million. |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**4.EARNINGS PER SHARE**

 

In conjunction with the reorganization plan,effective May 12, 2006, our common stock underwent a reverse split whichconverted 17.0928 shares of old common stock into the right to receive oneshare of new common stock. In accordance with FASB Statement No. 128, *“Earnings per Share,”* the computations of basic and dilutedearnings per share have been adjusted retroactively for all periods presentedto reflect that change in capital structure.

 

Our restricted shares granted under the 2006Equity Incentive Plan participate in any dividends declared on our commonstock.  Accordingly, the restrictedshares are considered participating securitiesunder the two-class method asrequired by Emerging Issues Task Force Issue No. 03-6, “*Participating Securities and the**Two-classmethod under FASB Statement No. 128*.”  Thetwo-class method is an earnings allocation formula that determines earnings foreach class of common stock and participating securities according to dividendsdeclared or accumulated and participation rights in undistributed earnings.Under the two-class method, net income is reduced by the amount of dividendsdeclared in the current period for each class of stock and by the contractualamounts of dividends that must be paid for the current period. The remainingearnings are then allocated to common stock and participating securities to theextent that each security may share in earnings as if all of the earnings forthe period had been distributed. Diluted earnings per share is calculated usingthe treasury stock and “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, these participatingsecurities will not be allocated any losses in the periods of net losses, butwill be allocated income in the periods of net income using the two-classmethod.

 

Thetables that follow reconcile the components of the basic and diluted earnings pershare for the three months and six months ended March 31, 2008 and 2007(in thousands, except per share and per share data):

 
| ** **                                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Numerator:                                                                            |       |                                             |       |   |   |
| Net income (loss) from continuing  operations attributable to common shareholders     |       | $                                                | 91         |   | $ | (880 | ) |
| Net income (loss) from continuing  operations attributable to restricted shareholders |       | 2                                                |       | — |   |
| Net income (loss) from continuing  operations                                         |       | $                                                | 93         |   | $ | (880 | ) |

 

16

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| Net income (loss) from discontinued  operations attributable to common shareholders     |   | $          | (54    | )          | $      | 138    |   |
|-----------------------------------------------------------------------------------------|--------|------------|--------|------------|--------|--------|--------|
| Net income (loss) from discontinued  operations attributable to restricted shareholders |   | —     |   | 2          |   |
| Net income (loss) from discontinued  operations                                         |   | $          | (54    | )          | $      | 140    |   |
|                                                                                    |   |       |   |       |   |   |   |
| Net income (loss) attributable to common  shareholders                                  |   | $          | 38     |       | $      | (740   | )      |
| Net income (loss) attributable to  restricted shareholders                              |   | 1          |   | —     |   |
| Net income (loss)                                                                       |   | $          | 39     |       | $      | (740   | )      |
|                                                                                    |   |       |   |       |   |
| Denominator:                                                                            |   |       |   |       |   |
| Weighted average common shares outstanding —  basic                                |   | 15,015,717 |   | 15,081,537 |   |
| Effect of dilutive stock options and  non-vested restricted stock                       |   | 5,803      |   | —     |   |
| Weighted average common and common  equivalent shares outstanding — diluted        |   | 15,021,520 |   | 15,081,537 |   |
|                                                                                    |   |       |   |       |   |
| Basic income (loss) per share:                                                          |   |       |   |       |   |
| Basic income (loss) per share from  continuing operations                               |   | $          | 0.01   |       | $      | (0.06  | )      |
| Basic income (loss) per share from  discontinued operations                             |   | $          | (0.00  | )          | $      | 0.01   |   |
| Basic loss per share                                                                    |   | $          | 0.00   |       | $      | (0.05  | )      |
|                                                                                    |   |       |   |       |   |
| Diluted income (loss) per share:                                                        |   |       |   |       |   |
| Diluted income (loss) per share from  continuing operations                             |   | $          | 0.01   |       | $      | (0.06  | )      |
| Diluted income (loss) per share from  discontinued operations                           |   | $          | (0.00  | )          | $      | 0.01   |   |
| Diluted loss per share                                                                  |   | $          | 0.00   |       | $      | (0.05  | )      |

 
| ** **                                                                              | ** ** | **Six Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Numerator:                                                                              |       |                                           |       |   |   |
| Net loss from continuing operations  attributable to common shareholders                |       | $                                              | (935       | ) | $ | (501 | ) |
| Net loss from continuing operations  attributable to restricted shareholders            |       | —                                         |       | — |   |
| Net loss from continuing operations                                                     |       | $                                              | (935       | ) | $ | (501 | ) |
|                                                                                    |       |                                           |       |   |   |
| Net income (loss) from discontinued  operations attributable to common shareholders     |       | $                                              | 174        |   | $ | (1,038 | ) |
| Net income (loss) from discontinued  operations attributable to restricted shareholders |       | 3                                              |       | — |   |
| Net income (loss) from discontinued  operations                                         |       | $                                              | 177        |   | $ | (1,038 | ) |
|                                                                                    |       |                                           |       |   |   |
| Net loss attributable to common  shareholders                                           |       | $                                              | (758       | ) | $ | (1,539 | ) |
| Net loss attributable to restricted  shareholders                                       |       | —                                         |       | — |   |
| Net loss                                                                                |       | $                                              | (758       | ) | $ | (1,539 | ) |
|                                                                                    |       |                                           |       |   |   |
| Denominator:                                                                            |       |                                           |       |   |   |
| Weighted average common shares outstanding —  basic                                |       | 15,054,431                                     |       | 15,040,375 |   |
| Effect of dilutive stock options and  non-vested restricted stock                       |       | —                                         |       | — |   |
| Weighted average common and common  equivalent shares outstanding — diluted        |       | 15,054,431                                     |       | 15,040,375 |   |
|                                                                                    |       |                                           |       |   |   |
| Basic income (loss) per share:                                                          |       |                                           |       |   |   |
| Basic income (loss) per share from  continuing operations                               |       | $                                              | (0.06      | ) | $ | (0.03 | ) |
| Basic income (loss) per share from  discontinued operations                             |       | $                                              | 0.01       |   | $ | (0.07 | ) |
| Basic loss per share                                                                    |       | $                                              | (0.05      | ) | $ | (0.10 | ) |
|                                                                                    |       |                                           |       |   |   |
| Diluted income (loss) per share:                                                        |       |                                           |       |   |   |
| Diluted income (loss) per share from  continuing operations                             |       | $                                              | (0.06      | ) | $ | (0.03 | ) |
| Diluted income (loss) per share from  discontinued operations                           |       | $                                              | 0.01       |   | $ | (0.07 | ) |
| Diluted loss per share                                                                  |       | $                                              | (0.05      | ) | $ | (0.10 | ) |

 

**5.OPERATING SEGMENTS**

 

In accordancewith SFAS No. 131, *“Disclosuresabout Segments of an Enterprise**andRelated Information”*certain information is disclosed based on theway management organizes financial information for making operating decisionsand assessing performance.

 

We manage andmeasure performance of our business in three distinct operating segments;commercial, industrial, and residential. We also have a corporate segment that provides general andadministrative services to our operating segments. The commercial 

 

17

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segmentprovides electrical and communications contracting, design, installation,renovation, engineering and maintenance and replacement services in facilitiessuch as office buildings, high-rise apartments and condominiums, theaters,restaurants, hotels, hospitals and critical-care facilities, school districts,light manufacturing and processing facilities, military installations,airports, outside plant, network enterprises and switch network customers. Theindustrial segment provides electrical contracting, design, installation,renovation and engineering and maintenance and replacement services infacilities such as manufacturing and distribution centers, water treatmentfacilities, refineries, petrochemical and power plants, and alternative energyfacilities.  In addition to theseservices, our industrial segment also assembles modular power distributioncenters.  The residential segment consistsof electrical contracting, installation, replacement and renovation services insingle-family, condominium, townhouse and low-rise multifamily housing units.Corporate includes expenses associated with our home office.

 

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.

 

Segmentinformation for continuing operations for the three months and six months endedMarch 31, 2008 and 2007 is as follows (in thousands):

 
| ** **                            | ** ** | **Three Months Ended March 31, 2008 (Unaudited)** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Commercial**                                                                  | ** ** | **Industrial** | ** ** | **Residential** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                              |       | $                                                                               | 111,491    |   | $ | 34,688 |   | $ | 50,320 |   | $ | — |   | $ | 196,499 |   |
| Cost of services                      |       | 95,542                                                                          |       | 29,933 |   | 40,255 |   | — |   | 165,730 |   |
| Gross profit                          |       | 15,949                                                                          |       | 4,755 |   | 10,065 |   | — |   | 30,769 |   |
| Selling, general and administrative   |       | 9,646                                                                           |       | 1,903 |   | 8,183 |   | 7,942 |   | 27,674 |   |
| Loss (gain) on sale of assets         |       | (103                                                                            | )          | — |   | 61 |   | 35 |   | (7 | ) |
| Restructuring charge                  |       | 1,873                                                                           |       | 136 |   | 89 |   | — |   | 2,098 |   |
| Income (loss) from operations         |       | $                                                                               | 4,533      |   | $ | 2,716 |   | $ | 1,732 |   | $ | (7,977 | ) | $ | 1,004 |   |
| Other data:                           |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense |       | $                                                                               | 796        |   | $ | 327 |   | $ | 645 |   | $ | 605 |   | $ | 2,373 |   |
| Capital expenditures                  |       | $                                                                               | 106        |   | $ | 474 |   | $ | 212 |   | $ | 637 |   | $ | 1,429 |   |
| Total assets                          |       | $                                                                               | 131,382    |   | $ | 34,288 |   | $ | 64,094 |   | $ | 86,272 |   | $ | 316,036 |   |

 
| ** **                            | ** ** | **Three Months Ended March 31, 2007 (Unaudited)** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Commercial**                                                                  | ** ** | **Industrial** | ** ** | **Residential** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                              |       | $                                                                               | 113,819    |   | $ | 27,607 |   | $ | 73,675 |   | $ | — |   | $ | 215,101 |   |
| Cost of services                      |       | 97,437                                                                          |       | 22,937 |   | 59,158 |   | — |   | 179,532 |   |
| Gross profit                          |       | 16,382                                                                          |       | 4,670 |   | 14,517 |   | — |   | 35,569 |   |
| Selling, general and administrative   |       | 13,268                                                                          |       | 2,070 |   | 7,678 |   | 12,294 |   | 35,310 |   |
| Loss (gain) on sale of assets         |       | (42                                                                             | )          | (11 | ) | 30 |   | 58 |   | 35 |   |
| Income (loss) from operations         |       | $                                                                               | 3,156      |   | $ | 2,611 |   | $ | 6,809 |   | $ | (12,352 | ) | $ | 224 |   |
| Other data:                           |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense |       | $                                                                               | 1,236      |   | $ | 151 |   | $ | 252 |   | $ | 967 |   | $ | 2,606 |   |
| Capital expenditures                  |       | $                                                                               | 25         |   | $ | 194 |   | $ | 64 |   | $ | 62 |   | $ | 345 |   |
| Total assets                          |       | $                                                                               | 111,166    |   | $ | 31,840 |   | $ | 63,469 |   | $ | 145,603 |   | $ | 352,078 |   |

