INTEGRATED ELECTRICAL SERVICES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003

OR

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

COMMISSION FILE NUMBER 1-13783
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INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0542208
(State of 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) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 860-1500

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

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

Indicate by checkmark if disclosure of delinquent filings pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [X]

As of November 20, 2003, there were outstanding 38,229,744 shares of common
stock of the Registrant. The aggregate market value on such date of the voting
stock of the Registrant held by non-affiliates was an estimated $208.0 million.

DOCUMENT INCORPORATED BY REFERENCE

The information called for by Part III of this Form 10-K is incorporated by
reference from the Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held January 22, 2004.
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FORM 10-K

INTEGRATED ELECTRICAL SERVICES, INC.
TABLE OF CONTENTS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes certain statements, including
statements relating to the Company's expectations of its future operating
results, that may be deemed to be "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of
the Securities Exchange Act of 1934, as amended and the Private Securities
Litigation Act of 1995. Statements that include the words "except," "intend,"
"plan," "believe," "project," "anticipate," "will" and similar statements of a
future or forward-looking nature identify "forward-looking" statements. These
statements are based on the Company's expectations and involve risks and
uncertainties that could cause the Company's actual results to differ materially
from those set forth in the statements. Such risks and uncertainties include,
but are not limited to, the inherent uncertainties in estimating future results,
fluctuations in operating results because of variations in levels of
construction, changes in general economic conditions in the areas we operate,
incorrect estimates used in entering into fixed price contracts, difficulty in
managing the operation and growth of existing businesses, the level of
competition in the construction industry, changes in economic viability of
competitor companies bidding projects that can result in other companies bidding
projects under cost, changes in availability of bonding capacity necessary to
perform certain types of projects, availability and quality of existing
workforce and newly hired employees, weather delaying work, interest rate
changes, ability to manage companies in a decentralized structure, changes in
management and key personnel, shifting of industrial construction to other
countries, regulatory impacts in areas of required ratios of journeymen to
helpers and in apprenticeship programs, changes in availability of qualified
employees and electricians in particular, unanticipated levels of casualty
losses, changes in legislation or regulation in accounting requiring a change in
the way we report and due to seasonality (see also "Business-Risk Factors").
Although the Company believes the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by such factors. The Company
specifically disclaims any duty or obligation to update forward-looking
statements based on later acquired information.

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PART I

ITEM 1. BUSINESS

In this annual report, the words "IES," the "Company," "we," "our," "ours,"
and "us" refer to Integrated Electrical Services, Inc. and, except as otherwise
specified herein, to our subsidiaries. Our fiscal year ends on September 30.

We are the largest provider of electrical contracting services in the
United States according to EC&M Magazine. We provide a broad range of services
including designing, building, maintaining and servicing electrical, data
communications and utilities systems for commercial, industrial and residential
customers.

Our electrical contracting services include design of the electrical
distribution systems within a building or complex, procurement and installation
of wiring and connection to power sources, end-use equipment and fixtures as
well as long-term contract maintenance. We service commercial, industrial, and
residential markets and have a diverse customer base including: general
contractors; property managers and developers; corporations; government agencies
and municipalities; and homeowners. We provide services for a variety of
projects including: high-rise residential and office buildings, power plants,
manufacturing facilities, municipal infrastructure and health care facilities
and residential developments. We also offer low voltage contracting services as
a complement to our electrical contracting business. Our low voltage services
include design and installation of external cables for corporations,
universities, data centers and switching stations for data communications
companies as well as the installation of fire and security alarm systems. Our
utility services consist of overhead and underground installation and
maintenance of electrical and other utilities transmission and distribution
networks, installation and splicing of high-voltage transmission and
distribution lines, substation construction and substation and right-of-way
maintenance. Our maintenance services generally provide recurring revenues that
are typically less affected by levels of construction activity. We focus on
projects that require special expertise, such as design-and-build projects that
utilize the capabilities of our in-house engineers or projects that require
specific market expertise such as hospitals or power generation facilities, as
well as service, maintenance and certain renovation and upgrade work, which
tends to either be recurring, have lower sensitivity to economic cycles, or
both.