 

18

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** **
| ** **                            | ** ** | **Six Months Ended March 31, 2008 (Unaudited)** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Commercial**                                                                | ** ** | **Industrial** | ** ** | **Residential** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                              |       | $                                                                             | 221,172    |   | $ | 67,686 |   | $ | 105,614 |   | $ | — |   | $ | 394,472 |   |
| Cost of services                      |       | 188,965                                                                       |       | 57,099 |   | 84,646 |   | — |   | 330,710 |   |
| Gross profit                          |       | 32,207                                                                        |       | 10,587 |   | 20,968 |   | — |   | 63,762 |   |
| Selling, general and administrative   |       | 20,597                                                                        |       | 4,533 |   | 16,712 |   | 16,389 |   | 58,231 |   |
| Loss (gain) on sale of assets         |       | (120                                                                          | )          | — |   | 61 |   | 35 |   | (24 | ) |
| Restructuring charge                  |       | 3,025                                                                         |       | 227 |   | 141 |   | — |   | 3,393 |   |
| Income (loss) from operations         |       | $                                                                             | 8,705      |   | $ | 5,827 |   | $ | 4,054 |   | $ | (16,424 | ) | $ | 2,162 |   |
| Other data:                           |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense |       | $                                                                             | 1,359      |   | $ | 615 |   | $ | 1,333 |   | $ | 1,279 |   | $ | 4,586 |   |
| Capital expenditures                  |       | $                                                                             | 170        |   | $ | 534 |   | $ | 284 |   | $ | 3,506 |   | $ | 4,494 |   |

 
| ** **                            | ** ** | **Six  Months Ended March 31, 2007 (Unaudited)** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                            | ** ** | **Commercial**                                        | ** ** | **Industrial** | ** ** | **Residential** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                              |       | $                                                     | 226,304    |   | $ | 57,837 |   | $ | 159,205 |   | $ | — |   | $ | 443,346 |   |
| Cost of services                      |       | 191,559                                               |       | 48,861 |   | 129,227 |   | — |   | 369,647 |   |
| Gross profit                          |       | 34,745                                                |       | 8,976 |   | 29,978 |   | — |   | 73,699 |   |
| Selling, general and administrative   |       | 24,460                                                |       | 4,350 |   | 17,848 |   | 24,004 |   | 70,662 |   |
| Loss (gain) on sale of assets         |       | (83                                                   | )          | (28 | ) | 27 |   | 58 |   | (26 | ) |
| Income (loss) from operations         |       | $                                                     | 10,368     |   | $ | 4,654 |   | $ | 12,103 |   | $ | (24,062 | ) | $ | 3,063 |   |
| Other data:                           |       |                                                  |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense |       | $                                                     | 1,943      |   | $ | 308 |   | $ | 509 |   | $ | 2,247 |   | $ | 5,007 |   |
| Capital expenditures                  |       | $                                                     | 316        |   | $ | 267 |   | $ | 246 |   | $ | 77 |   | $ | 906 |   |

 

We have nooperations or long-lived assets in countries outside of the United States.

 

Total assetsas of March 31, 2008 and 2007 exclude assets from discontinued operationsof $1.8 million and $12.7 million, respectively.

 

**6.****      STOCKHOLDERS’ EQUITY**

 

The 2006Equity Incentive Plan (the “2006 Plan”) became effective under our plan ofreorganization on May 12, 2006. The 2006 Plan, as amended, provides forgrants of both stock options and common stock, including restricted stock andperformance-based restricted stock. We have approximately 1.5 millionshares of common stock authorized for issuance under the 2006 Plan.

 

*Treasury Stock*

 

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 March 31, 2008, we have repurchased 156,161 shares at an averagecost of $18.09.  During the six months ended March 31, 2008, werepurchased 31,212 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 39,289 unvested shares havebeen forfeited by former employees and returned to treasury stock.

 

*Restricted Stock*

 

We granted101,650 shares of restricted stock to our employees during the first six monthsof our 2008 fiscal year.  Theserestricted shares were granted at prices ranging from $13.38 to $19.98 with aweighted average price of $19.17.  7,500of these shares vest one-third per year beginning on the first anniversary ofthe grant, and the remaining 94,150 cliff vest on the third anniversary of thegrant.

 

We granted3,600 shares of restricted stock to one employee during the first six months ofour 2007 fiscal year that were subsequently forfeited in October 2007.  These restricted shares were granted at$23.61 and were to vest one-third per year beginning on the first anniversaryof the grant.

 

During the three months ended March 31, 2008 and 2007, werecognized $0.7 million and $0.7 million, respectively, in compensation expenserelated to these awards.  During the sixmonths ended March 31, 2008 and 2007, we recognized $1.4 million and $2.5million, 

respectively, in compensation expense related to these awards.  As of March 31, 2008, the unamortizedcompensation cost related to 

 

19

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outstanding unvested restricted stock was $3.0 million.  We expect to recognize $1.2 million relatedto these awards during the remaining six months of our 2008 fiscal year, and$1.8 million thereafter.

 

All therestricted shares granted under the 2006 Plan (vested or unvested) participatein dividends issued to common shareholders, if any.

 

*Performance-Based Restricted Stock*

 

During the sixmonths ended March 31, 2008, we granted 15 members of our seniormanagement team 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 fiscal years.  The potential range of this award is between0 and 188,300 shares of restricted stock, depending on the actual cumulativeearnings per share for this period.

 

At the time the awards were granted, we forecasted that we willultimately issue 94,150 restricted shares, and we have based our compensationexpense on this amount.  The awards vestover three years and are being amortized in a straight-line manner throughoutthat period.  As of March 31, 2008,we believe our target estimate is reasonable; however, any deviation in thecumulative fully diluted earnings per share that we achieve during our 2008 and2009 fiscal years will result in a change in the actual amount of stock basedcompensation that we recognize over the vesting period.  Under SFAS 123(R), the estimated fair valueof these PSUs on the date of grant was $1.5 million.

 

During the three months and six months ended March 31, 2008, werecognized $0.1 million and $0.2 million, respectively, in compensation expenserelated to these PSU awards.  As of March 31,2008, the unamortized compensation cost related to the PSU awards was $1.3million.  We expect to recognize $0.3million related to these awards during the remaining six months of our 2008fiscal year, and $1.0 million thereafter.

 

*Stock Options*

 

We granted21,000 stock options during the first six months of our 2008 fiscal year.  These options have exercise prices rangingfrom $13.38 to $18.79 with a weighted average exercise price of $16.21. Theseoptions vest over a three year period at a rate of one-third on the annualanniversary date of the grant and expire ten years from the grant date if theyare not exercised.

 

We did notgrant any stock options during the first six months of our 2007 fiscal year.

 

During the three months ended March 31, 2008 and 2007, werecognized $0.1 million and $0.1 million, respectively, in compensation expenserelated to these awards.  During the sixmonths ended March 31, 2008 and 2007, we recognized $0.2 million and $0.2million, respectively, in compensation expense related to these awards.  As of March 31, 2008, the unamortizedcompensation cost related to outstanding unvested stock options was $0.9million.  We expect to recognize $0.3million related to these awards during the remaining six months of our 2008 fiscalyear, 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                            |       | —     |       | —                                         |       |
| Forfeited                            |       | 5,000      |       | 13.38                                          |       |
| Outstanding, March 31, 2008     |       | 207,471    |       | $                                              | 25.92      |   |
| Exercisable, March 31, 2008     |       | 84,804     |       | $                                              | 33.75      |   |

 

20

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The following table summarizes all options outstanding and exercisableat March 31, 2008:

 
| **Range of Exercise Prices** | ** ** | **Outstanding as of  March 31, 2008** | ** ** | **Remaining  Contractual Life  in Years** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Exercisable as of  March 31, 2008** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| $13.38 -  $18.79                            |       | 116,000                                                   |       | 8.5                                                 |       | $                                         | 17.32      |                                                      | 33,333     |                                      | $          | 17.36 |   |
| $25.08 -  $33.55                            |       | 40,000                                                    |       | 9.1                                                 |       | 27.15                                     |       | —                                                    |       | —                                    |       |
| $34.50 -  $57.50                            |       | 51,471                                                    |       | 0.1                                                 |       | 44.36                                     |       | 51,471                                                    |       | 44.36                                     |       |
|                                        |       | 207,471                                                   |       | 6.5                                                 |       | $                                         | 25.92      |                                                      | 84,804     |                                      | $          | 33.75 |   |

 

Upon exerciseof stock options, it is our policy to first issue shares from treasury stock,then to issue new shares.  Unexercisedoptions expire between May 2008 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 some 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 are managedthrough safety programs, insurance programs, litigation management at thecorporate office and the local level and a network of attorneys and law firmsthroughout the country. Nevertheless, claims are sometimes made and lawsuitsfiled and sometimes for amounts in excess of their value or amounts for whichthey are eventually resolved. Claims and litigation normally follow apredictable course of time to resolution. Given our size, with many contractsand employees, there can be periods of time where a disproportionate amount ofthe claims and litigation may be concluded all in the same quarter, or year. Ifthese matters resolve near the same time then the cumulative effect can behigher than the ordinary level in any one reporting period.  In our opinion, all such proceedings are eitheradequately covered by insurance or, if not so covered, should not ultimatelyresult in any liability which would have a material adverse effect on ourfinancial position, liquidity or results of operations. We expense routinelegal costs related to proceedings as incurred.

 

We are notaware of any litigation or pending litigation that we currently believe willhave a material impact on our results of operations or our financial position.

 

We are subjectto large 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 March 31, 2008, we have $12.1 million accrued for selfinsurance liabilities including $4.3 million for general liability coveragelosses. For those legal proceedings not expected to be covered by insurance, wehave accrued $0.1 million at March 31, 2008.

 

*Surety*

 

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 our subcontractors and vendors. In the event thatwe fail to perform under a contract or pay subcontractors and vendors, thecustomer may demand the surety to pay or perform under our bond. Our relationshipwith our sureties is such that we will indemnify the sureties for any expensesthey incur in connection with any of the bonds they issue on our behalf. Todate, we have not incurred significant expenses to indemnify our sureties forexpenses they incurred on our behalf. As of March 31, 2008, our cost tocomplete projects covered by surety bonds was $118.7 million, and we utilized acombination of cash and letters of credit totaling $34.1 million tocollateralize our bonding programs. At March 31, 2008, that collateral wascomprised of $22.5 million in letters of credit and $11.6 million of cash andaccumulated interest which is included in Other Non-Current Assets.

 

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 

 

21

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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.

 

Under thecurrent terms of our primary surety agreement, we may have up to $150.0 millionin costs to complete on bonded projects at any time.  We maintain $9.0 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.

 

*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 March 31, 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 the representationsof the purchaser who is, in those cases, often the person most familiar withthe business sold. There is the potential from selling assets net ofliabilities, but retaining the entities from which they were sold, that if thepurchaser is unwilling or unable to perform the transferred liabilities, we maybe forced to fulfill obligations that were assigned or sold to others. If thiswere to occur, we would seek reimbursement from the purchasers. These potentialliabilities will continue to diminish over time. To date, we have not beenrequired to perform any projects sold under this divestiture program.

 

From time totime, we may enter into firm purchase commitments for materials such as copperwire and aluminum wire among others which we expect to use in the ordinarycourse of business. These commitments are typically for terms less than oneyear and require us to buy minimum quantities of materials at specificintervals at a fixed price over the term. As of March 31, 2008, we had$5.6 million in open purchase commitments for 1.7 million pounds of copper wirewhich we expect to take delivery on between April 2008 and June 2008.

 

As of March 31,2008, one of our subsidiaries 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 and believe payment is not probable.  In 2006 we reversed previously recognized revenuesrelated to this project of $0.5 million and wrote off a related $0.4 millionreceivable and $0.1 million underbilling because we believed the revenues wereuncollectible.   We recognize thatlitigation may ensue related to the entire $4.9 million in backcharges.  While we believe these charges aresubstantially without merit, there can be no assurances that we will ultimatelyprevail in this dispute or any litigation that may be commenced.

 

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 againstlegal fees and the remainder as other income. This settlement was to compensatethe Company for damages associated with these employees’ departure from theCompany.  We collected this settlement infull in March 2008.

 

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We havecommitted to invest up to $5.0 million in EnerTech Capital Partners II L.P.(“EnerTech”). EnerTech is a private equity firm specializing in investmentopportunities emerging from the deregulation and resulting convergence of theenergy, utility and telecommunications industries. Through March 31, 2008,we had invested $4.85 million under our commitment to EnerTech.

 

We are partyto an arrangement with a third party to finance certain insurance premiums forwhich that company has rights to receive a refund of amounts paid to theinsurance companies should we cancel the underlying insurance policies. At March 31,2008, we had $3.2 million in prepaid expenses and a corresponding $3.3 millionaccrued liability related to this arrangement.

 

**8.   SUBSEQUENT EVENTS**

 

On May 9,2008 we entered into an amendment to our Revolving Credit Facility with Bank ofAmerica and other creditors, extending the maturity date to May 12, 2010and reducing the facility size to $60.0 million. Other terms and covenants ofthe renewed agreement are described in Note 3, *“Debt”.*

 

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** **

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

 

You should read the following discussion of our financial condition andresults of operations with our audited consolidated financial statements, therelated Notes, and management’s discussion and analysis included in our September 30,2007 Annual 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.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our discussionand analysis of our financial condition and results of operation are based onour condensed 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 haveidentified the accounting principles, which we believe are most critical to ourreported financial status by considering accounting policies that involve themost complex or subjective decisions or assessments. We identified our mostcritical accounting policies to be those related to revenue recognition, theassessment of goodwill impairment, our allowance for doubtful accounts receivable,the recording of our self-insurance liabilities and 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 2007Form 10-K.

 

During the first six months of our 2008 fiscal year, there has beenonly one change to our critical accounting policies and estimates from thosedescribed in our 2007 Form 10-K. On October 1, 2007, we adopted theprovisions of FASB Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes, an Interpretation of FASB Statement 109”*(“FIN 48”).  FIN 48 created a singlemodel to address accounting for uncertain income tax positions and establisheda minimum recognition threshold a tax position must meet before beingrecognized in the financial statements. For additional analysis of our adoptionof FIN 48, see Item 1*. CondensedConsolidated Financial Statements*— Note 1, *“Business*” of this report.

** **

**RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

** **

We discuss recently adopted and issued accounting standards inItem 1*. Condensed ConsolidatedFinancial Statements*— Note 1, *“Business”*of this report.

** **

**RESTRUCTURING PROGRAM**

 

As more fully described in Note 2 of our condensed consolidatedfinancial statements, we are restructuring our operations from our previousgeographic structure into three major lines of business: Industrial, Commercialand Residential.  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 us to implement a market-basedgrowth strategy in the future.  Theoperational restructuring plan has consolidated administrative supportfunctions, eliminating redundant functions that were previously performed ateach of our 27 business units. We expect to incur pre-tax restructuringcharges, including severance benefits and consulting charges, of approximately$5.0 million to $10.0 million over the course of the process, which is expectedto be substantially complete by September 30, 2008.

 

The first component of our restructuring program was initiated at ourIndustrial division in June 2007. Under this portion of the planned restructuring, 5 of our business unitswere integrated under the IES Industrial division, 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 12employees who were separated from the Company on or before February 29,2008 through the elimination of redundant positions.

 

The second component of our restructuring program was initiated at ourCommercial division in September 2007. Under this portion of the restructuring, 17 of our business units wereintegrated under the IES Commercial division, and the support andadministrative functions of those businesses were combined at one operatinglocation.  In connection with thisrealignment, we approved a transition 

 

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and severance benefits program for approximately 100 employees who havebeen or will be separated through the elimination of redundant positions. Theaffected employees may continue to work for the Company for up to six months.

 

The third component of our restructuring program was initiated at ourResidential division in September 2007. Under this portion of the restructuring, 5 of our business units wereintegrated under the IES Residential division during our 2008 fiscal year, andthe support and administrative functions of those businesses has been combinedat one operating location. In connection with this realignment, we approved atransition and severance benefits plan for approximately 20 employees who havebeen separated through the elimination of redundant positions.

 

During the first six months of our 2008 fiscal year, we have expandedour restructuring efforts in response to the softening market conditions incertain segments of our business, and for further business optimization. Duringthe quarter ended March 31, 2008, we have:

 

·                  Reorganized theCommercial line of business into six operating divisions, replacing severaloperating company presidents with six general managers.

 

·                  Accelerated therollout of our employee severance programs, particularly within our Commercialline of business.

 

·                  Closed threeoffice locations in our Residential line of business and two office locationsin our Commercial line of business, consolidating them into other IESlocations.

 

·                  Hired a newGroup Vice President at our Industrial line of business.

 

·                  Reassigned aResidential Vice President to focus solely on multi-family housing.

** **

**EXIT OR DISPOSAL ACTIVITIES**

 

In March 2006,based on the recommendation of our Board of Directors, we committed to an exitplan with respect to several underperforming subsidiaries. The exit plancommitted to a shut-down or consolidation of the operations of thesesubsidiaries, or the sale or other disposition of the subsidiaries, whichevercame sooner. In June 2007, we also shut down our Mid-States Electricoperating company, located in Jackson, Tennessee. Mid-States’ operatingequipment was either transferred to other IES companies or will be sold tothird parties. 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 planis substantially complete for the subsidiaries that we elected to exit in March 2006,and the operations of these subsidiaries 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 subsidiaries indiscontinued operations for both the current period and all prior periods.Accordingly, previously reported results of these operations have beenreclassified. Revenue for these subsidiaries totaled $0.9 million and $6.2million for the six months ended March 31, 2008 and 2007,respectively.  Remaining net workingcapital related to these subsidiaries was $0.8 million and $4.3 million at March 31,2008 and September 30, 2007, respectively.

** **

**FINANCING**

 

*The Revolving Credit Facility*

 

On the date weemerged from bankruptcy, May 12, 2006, we entered into an agreement (the“Loan and Security Agreement”) for a revolving credit facility (the “RevolvingCredit Facility”) with Bank of America and certain other lenders.  On May 9, 2008 we entered into a revisedagreement governing the Revolving Credit Facility with the same financialinstitutions.  The terms of the revisedagreement are described in Note 3, *“Debt”.*

 

As of, and forthe six month period ended March 31, 2008, the Revolving Credit Facilityprovided access to revolving borrowings in the aggregate amount of up to $80.0million, with a $72.0 million sub-limit for letters of credit, for the purposeof refinancing the debtor-in-possession credit facility and to provide lettersof credit and financing subsequent to confirmation of the reorganization plan.At March 31, 2008, we had $35.7 million available under the RevolvingCredit Facility and $37.7 million in letters of credit issued against theRevolving Credit Facility.  We haveremaining availability under the Revolving Credit Facility of $34.3 million forletters of credit.