Since 1997, we have developed a national footprint of approximately 140
locations currently serving the continental 48 states through the acquisition
and internal growth of established companies operating in our core business
areas. From 1997 to 2003, revenues for our businesses increased at a compounded
annual growth rate of approximately 29%. Included in that growth was
approximately five percent organic or "same store sales" growth. This includes a
decline in our revenue base during 2002 and 2003 of approximately seven percent
due to market conditions and strategic divestitures. In 2003, we continued to
focus internally to integrate our information systems and established a
regionally based management structure to enhance operating controls at all
levels of our organization, as well as integrating a consolidated procurement
program and structure to manage customers and vendors on a national basis.

INDUSTRY OVERVIEW

Using the most recently available data from F. W. Dodge, we estimate the
electrical contracting industry will generate annual revenues in excess of $80
billion in 2003. Data from EC&M Magazine indicates that the electrical
contracting industry is highly fragmented, with more than 70,000 companies, most
of which are small, owner-operated businesses. This data also indicates that
there are only 12 U.S. electrical contractors with revenues in excess of $200
million. F. W. Dodge data indicates total construction industry revenues have
grown at an average compound rate of approximately five percent from 1997
through 2003. This includes a decline in the market from 2001 to 2003 of
approximately one percent, where commercial and industrial construction spending
was down due to soft market conditions, offset by a rise in residential
construction.

During the last decade, electrical contractors have experienced a growing
demand for their services due to more stringent electrical codes, increased use
of electrical power, increased drive toward outsourcing, increased demand for
bandwidth, demand for bundled services, and construction of smart houses with
integrated computer,

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temperature control and safety systems. This market, while up over the past
several years, has been depressed during the last two years due to decreased
overall construction spending.

COMPETITIVE STRENGTHS

Our competitive strengths include the following:

- Geographic diversity -- We have approximately 140 locations, currently
serving the continental 48 states and have worked on more than 2,000
contracts over $250,000 and more than 10,000 contracts overall in 2003.
IES' national presence mitigates the region specific economic slowdowns.
Our presence in states such as Alabama, Virginia, Texas and Colorado has
been particularly beneficial through this most recent construction
decline, because these areas were less impacted than some of the other
areas of the U.S. Since 1997, much of our revenues have been derived from
the fast growing Sunbelt states.

- Customer diversity -- Our diverse customer base includes general
contractors, property developers and managers, facility owners and
managers of large retail establishments, manufacturing and processing
facilities, utilities, government agencies and homeowners. No single
customer accounted for more than 10% of our revenues for the year ended
September 30, 2003. We believe that customer diversity provides us with
many advantages including enabling us to better serve national customers
with multiple locations and reducing our dependence on any particular
customer.

Our company services a wide variety of customers, which tends to cushion
us somewhat from sector declines. The impact of a slowdown in a particular
industry is typically muted when compared to its smaller, more
geographically or sector concentrated competitors. Additionally, our
expertise in a variety of industries allows us to be flexible and to share
our expertise across regions.

Electrical utility work is a component of our overall service offering
which allows us even further diversity. We do a significant amount of
power, power line and "electrical grid" work. During fiscal 2003,
approximately $107.3 million, or 7%, of our revenues were from power
utility work. Although current construction spending estimates according
to F.W. Dodge indicate that spending in this sector will be down in 2003
and 2004, recent large-scale power outages may encourage heightened
spending levels in this area. We have the ability to mobilize our
operations for the power utility sector quickly due to the number of
locations we have with expertise in this area.

We do see a shift in the composition of our backlog from time to time.
During 2003, our backlog of work in progress for commercial and industrial
work declined in the areas of hotels and condominiums, health care
facilities, manufacturing facilities and airports; areas of backlog growth
included institutions, utility work and projects for the government.

- Expertise -- We have developed areas of expertise in high-rise buildings
including hotels, condominiums and office buildings, retail centers,
hospitals, switching centers and utility substations and single-family
and multi-family residential homes. We believe that our technical
expertise provides us with (1) access to higher margin design-and-build
projects; (2) access to growth markets including wireless
telecommunications, highway lighting and traffic control, video and
security and fire systems; and (3) the ability to deliver quality service
with greater reliability than that of many of our competitors.

- Ability to Service National Projects -- Our nationwide presence and name
recognition helps us compete for larger, national contracts with
customers that operate throughout the U.S. Additionally, we believe our
size and national service offering uniquely positions us as the only
single source open shop electrical contracting service provider able to
execute projects on a national basis. We are able to take on very large
and complex projects, often with a national scope, that would strain the
capabilities and resources of most of our competitors. This type of work
represents a growing market and we have made significant progress in
pursuing these sizable accounts. A few of our current national customers
include Wal-Mart, the U.S. Navy, Marriott, Nordstrom, Intel, Starbucks,
Ryland Homes and Pulte Homes.

- Access to resources -- Access to resources is a key to success,
especially in this difficult environment. Many of our competitors have
experienced reduced access to both bonding capacity and capital, which

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constrains their ability to effectively compete and bid on many jobs. As
a result of our size and track record, we have the financial ability to
maintain adequate bonding capacity. This, in conjunction with our access
to a $125 million credit facility, provides a significant competitive
advantage over most of our competitors. We are able to bid on large
projects that require bonding and working capital that may exceed the
capacity of our competitors.

Many customers require subcontractors to post performance and payment
bonds issued by a surety. Those bonds guarantee the customer that the
service provider will perform under the terms of a contract and pay
subcontractors and vendors. In the event a contractor or subcontractor
fails to perform under a contract or pay subcontractors and vendors, the
customer may demand the surety to pay or perform under the bond.

We have maintained a relationship with the same surety since our inception
in 1997. Recently, we added a second or co-surety, thus increasing the
amount of surety credit available to us. Our relationship with our
sureties is such that we will indemnify them for any expenses they incur
in connection with any of the bonds they issue on our behalf. In a market
where bonding has become an issue for many of our competitors, we are
fortunate to be in such a strong position as it relates to bonding
capacity. To date, we have not incurred significant costs to indemnify our
sureties for expenses they incurred on our behalf. As of September 30,
2003, the expected cost to complete projects covered by surety bonds was
approximately $227.9 million.

- Proprietary systems and processes -- We have proprietary systems and
processes that help us bid on projects, manage projects once they have
been awarded and maintain and track customer information. In addition, we
developed and perfected techniques and processes for installation on a
variety of different projects, including a prefabrication process we
implemented throughout the organization. Through the consolidation of
over 85 entities, we have taken the best practices within our company and
leveraged those systems and processes across the entire organization for
"best in class" practices.

- Utilization of prefabrication processes -- Our size and 100% merit shop
environment has allowed us to quickly implement best prefabrication
practices across our company. We prefabricate significant portions of
electrical installations off-site and ship materials to the installation
sites in specific sequences to optimize materials management, improve
efficiency and minimize our employees' time on job sites. This is safer,
more efficient and more cost effective for both us and our customers. We
have prefabrication centers strategically located to service our
companies throughout the U.S., and we believe our prefabrication
processes are among the best in the electrical contracting industry.

- Experienced management -- Our management teams have extensive experience
and well-known reputations in the markets they serve. In addition, we
have developed a strong team of executive officers, led by Herbert
(Roddy) Allen, with extensive operating experience. We believe management
and our employees currently own approximately 25% of our outstanding
common stock.

STRATEGY

At the beginning of fiscal 2002 we implemented a three-phase strategy that
is in place and will continue. Phase one, "Back to Basics," focuses on our
business fundamentals, including building backlog, controlling costs and
generating strong cash flow. Phase two of our strategy, "One Company. One Plan,"
is a focus on initiatives to further integrate our company, given its formation
through a series of acquisitions and its decentralized organizational structure.
We recently entered phase three of our plan, "Continued Growth," which
emphasizes expanding the business both internally and externally through
selective acquisitions. Throughout the implementation of this three-phase
strategy, we have reduced our debt and increased our working capital, creating a
more conservative capital structure. The three phases of this initiative are
detailed in the table below. This multi-phased strategy builds upon itself. As
we enter the third phase, we continue to focus on the elements of the first two
phases.