 

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As of, and forthe six month period ended March 31, 2008, loans under the RevolvingCredit Facility bore interest at LIBOR plus 3.5% or the base rate plus 1.5% onthe terms set in the credit agreement. In addition, we were charged monthly inarrears (1) an unused line fee of either 0.5% or 0.375%, depending on theutilization of the credit line, (2) a letter of credit fee equal to theapplicable per annum LIBOR margin times the amount of all outstanding lettersof credit, and (3) certain other fees and charges as specified in therevolving credit agreement.

 

*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 and accrued interest of $1.0 million, thepayoff amount was $48.7 million. Finally, we wrote off previously unamortized debt issuance costs of $0.3million on the Eton Park Term Loan.

 

*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 subordinated note (the “Note”), together with cash on hand,were used to fund the repayment of the Eton Park Term Loan (as previouslydiscussed).

 

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.  The Note may be repaid at any timeprior to the maturity date by us at par plus accrued interest withoutpenalty.  The Note is subordinated to ourRevolving Credit Facility.  The Note isan unsecured obligation of the Company and its subsidiary borrowers.  The Note contains no financial covenants orrestrictions on dividends or distributions to stockholders.

** **

**SURETY**

 

*Primary* *Surety Agreement*

 

We are partyto an underwriting, continuing indemnity and security agreement, dated May 12,2006, since amended, with a major surety provider and its affiliates(collectively, the “Primary Surety Provider”) that provides for surety bonds tosupport our contracts with certain of our customers.  As of March 31, 2008, we had $113.6million in bonded costs to complete under this facility.

 

We have afinancing agreement with our Primary Surety Provider that provides: (1) for thePrimary Surety Provider, at its sole and absolute discretion, to issue upto an aggregate of $150.0 million in new surety bonds, and (2) thatthe Primary Surety Provider’s consent is required for our use of cashcollateral in the form of proceeds of all contracts as to which the PrimarySurety Provider has issued surety bonds.  The bond premium is $15.00 per thousanddollars of contract cost.

 

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*Other Bonding Facilities*

 

In addition toour Primary Surety Provider we also have additional surety bonding from twoother providers.

 

We are partyto a general agreement of indemnity dated September 21, 2005, sinceamended, with a national insurance company (the “Secondary Surety Provider”),which provides for surety bonds to support our contracts with certain of ourcustomers. This facility provides for the Secondary Surety Provider in its soleand absolute discretion to issue up to an aggregate of $10.0 million insurety bonds. Bonding in excess of $5.0 million is subject to theSecondary Surety Provider’s receipt of additional collateral in the form of anadditional irrevocable letter of credit from Bank of America in the amount of$1.5 million. As of March 31, 2008, we had under $50,000 in bondedcost to complete under this facility.

 

Finally, weare party to a general agreement of indemnity dated March 21, 2006, sinceamended, with an individual surety (the “Individual Surety Provider”), tosupplement the bonding capacity under our facilities with the Primary SuretyProvider and 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 arenot rated (as opposed to those of our Primary Surety Provider and SecondarySurety Provider); however, the issuance of these bonds to an obligee/contractoris backed by an instrument referred to as an irrevocable trust receipt issuedby First Mountain Bancorp as trustee for investors who pledge assets to supportthe receipt and thus the bond. The bonds are also reinsured.

 

The IndividualSurety Provider’s obligation to issue new bonds is discretionary, and theaggregate bonding is subject to the Individual Surety’s receipt of$2.0 million in collateral to secure all of our obligations to them. Bankof America and the Individual Surety Provider have entered into aninter-creditor agreement. As of March 31, 2008, we had $41.6 millionin aggregate face value of bonds issued under this bonding facility.  As of March 31, 2008, we had $5.1million bonded cost to complete under this facility.

 

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**RESULTS OF OPERATIONS FOR THE THREE MONTHSENDED MARCH 31, 2008 COMPARED TO THE THREE MONTHS ENDED MARCH 31,2007**

 

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  March 31, 2008** | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                           | ** ** | **$**                                                      | ** ** | **%**                                                      | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                           | ** ** | **(Dollars in millions)**                        | ** ** |
|                                                 |       |                                                       |       |                                                       |       |   |   |   |   |
| Revenues                                             |       | $                                                          | 196.5      |                                                       | 100.0      | % | $ | 215.1 |   | 100.0 | % |
| Cost of services (including depreciation)            |       | 165.7                                                      |       | 84.3                                                       | %          | 179.5 |   | 83.5 | % |
| Gross profit                                         |       | 30.8                                                       |       | 15.7                                                       | %          | 35.6 |   | 16.5 | % |
| Selling, general & administrative  expenses |       | 27.7                                                       |       | 14.1                                                       | %          | 35.3 |   | 16.4 | % |
| (Gain) loss on sale of assets                        |       | (0.0                                                       | )          | (0.0                                                       | )%         | 0.1 |   | 0.0 | % |
| Restructuring charges                                |       | 2.1                                                        |       | 1.1                                                        | %          | — |   | — |   |
| Income from operations                               |       | 1.0                                                        |       | 0.5                                                        | %          | 0.2 |   | 0.1 | % |
| Interest and other expense, net                      |       | 0.6                                                        |       | 0.3                                                        | %          | 1.5 |   | 0.7 | % |
| Income (loss) before income taxes                    |       | 0.4                                                        |       | 0.2                                                        | %          | (1.3 | ) | (0.6 | )% |
| Provision (benefit) for income taxes                 |       | 0.3                                                        |       | 0.2                                                        | %          | (0.4 | ) | (0.2 | )% |
| Income (loss) from continuing operations             |       | 0.1                                                        |       | 0.0                                                        | %          | (0.9 | ) | (0.4 | )% |
| Income (loss) from discontinued operations           |       | (0.1                                                       | )          | (0.0                                                       | )%         | 0.2 |   | 0.1 | % |
| Net income (loss)                                    |       | $                                                          | 0.0        |                                                       | 0.0        | % | $ | (0.7 | ) | (0.3 | )% |

 

**Revenues**

 
| ** **         | ** ** | **Three Months Ended  March 31, 2008** | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|--------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                      | ** ** | **%**                                                      | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in millions)**                        | ** ** |
|               |       |                                                       |       |                                                       |       |   |   |   |   |
| Commercial         |       | $                                                          | 111.5      |                                                       | 56.7       | % | 113.8 |   | 52.9 | % |
| Industrial         |       | 34.7                                                       |       | 17.7                                                       | %          | 27.6 |   | 12.8 | % |
| Residential        |       | 50.3                                                       |       | 25.6                                                       | %          | 73.7 |   | 34.3 | % |
| Total Consolidated |       | $                                                          | 196.5      |                                                       | 100.0      | % | $ | 215.1 |   | 100.0 | % |
|                    |            |                                                            |            |                                                            |            |  |  |  |  |  |  |

 

Consolidated revenues for the three months ended March 31, 2008were $18.6 million less than in the three months ended March 31, 2007, adecline of 8.6%.  This reduction is largely attributed to the nationwidedecline in demand for single-family homes which has affected our Residentialline of business, particularly in markets such as Southern California, Arizonaand Georgia. Industry studies indicate that housing starts declined by as muchas 40% for the quarter ended March 31, 2008 versus March 31, 2007.Consistent with the slowdown in housing construction, our Residential line ofbusiness experienced a $23.4 million decrease in revenues, down 31.8%.  Weattribute approximately three quarters of this decrease directly to reducedbuilding activity, while the remaining portion is mainly due to pricingpressure from our customers and increased competition.

 

Our Commercial segment experienced a $2.3 million decline in revenuesduring the three months ended March 31, 2008, a 2.0% decrease compared tothe same period in 2007.  Our Commercialsegment has been somewhat affected by reduced demand for light constructionprojects such as restaurants, movie theaters, grocery stores and local shoppingcenters, which is correlated to the slowdown in the housing sector.  We have also experienced increasedcompetition for low-end retail work from residential contractors who have beenimpacted by the housing slowdown. Partially offsetting the decline are several significant projectsincluding university buildings, high-rise office towers, large regional retailshopping centers, and data centers.

 

Our Industrial segment posted an improvement in revenues of $7.1million during the three months ended March 31, 2008, a 25.7% increasecompared to the same period in 2007.  TheIndustrial market has longer cycles than the overall construction industry dueto the nature of the projects, which are often large-scale, multi-yearcontracts, financed by large corporations or government agencies. 

 

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For the 2008 period, our Industrial division has seen growth in utilityline service projects, as well as increased construction at electricalsubstations, ethanol plants, and pulp and paper mills.

 

**Gross Profit**

 
| ** **         | ** ** | **Three Months Ended  March 31, 2008** | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|--------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                      | ** ** | **%**                                                      | ** ** | **$** | ** ** | **%** | ** ** |
|               |       | **(Dollars in millions)**                        |       |
|               |       |                                                       |       |                                                       |       |   |   |   |   |
| Commercial         |       | $                                                          | 15.9       |                                                       | 14.3       | % | $ | 16.4 |   | 14.4 | % |
| Industrial         |       | 4.8                                                        |       | 13.7                                                       | %          | 4.7 |   | 17.0 | % |
| Residential        |       | 10.1                                                       |       | 20.0                                                       | %          | 14.5 |   | 19.7 | % |
| Total Consolidated |       | $                                                          | 30.8       |                                                       | 15.7       | % | $ | 35.6 |   | 16.5 | % |

 

The decline inour consolidated gross profit for the three months ended March 31, 2008versus March 31, 2007 was primarily due to lower consolidated revenues, asdiscussed above.  Also contributing tothe reduction in gross profit was decreased margins as a percentage of revenueat our Industrial and Commercial lines of business, offset by an improvement ingross margin percentage in our Residential line of business.

 

The mostsignificant decline in gross profit occurred in our Residential segment, whichexperienced a $4.4 million decline compared to the prior period.  This decrease is due to the aforementioned$23.4 million decrease in revenues stemming from reduced construction ofsingle-family homes.  However, the grossmargin percentage in the Residential line of business improved approximately 30basis points in the current year in spite of the decline in the number ofhousing starts.  We attribute theimprovement in Residential’s gross margin percentage to a stabilization of thepricing environment relative to prior periods for inputs, improved projectexecution, and the ability to increase and decrease labor to meet projectdemands.  We have also added several newmulti-family housing projects with higher profit margins than some single-familyhousing projects.