5

- - PHASE I -- BACK TO BASICS

Build backlog. Building backlog is a primary element of our strategy. Our
ability to maintain a large backlog highlights the advantages of our size and
diverse customer base and helps us navigate through difficult economic periods.
Our backlog of work in progress has decreased to approximately $708 million as
of September 30, 2003 from approximately $801 million as of September 30, 2002.
This decline is the result of many factors, including the removal of $16.5
million of project work due to financial difficulties of one customer. We have
also changed our backlog calculation method for many industrial long-term
maintenance contracts, which has eliminated approximately $29 million in work
from backlog, although they are still a source of revenues for us. From 2001
through 2003, we worked on a few very large contracts that spanned two to three
years, which significantly increased backlog. These larger projects are nearing
completion, which lowers the total backlog. Our backlog of significant
longer-term contracts, defined as contracts in excess of $7.5 million, has
decreased from approximately $209.5 million, or 26% of our backlog, as of
September 30, 2002, to approximately $120.5 million, or 17% of our backlog, as
of September 30, 2003. This indicates the duration of our backlog is slightly
shorter, as it is comprised of smaller projects that are generally completed
more quickly and tend to earn higher margins. During the year ended September
30, 2003, our average contract size was approximately $0.5 million and lasted
approximately six months.

Control Costs. Reducing costs is a key element of the Back to Basics
strategy. We have taken and will continue to take steps to operate more
efficiently and reduce expenses in order to increase our profitability and
remain competitive within the industry. We continue to strengthen our
relationships with suppliers in an effort to reduce the costs of delivering
services. We consolidated the administrative functions of many of our business
locations in an effort to streamline operations and we will continue to do so
where appropriate. We believe that by focusing on cost reduction, we are better
positioned for competitive success in any business environment. The table below
shows a reduction of over $60 million in our selling, general and administrative
expenses over a two-year period (in millions):

Focus on cash flow. Focusing on cash flow is the third component of the
Back to Basics strategy. We are focused on increasing cash flow by strategic
planning and by maintaining an efficient base business. Effective tax planning
reduced cash taxes paid by $8.2 million for the year ended September 30, 2002
and by $10.3 million for the year ended September 30, 2003. We have improved
cash flow generation from operations over the last two years. Cash flow from
operations increased from $8.6 million in 2001 to $53.4 million and $39.3
million in 2002 and 2003, respectively. We also reduced capital expenditures
from $25.8 million in 2001 to $11.9 million and $8.7 in 2002 and 2003,
respectively.

- - PHASE II -- ONE COMPANY. ONE PLAN.

In fiscal 2002, with Back to Basics in place and its benefits ongoing, we
moved to phase two of our strategic plan, One Company. One Plan. The primary
goal of One Company. One Plan. was to achieve a higher level of integration
among our operating units. We divested non-core and under-performing
subsidiaries and combined some operating locations. We continue to streamline
the organization and recognize significant value from increased integration. We
instituted a new management structure to share best practices, began
implementation of an integrated financial planning and reporting system, focused
on unified employee programs and incentives and increased employee training
programs. We also focused on improving our safety record, generating savings
through a centralized procurement program and servicing customers on a national
basis.

Management structure. We manage our business based on our operating
segments. Within our commercial and industrial segment, our subsidiaries are
managed with five geographically based operating officers reporting directly to
our Chief Operating Officer. Our residential business segment also reports
directly to the Chief
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Operating Officer. This operating structure provides us a platform for strong
operating and financial controls, allows us to more efficiently manage the
business and fosters implementation of best practices across the organization.
This structure also allows us to manage customer relationships above the local
level. We believe this structure enables us to continue to expand the services
and expertise we offer in each of our local markets by using specialized
technical and marketing skills to maintain and strengthen relationships with
general contractors and other customers; build positive relationships with
engineers and architects; address design preferences and code requirements
across the nation; increase labor sharing and joint project execution and
continuously improve administrative, safety, hiring and training practices.

The Executive Committee, comprised of the Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, Chief Technology and Procurement
Officer, Senior Vice President of Operations and Senior Vice President of Human
Resources, monitors our operations and fosters our progress on the three-phase
strategy.

Financial reporting and planning. All of our operating subsidiaries are
joined on a common Wide Area Network ("WAN"). This platform enables us to access
and monitor the computer servers at each subsidiary location and facilitates
efficient communication. Stringent controls are in place limiting access to the
data stored on each location's server.

We are 80% complete in implementing a standard Enterprise Resource Planning
("ERP") software system across all of our operating units and are expecting full
implementation by the end of calendar year 2004. This software is a third-party
developed program specifically created for specialty construction contractors
and enables us to manage our projects and report our financial results. We also
implemented a consolidated financial analysis and planning system, which is
compatible with our financial reporting system, and enables us to further
analyze and track data, both from a financial statement standpoint and on a
job-by-job basis. These systems provide real-time access to financial records,
increase our ability to perform analyses, foster improved project management
systems and provide more uniform data, which help improve the overall management
of the business. To date, these systems have helped shorten and streamline the
monthly financial closing process together with providing higher data integrity.

Employee programs. We provide a common, unified healthcare plan to our
employees. We are focusing on other employee benefits as well, which include
employee training. As an example, we partnered with Fails Management Institute,
a firm that specializes in construction industry consulting, to train our
project managers. This program will ensure consistent project management
procedures and proficiency levels across the company. We are focused on all
aspects of employee benefits, including incentive compensation. We established a
bonus plan focused on overall company performance and subsidiary performance for
all executive management and subsidiary leaders. Our executive incentive
compensation plan, while discretionary, is structured so our management
executives and subsidiary leaders may receive compensation up to a targeted
amount once we achieve certain levels of profitability.

Safety. Our focus on safety is continuously improving performance. The
frequency of recordable accidents, defined as number of recorded accidents per
100 employees per year, is a key safety measure. Recordable frequency rates have
decreased each year to 3.80 per 100 employees in fiscal 2003, as shown in the
table below. The industry average through 2001 is approximately eight recordable
accidents per 100 employees according to the Bureau of Labor Statistics, so our
safety focus has improved our performance to less than half the industry
average. In addition to protecting our workers, an improved safety record should
lead to lower insurance costs in the future.

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Procurement. Our procurement strategy involves forging relationships and
alliances with manufacturers, service providers and distributors. These
alliances include volume-based rebates, increased service commitments, funding
for our company-wide procurement catalog and partial sponsorship of company-wide
events. As part of this procurement strategy, we established a system for
improving the accuracy of tracking the goods and services we purchase. We
currently track approximately 70% of our procurement spending for electrical
supplies. The national procurement initiative is generating positive results, as
evidenced by our rebate program. We earned cash volume-based rebates of
approximately $2.1 million and $2.5 million during the years ended September 30,
2002 and 2003, respectively.

Customer focus. We are committed to managing relationships with
nation-wide customers and providing services to larger customers across the
country. We maintain a customer database that tracks projects and provides
centralized access to customer data. This database is particularly important due
to our unique relationship with our customers. We typically perform work for a
general contractor; however, the ultimate customer is the end user, such as
Walgreen's or 3M. We believe it is imperative that we maintain and foster
relationships with both of these customer groups, so we track our work performed
accordingly. We also place emphasis on multi-location national projects. During
the year ended September 30, 2003, we commenced work on two new projects with a
national scope. We believe these projects will provide us with additional
opportunities for growth in the future.

- - PHASE III -- CONTINUED GROWTH

With the implementation of the first two phases of our strategy, we have a
solid foundation for strategic, profitable growth. We are more streamlined and
efficient, and we function more as a unified organization than as a federation
of different entities.

Internal growth. We expect to grow internally by expanding our service
offerings in our existing markets and through expanding the geographic locations
we currently serve. We also plan to open new locations in certain strategic
markets where we do not currently have a presence.