 

Industrial gross profit improved slightly by $0.1 million in the threemonth period ended March 31, 2008 compared to the prior year.  Revenues increased $7.1 million; however, thegross profit percentage fell 330 basis points. The decrease in our gross margin percentage is due to certain operatingcost increases, notably transportation expenses.  We have also seen a mix change in some of ourlarger, more profitable projects that have been completed and not yet replaced.

 

Our Commercial segment’s gross margin percentage declined approximately10 basis points to 14.3% of revenues during the three months ended March 31,2008 from 14.4% from the same period in 2007. This decline was principally driven by two of our seventeen divisions,in which we had underperforming legacy projects at one division and thecompletion of low margin contracts at the other.

 

 **Selling, General andAdministrative Expenses**

 
| ** **         | ** ** | **Three Months Ended  March 31, 2008** | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|--------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                      | ** ** | **%**                                                      | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in millions)**                        | ** ** |
|               |       |                                                       |       |                                                       |       |   |   |   |   |
| Commercial         |       | $                                                          | 9.6        |                                                       | 8.7        | % | $ | 13.2 |   | 11.7 | % |
| Industrial         |       | 1.9                                                        |       | 5.5                                                        | %          | 2.1 |   | 7.5 | % |
| Residential        |       | 8.2                                                        |       | 16.3                                                       | %          | 7.7 |   | 10.4 | % |
| Corporate          |       | 8.0                                                        |       | —                                                     |       | 12.3 |   | — |   |
| Total Consolidated |       | $                                                          | 27.7       |                                                       | 14.1       | % | $ | 35.3 |   | 16.4 | % |

 

Selling, general, and administrative expenses include costs notdirectly associated with performing work for our customers. These costs consistprimarily of compensation and benefits related to corporate management,occupancy and utilities, training, professional service and consulting fees,travel, certain types of depreciation and amortization, and repairs andmaintenance expenses.

 

During the three months ended March 31, 2008, our selling, generaland administrative expenses fell to $27.7 million, a decrease of $7.6 millionfrom the same period in the prior year.  This decrease was in part due toour strategic efforts to restructure our field offices and to eliminateredundant positions and facilities.  Thegreatest impact of these cost cutting measures was in our Commercial line ofbusiness, where approximately 100 positions have been eliminated.  Lower revenues also reduced selling costs,including target 

 

29

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incentives for field office management. Notable declines in our selling, general and administrative costsbetween the three months ended March 31, 2008 and 2007 include a $1.7million decrease in target incentives for our operating company leadership,$2.1 million in lower operating company general and administrative chargeswhich are as a result of our restructuring efforts, and a $3.8 million decreasein corporate expenses, which includes reductions in corporate office salariesand bonuses, insurance costs, travel, and professional fees such as legal,consulting, accounting and auditing fees.

 

**RestructuringCharges**

 

As discussed previously in this report, we are in process ofrestructuring our operations from a 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 centralized location.  This integration has enabled us to eliminatea number of redundant functions.

 

In conjunction with our restructuring program we recognizedthe following costs during the three months ended March 31, 2008 (inthousands):

 
| Severance compensation       |   | $   | 1,139  |   |
|------------------------------|--------|-----|--------|--------|
| Consulting and other charges |   | 828 |   |
| Non-cash asset write offs    |   | 131 |   |
| Total restructuring charges  |   | $   | 2,098  |   |

 

We did not have any restructuring charges during the three months endedMarch 31, 2007.

 

**Interest and OtherExpense, Net**

 

Interest and other expense, net decreased approximately $0.9 million,or 61.7%, from $1.5 million for the three months ended March 31, 2007, to$0.6 million for the three months ended March 31, 2008.  These charges are made up of the amountsshown in the following table.

 
| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**             | ** ** |
|                                  |       |                                             |       |   |   |
| Interest expense                      |       | $                                                | 1,256      |   | $ | 2,220 |   |
| Deferred financing charges            |       | 662                                              |       | 274 |   |
| Total interest expense                |       | 1,918                                            |       | 2,494 |   |
|                                  |       |                                             |       |   |   |
| Interest income                       |       | (441                                             | )          | (973 | ) |
| Other (income) expense                |       | (896                                             | )          | (2 | ) |
| Total interest and other expense, net |       | $                                                | 581        |   | $ | 1,519 |   |

 

During the three month period ended March 31,2008, we incurred interest expense of $1.3 million on an average debt balanceof $25.0 million for the Tontine Term Loan, on an average letter of creditbalance of $38.0 million under the Revolving Credit Facility and on an averageunused line of credit balance of $42.0 million.  This compares to interestexpense of $2.2 million for the six months ended March 31, 2007, on anaverage debt balance of $57.4 million for the Eton Park Term Loan, an averageletter of credit balance of $46.3 million under the Revolving Credit Facilityand an average unused line of credit balance of $33.7 million.

 

Deferred financing fees increased $0.4million in the current period as a result of increased amortization charges onthe Tontine Term Loan, compared to the amortization of the previous Eton ParkTerm Loan.

 

Total interest expense was offset by $0.4million in interest income on an average cash and cash equivalents balance of$57.5 million in the 2008 period and $1.0 million in interest income on anaverage cash and cash equivalents balance of $90.0 million in the 2007 period.

 

30

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Other income of $0.9 million in the 2008 period included a gain of $0.2million associated with cash distributions from our investment in Enertech, anda $1.1 million settlement with a group of former employees out of which $0.4million was recorded as a reduction against legal fees and the remainder asother income. This settlement was to compensate the Company for damagesassociated with these employees’ 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 in ownership as defined in Internal Revenue Code Section 382.As such, our net operating loss utilization after the change date will besubject to Section 382 limitations for federal income taxes and some stateincome taxes. We have provided valuation allowances on all net operating losseswhere it is determined it is more likely than not that they will expire withoutbeing utilized.

 

The provisionfor income taxes from continuing operations increased from a benefit of $0.4million for the three months ended March 31, 2007 to an expense of $0.3 millionfor the three months ended March 31, 2008. The increases in the provisionfor income taxes for the three months ended March 31, 2008 is attributableto our income from continuing operations for the three months ended March 31,2008 and offset by a decrease in the provision for contingent tax liabilities.

 

For the three months ended March 31, 2008 and 2007, no income taxbenefit was recorded for net operating losses in separate company state taxjurisdictions. In addition, under SOP 90-7, the reversal of valuationallowances provided against deferred tax assets in fresh-start reporting doesnot result in a reduction in the provision for income taxes.

 

**Income (Loss) fromDiscontinued Operations**

 

As discussedearlier in this report, we have shut down six underperforming subsidiariessince March 2006.  This exit plan issubstantially complete; however, there are still some revenues and expensesassociated with the wind down of these subsidiaries.  Such income statement amounts are classifiedas discontinued operations.

 

Revenues atthese subsidiaries were $38,000 and $2.8 million for the three months ended March 31,2008 and 2007, and net income (loss) was $(0.1) million and $0.1 million,respectively.

 

 **RESULTSOF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2008 COMPARED TO THE SIXMONTHS ENDED MARCH 31, 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.

 
| ** **                                           | ** ** | **Six Months Ended  March 31, 2008** | ** ** | **Six Months Ended  March 31, 2007** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                           | ** ** | **$**                                                    | ** ** | **%**                                                    | ** ** | **$** | ** ** | **%** | ** ** |
|                                                 |       | **(Dollars in millions)**                      |       |
|                                                 |       |                                                     |       |                                                     |       |   |   |   |   |
| Revenues                                             |       | $                                                        | 394.5      |                                                     | 100.0      | % | $ | 443.3 |   | 100.0 | % |
| Cost of services (including depreciation)            |       | 330.7                                                    |       | 83.8                                                     | %          | 369.6 |   | 83.4 | % |
| Gross profit                                         |       | 63.8                                                     |       | 16.2                                                     | %          | 73.7 |   | 16.6 | % |
| Selling, general & administrative  expenses |       | 58.2                                                     |       | 14.8                                                     | %          | 70.7 |   | 15.9 | % |
| (Gain) on sale of assets                             |       | (0.0                                                     | )          | (0.0                                                     | )%         | (0.0 | ) | (0.0 | )% |
| Restructuring charges                                |       | 3.4                                                      |       | 0.9                                                      | %          | — |   | — |   |
| Income from operations                               |       | 2.2                                                      |       | 0.5                                                      | %          | 3.1 |   | 0.7 | % |
| Interest and other expense, net                      |       | 3.3                                                      |       | 0.8                                                      | %          | 3.2 |   | 0.7 | % |
| Income (loss) before income taxes                    |       | (1.1                                                     | )          | (0.3                                                     | )%         | (0.1 | ) | (0.0 | )% |
| Provision (benefit) for income taxes                 |       | (0.2                                                     | )          | (0.0                                                     | )%         | 0.4 |   | 0.1 | % |
| Loss from continuing operations                      |       | (0.9                                                     | )          | (0.2                                                     | )%         | (0.5 | ) | (0.1 | )% |
| Income (loss) from discontinued operations           |       | 0.1                                                      |       | 0.0                                                      | %          | (1.0 | ) | (0.2 | )% |
| Net loss                                             |       | $                                                        | (0.8       | )                                                        | (0.2       | )% | $ | (1.5 | ) | (0.3 | )% |

 

31

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**Revenues**

 
| ** **         | ** ** | **Six Months Ended  March 31, 2008** | ** ** | **Six Months Ended  March 31, 2007** | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                    | ** ** | **%**                                                    | ** ** | **$** | ** ** | **%** | ** ** |
|               |       | **(Dollars in millions)**                      |       |
|               |       |                                                     |       |                                                     |       |   |   |   |   |
| Commercial         |       | $                                                        | 221.2      |                                                     | 56.1       | % | $ | 226.3 |   | 51.1 | % |
| Industrial         |       | 67.7                                                     |       | 17.1                                                     | %          | 57.8 |   | 13.0 | % |
| Residential        |       | 105.6                                                    |       | 26.8                                                     | %          | 159.2 |   | 35.9 | % |
| Total Consolidated |       | $                                                        | 394.5      |                                                     | 100.0      | % | $ | 443.3 |   | 100.0 | % |

 

Consolidated revenues for the six months ended March 31, 2008 were$48.8 million less than in the six months ended March 31, 2007, a declineof 11.0%.  This reduction is primarily attributed to the nationwidedecline in demand for single-family homes which has affected our Residentialline of business, particularly in markets such as Southern California, Arizonaand Georgia. Industry studies indicate that housing starts declined by as muchas 25% during 2007 from the previous year, and 40% for the calendar quarterended March 31, 2008 versus March 31, 2007. Consistent with theslowdown in housing construction, our Residential line of business experienceda $53.6 million decrease in revenues, down 33.7%.  We attributeapproximately three quarters of this decrease directly to reduced building activity,while the remaining portion of the decrease is mainly due to pricing pressurefrom our customers and increased competition.