External growth. Our acquisition and expansion plans will be strategically
focused and will occur at a manageable pace. We plan to continue to expand
through selective and cost effective acquisitions in geographic markets that are
projected to have higher than average construction spending growth. Acquisitions
and expansions will be focused where we do not currently have a significant
presence or in specific market segments or service offerings that tend to be
more profitable for us.

We made one acquisition during the year ended September 30, 2003 of a
company that services the commercial and industrial market in the state of
Colorado. According to F. W. Dodge, the state of Colorado is projected to have
approximately 12% compound annual growth in non-residential construction
spending over the next five years, which is over two times the projected U.S.
non-residential construction growth level. Previously, we did not have a strong
presence in Colorado. This acquisition, which occurred during our second fiscal
quarter, was accretive to earnings during the year ended September 30, 2003.

- - CAPITAL STRUCTURE IMPROVEMENTS

Across all three phases of our strategic plan, we are focused on
continuously improving our capital structure. We are utilizing cash flow from
operations to reduce debt and to repurchase common stock. We reduced our total
debt by $39.6 million during the year ended September 30, 2002, and we maintain
a $125 million credit facility with a group of lending institutions that has no
outstanding borrowings as of September 30, 2003. We also recently completed a
two million-share common stock repurchase program announced in August 2002. Our
working capital has increased $29.8 million from $236.6 million as of September
30, 2001 to $266.4 million as of September 30, 2003.

8

THE MARKETS WE SERVE

Commercial and Industrial Market. Our commercial and industrial work
consists primarily of electrical, communications and utility installations and
upgrade, renovation, replacement and service and maintenance work in:

- airports;
- community centers;
- high-rise apartments and condominiums;
- hospitals and health care centers;
- hotels;
- manufacturing and processing facilities;
- military installations;
- office buildings;
- refineries, petrochemical and power plants;
- retail stores and centers;
- schools; and
- theaters, stadiums and arenas.

Our commercial and industrial customers include:

- general contractors;
- developers;
- building owners and managers;
- engineers;
- architects; and
- consultants.

Demand for our commercial and industrial services is driven by construction
and renovation activity levels, as well as more stringent local and national
electrical codes. From fiscal 1997 through 2003, our pro forma combined revenues
from commercial and industrial work has grown at a compound annual rate of
approximately 3.2% per year, including a decline of 6.6% from 2001 to 2003 where
commercial and industrial spending was down due to soft market conditions.
According to F. W. Dodge, the construction industry has grown at a compound
annual rate of approximately 2.1% per year, including a decline of 7.4% from
2001 to 2003 where commercial and industrial spending was down due to soft
market conditions. Commercial and industrial work represented approximately 85%,
81% and 81% of our revenues for the years ended September 30, 2001, 2002 and
2003, respectively. Pro forma combined revenues include revenues generated by
our subsidiaries prior to acquisition by us.

New commercial and industrial work begins with either a design request or
engineer's plans from the owner or general contractor. Initial meetings with the
parties allow us to prepare preliminary, detailed design specifications,
engineering drawings and cost estimates. Projects we design and build generally
provide us with higher margins. "Design and build" gives full or partial
responsibility for the design specifications of the installation. Design and
build is an alternative to the traditional "plan and spec" model, where the
contractor builds to the exact specifications of the architect and engineer. We
prefer to perform design and build work, because it allows us to use past
experience to install a more cost effective project for the customer with higher
profitability to us. Once a project is awarded, it is conducted in scheduled
phases and progress billings are rendered to our customer for payment, less a
retention of 5% to 10% of the construction cost of the project. We generally
provide the materials to be installed as a part of these contracts, which vary
significantly in size from a few hundred dollars to several million dollars and
vary in duration from less than a day to more than a year. Actual fieldwork is
coordinated during this time, including:

- ordering of equipment and materials;
- fabricating or assembling of certain components (pre-fabrication);
- delivering of materials and components to the job site; and
- scheduling of work crews and inspection and quality control.

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Our size enables us to effectively prefabricate significant portions of
certain projects at an alternative site and drop ship materials in specific
sequences. Prefabrication allows us to optimize materials management and
minimize the amount of time specialized employees spend on the job site, as well
as minimizing the overall time it takes to complete a project because working in
a controlled assembly environment is more efficient than preparing all materials
on site.

Our service and maintenance revenues are derived from service calls and
routine maintenance contracts, which tend to be recurring and less sensitive to
economic fluctuations. Service and maintenance is supplied on a long-term and
per-call basis. Long-term service and maintenance is provided through contracts
that require the customer to pay an annual or semiannual fee for periodic
diagnostic services at a specific discount from standard prices for repair and
replacement services. Per-call service and maintenance is initiated when a
customer requests emergency repair service. Service technicians are scheduled
for the call or routed to the customer's residence or business by the
dispatcher. We will then follow up with the customer to schedule periodic
maintenance work. Service personnel work out of our service vehicles, which
carry an inventory of equipment, tools, parts and supplies needed to complete
the typical variety of jobs. The technician assigned to a service call:

- travels to the residence or business;
- interviews the customer;
- diagnoses the problem;
- prepares and discusses a price quotation; and
- performs the work and often collects payment from the customer
immediately.

Most service work is warranted for thirty days.

We design and install communications and utility infrastructure systems and
low voltage systems for the commercial and industrial market as a complement to
our primary electrical contracting services. We believe the demand for our
communications services is driven by the following factors: the pace of
technological change; the overall growth in voice and data traffic; and the
increasing use of personal computers and modems, with particular emphasis on the
market for broadband internet access. Demand for our utilities services is
driven by industry deregulation, limited maintenance or capital expenditures on
existing systems and increased loads and supply and delivery requirements.
Demand for our low voltage systems is driven by the construction industry growth
rate and our ability to cross-sell among our customers.

Residential Market. Our work for the residential market consists primarily
of electrical installations in new single-family housing and low-rise,
multi-family housing, for local, regional and national homebuilders and
developers. We believe demand for our residential services is dependent on the
number of single-family and multi-family home starts. Single-family home starts
are affected by the level of interest rates and general economic conditions. A
competitive factor particularly important in the residential market is our
ability to develop relationships with homebuilders and developers by providing
services in multiple areas of their operations. This ability has become
increasingly important as consolidation has occurred in the residential
construction industry and homebuilders and developers have sought out service
providers that can provide consistent service in all of their operating regions.

We are currently one of the largest providers of electrical contracting
services to the U.S. residential construction market. Our residential business
has experienced significant growth. Our pro forma combined revenues from
residential electrical contracting have grown at a compound annual rate of
approximately 13.5% from fiscal 1997 through 2003 compared to an industry
average of approximately 8.8% according to F. W. Dodge. Residential electrical
contracting represented approximately 15%, 19% and 19% of our revenues for the
years ended September 30, 2001, 2002 and 2003, respectively.

New residential installations begin with a builder providing potential
subcontractors the architectural or electrical drawings for the residences
within the tract being developed. We typically submit a bid or contract proposal
for the work. Our personnel analyze the plans and drawings and estimate the
equipment, materials and parts and the direct and supervisory labor required to
complete the project. We deliver a written bid or negotiate an arrangement for
the job. The installation work is coordinated by our field supervisors and the
builders' personnel. Payments for the project are generally obtained within 30
days, at which time any mechanics' and

10

materialmen's liens securing these payments are released. Interim payments are
often obtained to cover labor and materials costs on larger projects.

CUSTOMERS

Major Customers. We have a diverse customer base. During the year ended
September 30, 2003, no single customer accounted for more than 10% of our
revenues. As a result of our emphasis on quality and worker reliability, our
management and a dedicated sales and work force have been responsible for
developing and maintaining successful relationships with key customers. We
recently worked on projects for the following customers:

3M Hubbard Construction Group Nissan
AMEC Hyatt Corporation Robins & Morton
Austin Industries Intel Six Continents
Beck Group J. E. Dunn Group Skanska USA
Bovis, Inc. Kohl's Structure Tone, Inc.
Centex Construction Kraft Construction Target
Fluor Corporation Lemoine Company Turner Corporation
Four Seasons Hotel Lennar Homes Walgreen's
Hannover Company Manhattan Construction Wal-Mart
Hansel Phelps Corporation Marriott International Weitz Group
Home Depot MB Kahn Whiting Turner Construction

We intend to continue our emphasis on developing and maintaining
relationships with our customers by providing superior, high-quality service.