 

Our Commercial segment experienced a $5.1 million decline in revenuesduring the six months ended March 31, 2008, a 2.3% decrease.  Our Commercial segment has been affected byreduced demand for light construction projects such as restaurants, movietheaters and local shopping centers, which is correlated to the slowdown in thehousing sector.  We have also experiencedincreased competition for low-end retail work from residential contractors whohave been affected by the housing slowdown. Partially offsetting the overall decline are significant projects thatwe have begun for institutional developers, including a university, high-riseoffice towers, and data centers.

 

Offsetting the overall decrease in revenues, our Industrial segmentposted an improvement in revenues of $9.9 million, a 17.1% increase, during thesix months ended March 31, 2008. The Industrial market is generally not as cyclical as the rest of theconstruction industry due to the nature of the projects, which are oftenlarge-scale, multi-year contracts, financed by large corporations or governmentagencies. For the 2008 period, our Industrial division has seen growth inutility line service projects, as well as increased construction at electricalsubstations, ethanol plants, and pulp and paper mills.

 

**Gross Profit**

 
| ** **         | ** ** | **Six Months Ended  March 31, 2008** | ** ** | **Six Months Ended  March 31, 2007** | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                    | ** ** | **%**                                                    | ** ** | **$** | ** ** | **%** | ** ** |
|               |       | **(Dollars in millions)**                      |       |
|               |       |                                                     |       |                                                     |       |   |   |   |   |
| Commercial         |       | $                                                        | 32.2       |                                                     | 14.6       | % | $ | 34.7 |   | 15.3 | % |
| Industrial         |       | 10.6                                                     |       | 15.6                                                     | %          | 9.0 |   | 15.6 | % |
| Residential        |       | 21.0                                                     |       | 19.9                                                     | %          | 30.0 |   | 18.8 | % |
| Total Consolidated |       | $                                                        | 63.8       |                                                     | 16.2       | % | $ | 73.7 |   | 16.6 | % |

 

The decline inour consolidated gross profit for the six months ended March 31, 2008versus March 31, 2007 was primarily due to lower consolidated revenues, asdiscussed above.  Also contributing tothe reduction in gross profit was decreased margin as a percentage of revenuein our Commercial line of business, offset by an improvement in gross margin inour Residential line of business.

 

The mostsignificant decline in gross profit occurred in our Residential segment, whichexperienced a $9.0 million decline compared to the current period.  This decline is due to the aforementioned$53.6 million decrease in revenues related to reduced demand for single-familyhomes.  However, the gross marginpercentage in the Residential line of business improved approximately 110 basispoints in the current year in spite of the decline in the number of housingstarts this year.  We attribute theimprovement in Residential’s gross margin percentage to a stabilization of thepricing environment relative to prior periods for inputs, improved projectexecution, and the ability to increase and decrease labor to meet projectdemands.

 

32

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Industrial gross profit improved $1.6 million in the six month periodended March 31, 2008 compared to the prior period.  The improved gross profit in our Industrialsector is tied to the $9.9 million increase in revenue, discussed above.  Although revenues have increased, our overallgross margin percentage has remained flat, primarily due to certain costincreases, notably transportation expenses, which have led to reducedprofitability.  We have also seen a mixchange in some of our larger, more profitable projects that have been completedand not yet replaced.

 

Our Commercial segment’s gross margin percentage declined approximately70 basis points to 14.6% of revenues during the first half of 2008 from 15.3%from the same period in 2007.  Thisdecline was principally driven by two of our seventeen divisions, in which wehad underperforming legacy projects at one division and the completion of lowmargin contracts at the other.

 

**Selling, General and Administrative Expenses**

 
| ** **         | ** ** | **Six Months Ended  March 31, 2008** | ** ** | **Six Months Ended  March 31, 2007** | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **         | ** ** | **$**                                                    | ** ** | **%**                                                    | ** ** | **$** | ** ** | **%** | ** ** |
|               |       | **(Dollars in millions)**                      |       |
|               |       |                                                     |       |                                                     |       |   |   |   |   |
| Commercial         |       | $                                                        | 20.6       |                                                     | 9.3        | % | $ | 24.5 |   | 10.8 | % |
| Industrial         |       | 4.5                                                      |       | 6.7                                                      | %          | 4.3 |   | 7.5 | % |
| Residential        |       | 16.7                                                     |       | 15.8                                                     | %          | 17.9 |   | 11.2 | % |
| Corporate          |       | 16.4                                                     |       | —                                                   |       | 24.0 |   | — |   |
| Total Consolidated |       | $                                                        | 58.2       |                                                     | 14.8       | % | $ | 70.7 |   | 15.9 | % |

 

Selling, general, and administrative expenses include costs notdirectly associated with performing work for our customers. These costsprimarily consist of compensation and benefits related to corporate management,occupancy and utilities, training, professional service and consulting fees,travel, certain types of depreciation and amortization, and repairs andmaintenance expenses.

 

During the six months ended March 31, 2008, our selling, generaland administrative expenses fell to $58.2 million, a decrease of $12.5 millionfrom the same period in the prior year.  This decrease was in part due toour strategic efforts to restructure our field offices and to eliminateredundant positions and facilities.  Thegreatest impact of these cost cutting measures was in our Commercial line ofbusiness, where approximately 100 positions have been eliminated.  Despite the decrease in Residential generaland administrative expenses, the 33.7% decline in that segment’s revenuescaused its cost of services percentage to increase 4.6%, as the ratio of fixedversus variable costs increased.  Lowerrevenues also reduced selling costs, including target incentives.  Notable declines in our selling, general andadministrative costs between the six months ended March 31, 2008 and 2007include a $2.9 million decrease in target incentives for our operating companyleadership, $3.1 million in lower operating company general and administrativecharges which are as a result of our restructuring efforts, and a $6.5 milliondecrease in corporate expenses, which includes reductions in corporate officesalaries and bonuses, insurance costs, travel, and professional fees such aslegal, consulting, accounting and auditing fees.

 

**RestructuringCharges**

 

As discussed previously in this report, we are in process ofrestructuring our operations from our current decentralized structure into threemajor lines 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 centralized location.  This integration has enabled us to eliminatea number of redundant functions.

 

In conjunction with our restructuring program we recognizedthe following costs during the six months ended March 31, 2008 (inthousands)

 
| Severance compensation  |   | $     | 1,768  |   |
|------------------------------|--------|-------|--------|--------|
| Consulting and other charges |   | 1,494 |   |
| Non-cash asset write offs    |   | 131   |   |
| Total restructuring charges  |   | $     | 3,393  |   |

 

We did not have any restructuring charges during the sixmonths ended March 31, 2007.

 

33

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**Interest and OtherExpense, Net**

 

Interest and other expense, net increased approximately $0.1 million,or 3.2%, from $3.2 million for the six months ended March 31, 2007, to$3.3 million for the six months ended March 31, 2008.  These charges are made up of the amountsshown in the following table.

 
| ** **                            | ** ** | **Six Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**           | ** ** |
|                                  |       |                                           |       |   |   |
| Interest expense                      |       | $                                              | 2,699      |   | $ | 4,532 |   |
| Deferred financing charges            |       | 1,400                                          |       | 537 |   |
| Debt prepayment penalty               |       | 2,052                                          |       | — |   |
| Total interest expense                |       | 6,151                                          |       | 5,069 |   |
|                                  |       |                                           |       |   |   |
| Interest income                       |       | (1,545                                         | )          | (1,983 | ) |
| Other (income) expense                |       | (1,323                                         | )          | 95 |   |
| Total interest and other expense, net |       | $                                              | 3,283      |   | $ | 3,181 |   |

 

During the six month period ended March 31,2008, we incurred interest expense of $2.7 million on an average debt balanceof $35.3 million for the Eton Park Term Loan and the Tontine Term Loan, on anaverage letter of credit balance of $39.2 million under the Revolving CreditFacility and on an average unused line of credit balance of $40.8million.  This compares to interest expense of $4.5 million for the sixmonths ended March 31, 2007, on an average debt balance of $56.5 millionfor the Eton Park Term Loan, an average letter of credit balance of $45.9million under the Revolving Credit Facility and an average unused line ofcredit balance of $34.1 million.

 

As mentioned earlier in this report, on December 12,2007, we repaid our Eton Park Term Loan using cash on hand and the proceedsfrom the Tontine Term Loan.  We incurred a prepayment penalty of $2.1million on the Eton Park Term Loan, and we also wrote off previouslyunamortized debt issuance costs of $0.3 million.  Other 2008 deferredfinancing charges of $1.1 million were the amortization fees incurred on thenew Tontine Term Loan and the Eton Park Term Loan before it was repaid. 2007deferred financing charges of $0.5 million were exclusively for the Eton ParkTerm Loan.

 

Total interest expense was offset by $1.5million in interest income on an average cash and cash equivalents balance of$51.9 million in the 2008 period and $2.0 million in interest income on anaverage cash and cash equivalents balance of $80.5 million in the 2007 period.

 

Other income of $1.3 million in the 2008 period included a gain of $0.6million associated with cash distributions from our investment in Enertech, anda $1.1 million settlement with a group of former employees out of which $0.4million was recorded as a reduction against legal fees and the remainder asother income. This settlement was to compensate the Company for damagesassociated with these employees’ 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 in ownership as defined in Internal Revenue Code Section 382.As such, our net operating loss utilization after the change date will besubject to Section 382 limitations for federal income taxes and some stateincome taxes. We have provided valuation allowances on all net operating losseswhere it is determined it is more likely than not that they will expire withoutbeing utilized.

 

The provisionfor income taxes from continuing operations decreased from an expense of $0.4million for the six months ended March 31, 2007 to a benefit of $0.2million for the six months ended March 31, 2008. The decreases in theprovision for income taxes for the six months ended March 31, 2008 isattributable to a loss from continuing operations for the current period and adecrease in the provision for contingent tax liabilities.

 

For the six months ended March 31, 2008 and 2007, no income taxbenefit was recorded for net operating losses in separate company state taxjurisdictions. In addition, under SOP 90-7, the reversal of valuationallowances provided against deferred tax assets in fresh-start reporting doesnot result in a reduction in the provision for income taxes.

 

34

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**Income (Loss) from Discontinued Operations**

 

As discussedearlier in this report, we have shut down six underperforming subsidiariessince March 2006.  This exit plan issubstantially complete; however, there are still some revenues and expensesassociated with the wind down of these subsidiaries.  Such income statement amounts are classifiedas discontinued operations.

 

Revenues atthese subsidiaries were $0.9 million and $6.2 million for the six months endedMarch 31, 2008 and 2007, and net income (loss) was $0.2 million and $(1.0)million, respectively.

 

**Working Capital**

 
| ** **                                                                   | ** ** | **March 31,  2008**            | ** ** | **September 30,  2007** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **(Dollars in millions)** | ** ** |
| CURRENT ASSETS:                                                              |       |                                |       |                         |       |
| Cash and cash equivalents                                                    |       | $                                   | 31.9       |                         | 69.7       |   |
| Restricted cash                                                              |       | 20.0                                |       | 20.0                         |       |
| Accounts receivable                                                          |       |                                |       |                         |       |
| Trade, net of allowance of $3.2 and $2.6  respectively                       |       | 144.5                               |       | 131.8                        |       |
| Retainage                                                                    |       | 27.9                                |       | 29.5                         |       |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |       | 15.4                                |       | 16.1                         |       |
| Inventories                                                                  |       | 18.4                                |       | 15.3                         |       |
| Prepaid expenses and other current assets                                    |       | 6.4                                 |       | 4.6                          |       |
| Assets from discontinued operations                                          |       | 1.8                                 |       | 6.4                          |       |
| Total current assets                                                         |       | $                                   | 266.3      |                         | $          | 293.4 |   |
|                                                                         |       |                                |       |                         |       |
| CURRENT LIABILITIES:                                                         |       |                                |       |                         |       |
| Current maturities of long-term debt                                         |       | $                                   | 0.2        |                         | $          | 0.1 |   |
| Accounts payable and accrued expenses                                        |       | 91.6                                |       | 98.4                         |       |
| Billings in excess of costs and estimated  earnings on uncompleted contracts |       | 37.9                                |       | 35.3                         |       |
| Liabilities from discontinued operations                                     |       | 0.8                                 |       | 1.9                          |       |
| Total current liabilities                                                    |       | $                                   | 130.5      |                         | $          | 135.7 |   |
| Working capital                                                              |       | $                                   | 135.8      |                         | $          | 157.7 |   |

 

Working capital decreased $21.9 million, or 13.9%during the six months ended March 31, 2008, due in large part to ourrepayment of the Eton Park Term Loan and the concurrent entrance into theTontine Term Loan.  On December 12,2007, we entered into a $25.0 million senior subordinated loan agreement withTontine Capital Partners, L.P., a related party.  The proceeds of the subordinated notes,together with cash on hand, were used to fund the repayment of the Eton ParkTerm Loan, which had an outstanding balance of $45.6 million onDecember 12, 2007.  With accruedinterest and a prepayment penalty of $2.1 million, the total payment amount was$48.7 million.

 

We experienced a decrease in current assets of$27.1 million, or 9.3%, to $266.3 million as of March 31, 2008from $293.4 million as of September 30, 2007. During the six monthsended March 31, 2008, we had a $37.8 million decrease in cash andcash equivalents, of which $23.7 million was related to the refinancing of ourterm loan agreements as noted above.  Ourtrade accounts receivables, net rose by $12.7 million.  Days sales outstanding increased to69 days at March 31, 2008 from 60 days at September 30,2007.  There was a $1.6 milliondecrease in retainage and a $0.7 million decrease in costs in excess ofbillings. We also had a $4.6 million decrease in assets from discontinuedoperations due to the collection of a nearly $3.0 million receivable from oneof our divested subsidiaries. Inventories, prepaid expenses and other currentassets increased by a total of $4.9 million due primarily to the renewalof an insurance policy.

 

Our total current liabilities decreased $5.2 million,or 3.8%, to $130.5 million as of March 31, 2008 from$135.7 million as of September 30, 2007. This is a result of$6.8 million decrease in accounts payable and accrued expenses due toreduced operating activity, payments in the first quarter for 2007 accruedbonuses and lower accrued bonuses for the current period on lower operatingincome.  We also reduced liabilities atour discontinued operations by $1.1 million. Partially offsetting the decrease in current liabilities, we experienceda $2.6 million increase in billings in excess of costs.

 

35

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**Liquidity and Capital Resources**

 

As of March 31, 2008, we had cash and cash equivalentsof $31.9 million, restricted cash of $20.0 million, working capitalof $135.8 million, $25.0 million in outstanding borrowings under ourTontine Term Loan, $37.7 million of letters of credit outstanding andavailable capacity under our Revolving Credit Facility of $34.3 million.

 

During the six months ended March 31, 2008, we used$8.0 million in cash in our operating activities principally due to thetiming of our account payables and payment of year-end accrued bonuses inDecember 2007. We also had combined cash outflow of $29.8 million forour investing and financing activities during the six months endedMarch 31, 2008.  This included$6.1 million in capital expenditures primarily for computer equipment usedin our new operating management and financial reporting systems, $20.5 millionpayments net of borrowings of long term debt, and $3.4 million for theacquisition of treasury stock in January 2008 and December 2007.

 

On May 9, 2008 we renegotiated the terms of our Revolving CreditFacility, extending the maturity date to May 12, 2010, reducing thefacility size to $60.0 million, and eliminating the restricted cashrequirement. The terms of the revised agreement are described in Note 3, *“Debt”.*

 

*Bonding Capacity*

 

 At March 31, 2008, we have adequate surety bonding capacityunder our surety agreements. Our ability to access this bonding capacity is atthe sole discretion of our surety providers and is subject to certain otherlimitations such as limits on the size of any individual bond.  The limitations on the size of an individualbond from our Primary Surety Provider were removed as of October 2007, andour bonding capacity has been raised to $150.0 million.  As of March 31, 2008, the expectedcumulative cost to complete for projects covered by three surety providers was$118.7 million. We also had $41.6 million in aggregate face value of bondsissued under our Individual Surety. We believe we have adequate remainingavailable bonding capacity to meet our current needs, subject to the solediscretion of our surety providers. In addition, to access the remainingavailable bonding capacity may require us to post additional collateral. Formore information see Part I, Item 2. *“Surety”*.

 

**Off-Balance Sheet Arrangements andContractual Obligations**

 

 As iscommon in our industry, we have entered into certain off-balance sheetarrangements that expose us to increased risk. Our significant off-balancesheet transactions include commitments associated with non-cancelable operatingleases, letter of credit obligations, firm commitments for materials and suretyguarantees.

 

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 orterminate a lease before the end of its term. Typically, we are liable to thelessor for various lease cancellation or termination costs and the differencebetween the then fair market value of the leased asset and the implied bookvalue of the leased 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 March 31, 2008, $0.5 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 March 31, 2008,$14.7 million of our outstanding letters of credit were to collateralizeour insurance programs.

 

From time totime, we may enter into firm purchase commitments for materials such as copperwire and aluminum wire among others which we expect to use in the ordinarycourse of business. These commitments are typically for terms less than oneyear and require us to buy minimum quantities of materials at specifiedintervals at a fixed price over the term. As of March 31, 2008, we had$5.6 million in open purchase commitments for 1.7 million pounds of copper wirewhich we expect to take delivery on between April 2008 and June 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 

 

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under acontract or pay subcontractors and vendors, the customer may demand the suretyto pay or perform under our bond. Our relationship with our sureties is suchthat we will indemnify the sureties for any expenses they incur in connectionwith any of the bonds they issues on our behalf. To date, we have not incurredsignificant costs to indemnify our sureties for expenses they incurred on ourbehalf. As of March 31, 2008, our expected costs to complete on projectscovered by surety bonds was $118.7 million and we utilized a combinationof cash, accumulated interest thereon and letters of credit totaling$34.1 million to collateralize our bonding programs.

 

InApril 2000, we committed to invest up to $5.0 million in EnerTech.EnerTech is a private equity firm specializing in investment opportunitiesemerging from the deregulation and resulting convergence of the energy, utilityand telecommunications industries. Through March 31, 2008, we had invested$4.85 million under our commitment to EnerTech. The carrying value of thisEnerTech investment at March 31, 2008 and September 30, 2007 was$3.0 million and $2.9 million, respectively. This investment isaccounted for on the cost basis of accounting and, accordingly, we do not recordunrealized gains or losses for the EnerTech investment that we believe aretemporary in nature. As a result of our Chapter 11 bankruptcy, weimplemented fresh-start reporting per SOP 90-7. At April 30, 2006,there was an adjustment of $0.6 million to write down the investment inEnerTech to reflect the fair value of the asset in accordance with fresh-startaccounting. As of March 31, 2008, there were no unrealized losses relatedto our share of the EnerTech fund. If facts arise that lead us to determinethat any unrealized gains or losses are not temporary, we would write up ordown our investment in EnerTech through a charge to other income/expense duringthe period of such determination.

 

As ofMarch 31, 2008, our future contractual obligations due bySeptember 30 of each of the 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 |       | $        | 4,881      |     | $          | 7,388    |       | $        | 4,707      |     | $          | 2,491          |       | $         | 889        |   | $ | 289 |   | $ | 20,645 |   |
| Capital lease obligations   |       | $        | 81         |     | $          | 131      |       | $        | 89         |     | $          | 8              |       | $         | —     |   | $ | — |   | $ | 309 |   |
| Purchase obligations (2)    |       | $        | 5,612      |     | $          | —   |       | $        | —     |     | $          | —         |       | $         | —     |   | $ | — |   | $ | 5,612 |   |

 

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| (1)  | The tabular  amounts exclude the interest obligations that will be created if the debt and  capital lease obligations are outstanding for the periods presented. |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                             |
| (2)  | Purchase  obligation for copper wire to be settled by June 2008.                                                                                            |

 

Our othercommercial commitments expire by September 30 of each of the followingfiscal years (in thousands):

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

 

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| (3)  | Balance of  investment commitment in EnerTech. |
|-----------|------------------------------------------------|

 

**Outlook**

 

We anticipatethat the combination of cash on hand, cash flows and available capacity underour Revolving Credit Facility will provide sufficient cash to enable us to meetour working 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 thesix months ended March 31, 2008, we experienced steady increases in fuelprices, and we have recently observed an increase in copper prices that willhave an effect on our wire input prices. Due to the current market conditions, especially the slowdown in thehousing sector, we have not been able to pass all of these price increases toour customers.  Over the long-term,however, we expect that we will be able to adjust our pricing to incorporatethese conditions and other inflationary factors.

 

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** **

**ITEM 3.QUANTITATIVE AND QUALITATIVE 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.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

**(a) ****Disclosure controls and procedures**

 

Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in reports filed or submitted under the Securities Exchange Actof 1934 (“Exchange Act”) is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed under the ExchangeAct is accumulated and communicated to management, including the principalexecutive and financial officers, as appropriate to allow timely decisionsregarding required disclosure. There are inherent limitations to theeffectiveness of any system of disclosure controls and procedures, includingthe possibility of human error and the circumvention or overriding of thecontrols and procedures. Accordingly, even effective disclosure controls andprocedures can only provide reasonable assurance of achieving their controlobjectives.

 

An evaluationwas performed under the supervision and with the participation of ourmanagement, our principal executive officer (CEO) and principal financialofficer (CFO), of the effectiveness of the design and operation of ourdisclosure controls and procedures as of the end of the period covered by thisreport. Based on that evaluation and the material weakness identified in ourSeptember 30, 2007 Annual Report on Form 10-K, our management,including our CEO and the CFO, concluded that our disclosure controls andprocedures remained ineffective, as of March 31, 2008.

 

The conclusionthat our disclosure controls and procedures were not effective as ofMarch 31, 2008, was based on the identification of a material weakness ininternal controls as of September 30, 2007, for which remediation isunderway.

 

Ourmanagement, including our CEO and CFO, is responsible for establishing andmaintaining adequate internal control over financial reporting, as defined inRules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of1934, as amended. 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 of Material Weakness**

 

We haveimplemented a remediation plan at the subsidiary where the material weaknessoriginated that included the following:

 

•                  Deployed Companyfinancial and operational experts to review and validate the subsidiary’syear-end 2007 cost estimates on all contracts;

 

•                  Appointed aChief Accounting Officer with experience in re-designing accounting and financeprocesses, realigning decentralized organizations and improving internalcontrols, in order to meet the requirements of our remediation plan;

 

•                  Replacedappropriate management, including the General Manager, Financial Manager, VP ofOperations and several Project Managers at this subsidiary;

 

•                  Establishedproject review procedures, including job site walk through process and costestimate reviews by appropriate independent experts and management from otherCompany subsidiaries;

 

•                  Reinforceddirect reporting relationship of Finance team to Corporate Finance personnel;

 

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•                  Standardized abest in class cost-to-complete process across the Company, and with increasedscrutiny at this subsidiary;

 

•                  Implemented aproprietary Project Management Operating System at this subsidiary;

 

•                  Enhancedaccounting controls through the consolidation of back office processing;

 

•                  Heightenedreview, testing and monitoring of the internal controls with respect to theoperation of our project costs estimation processes at this subsidiary.

 

**(c) Changes in Internal Control Over Financial Reporting**

 

AtMarch 31, 2008, we believe that the steps identified above shouldeventually remediate the identified material weakness. This remediation isongoing, and this represents the only changes to our internal controls overfinancial reporting that were identified in connection with the evaluationrequired by Rules 13a-15(d) or 15d-15(d) under the Exchange Actduring the three months ended March 31, 2008 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting. We cannot be certain that the material weakness willbe remediated by the plan outlined above nor do we provide assurance that noadditional material weaknesses will be identified.

 

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** **

**PART II. OTHERINFORMATION**

 

**ITEM1. 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 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** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
|                                                              |       |                                             |       |                                             |       |                                                                                                                                            |       |                                                                                                                        |       |
| January 1, 2008 to January 31, 2008 |       | 71,260                                           |       | $                                                | 18.25      |                                                                                                                                            | 156,161    |                                                                                                                        | 843,839    |   |
| February 1, 2008 to February 29,  2008                  |       | —                                           |       | —                                           |       | —                                                                                                                                          |       | 843,839                                                                                                                     |       |
| March 1, 2008 to March 31, 2008                         |       | —                                           |       | —                                           |       | —                                                                                                                                          |       | 843,839                                                                                                                     |       |
| Total for period                                                  |       | 71,260                                           |       | $                                                | 18.25      |                                                                                                                                            | 156,161    |                                                                                                                        | 843,839    |   |

 

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| (1) |   | On December 12, 2007, we announced that our Board of Directors  authorized the repurchase of up to one million shares of our common stock.  This share repurchase plan is authorized through December 2009. The  table does not include 31,212 shares withheld to satisfy tax withholding  requirements related to restricted stock issued under the Amended and  Restated 2006 Equity Incentive Plan. The average cost of these shares was  $18.09. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**ITEM3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The Companyheld its annual meeting of stockholders in Houston, Texas on February 7,2008. The following sets forth the matters submitted to a vote of thestockholders:

 

(A) Theindividuals listed in the table below were elected to the Board of Directors asstated in the Company’s Proxy Statement dated January 4, 2008, for termsexpiring at the 2009 annual stockholders’ meeting and until their successorshave been elected and qualified.  Eachnominee was elected by a vote that totaled more than a majority of the commonstock of the Company.

 
| **Nominee**       | ** ** | **Affirmative  Votes** | ** ** | **Votes  Withheld** | ** ** |
|-------------------|------------|------------------------|------------|---------------------|------------|
| Charles H. Beynon |       | 13,846,914             |       | 261,818             |       |
| Michael J. Caliel |       | 13,984,060             |       | 124,672             |       |
| Michael J. Hall   |       | 13,846,914             |       | 261,818             |       |
| Joseph P. Lash    |       | 13,570,858             |       | 537,874             |       |
| Donald L. Luke    |       | 13,990,243             |       | 118,489             |       |
| John E. Welsh     |       | 13,846,943             |       | 118,489             |       |

 

(B) Thestockholders ratified the appointment of Ernst & Young LLP to auditthe financial statements of the Company and its subsidiaries, by a vote of14,087,422 shares, with 15,722 shares against and 5,587 shares abstaining.

 

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**ITEM 6. EXHIBITS**

 

*10.1       EmploymentAgreement between the Company and Alan O. Gahm dated January 21,2008.  (Incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K datedJanuary 23, 2008)

 

10.2         Amendmentto Loan and Security Agreement, dated March 5, 2008, by and among theCompany and its subsidiaries, Bank of America, N.A. and the lenders partythereto.  (Incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K datedMarch 17, 2008)

 

10.3         Amendmentto Loan and Security Agreement, dated May 7, 2008, by and among theCompany and its subsidiaries, Bank of America, N.A. and the lenders thereto.(1)

 

31.1         Rule 13a-14(a)/15d-14(a) Certificationof Michael J. Caliel, Chief Executive Officer (1)

 

31.2         Rule 13a-14(a)/15d-14(a) Certificationof Raymond K. Guba, Chief Financial Officer (1)

 

32.1         Section 1350Certification of Michael J. Caliel, Chief Executive Officer (1)

 

32.2         Section 1350Certification of Raymond K. Guba, Chief Financial Officer (1)

 

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*    This exhibit relates to amanagement contract or compensatory plan or arrangement

 

(1)    Filed herewith

 

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** **

**INTEGRATED ELECTRICALSERVICES, INC. AND SUBSIDIARIES**

 

**SIGNATURES**

 

Pursuant tothe 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:  May 12, 2008 | By:                                   | /S/RAYMOND  K. GUBA |
| ** **               | ** **                            | **Raymond K. Guba** |
| ** **               | ** **                            | **Senior Vice President and** |
| ** **               | ** **                            | **Chief Financial Officer** |

 

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** **

**EXHIBIT INDEX**

 

*10.1       EmploymentAgreement between the Company and Alan O. Gahm dated January 21,2008.  (Incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K datedJanuary 23, 2008)

 

10.2         Amendmentto Loan and Security Agreement, dated March 5, 2008, by and among theCompany and its subsidiaries, Bank of America, N.A. and the lenders partythereto.  (Incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K datedMarch 17, 2008)

 

10.3         Amendmentto Loan and Security Agreement, dated May 7, 2008, by and among the Companyand its subsidiaries, Bank of America, N.A. and the lenders thereto. (1)

 

31.1         Rule 13a-14(a)/15d-14(a) Certificationof Michael J. Caliel, Chief Executive Officer (1)

 

31.2         Rule 13a-14(a)/15d-14(a) Certificationof Raymond K. Guba, Chief Financial Officer (1)

 

32.1         Section 1350Certification of Michael J. Caliel, Chief Executive Officer (1)

 

32.2         Section 1350Certification of Raymond K. Guba, Chief Financial Officer (1)

 

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* These exhibits relate to management contracts or compensatory plans orarrangements

 

(1)  Filed herewith

 

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