COMPANY OPERATIONS

Employee Screening, Training and Development. We are committed to
providing the highest level of customer service through the development of a
highly trained workforce. Employees are encouraged to complete a progressive
training program to advance their technical competencies and to ensure that they
understand and follow the applicable codes, our safety practices and other
internal policies. We support and fund continuing education for our employees,
as well as apprenticeship training for technicians under the Bureau of
Apprenticeship and Training of the Department of Labor and similar state
agencies. Employees who train as apprentices for four years may seek to become
journeymen electricians and, after additional years of experience, master
electricians. We pay progressive increases in compensation to employees who
acquire this additional training, and more highly trained employees serve as
foremen, estimators and project managers. Our master electricians are licensed
in one or more cities or other jurisdictions in order to obtain the permits
required in our business. Some employees have also obtained specialized licenses
in areas including security systems and fire alarm installation. In some areas,
licensing boards have set continuing education requirements for maintenance of
licenses. Because of the lengthy and difficult training and licensing process
for electricians, we believe that the number, skills and licenses of our
employees constitute a competitive strength in the industry.

We actively recruit and screen applicants for our technical positions and
have established programs in some locations to recruit apprentice technicians
directly from high schools and vocational technical schools. We recently
initiated recruiting efforts at universities and colleges, such as Texas A&M
University and Clemson University, for skilled graduates in the Engineering and
Construction Science fields. Prior to hiring new employees, we assess their
technical competence level, confirm background references and conduct drug
testing.

Materials and Supplies. As a result of economies of scale, we believe we
have been able to purchase equipment, parts and supplies at discounts to prices
at which stand-alone companies can purchase. In addition, as a result of our
size, we are able to lower our costs for (i) the purchase or lease of vehicles;
(ii) bonding,

11

(iii) property, casualty and liability insurance; (iv) health insurance and
related benefits; (v) retirement benefits administration; and (vi) office and
computer equipment.

Substantially all the equipment and component parts we sell or install are
purchased from manufacturers and other outside suppliers. We are not materially
dependent on any one of these outside sources for our supplies.

Control and Information Systems. We are committed to performing those
controls and procedures that improve our efficiency and the monitoring of our
operations. We are over 80% complete in deploying a standard Enterprise Resource
Planning ("ERP") software to all of our operating companies. We believe ERP
applications are paramount to a growing business with our diverse geographic
platform. Additionally, we have implemented a financial reporting and planning
application to complement the ERP application that provides a uniform structure
and analytical tools for the reporting process. This application was utilized
for our 2003 and 2004 planning processes. We expect to have the implementation
completed by the end of calendar year 2004. Implementation of this ERP system
and financial reporting application allows us to obtain more timely results of
operating performance and perform more detailed analyses. In addition to our ERP
system, other controls and procedures we have in place include:

- pre-determined approval levels for bidding jobs. Each subsidiary may
approve certain jobs based on each subsidiary's gross revenues, the level
of experienced estimating personnel on staff, the type of work to be bid
(i.e. niche vs. non-niche work to take advantage of our centers of
excellence), and manpower availability. If a job exceeds these parameters
additional approvals must be obtained.
- an automated uniform monthly reporting process with data controls.
- a series of quarterly reviews conducted by our senior management team.
Every other quarter, these meeting locations rotate between the corporate
office in Houston, Texas and various locations. The content of such
meetings includes discussing safety performance, previous operating
results, forecasts for the future, issues, opportunities and concerns.
- a formalized planning process that involves analyzing industry trends at
a county level for each subsidiary. This planning also formalizes the
capital allocation process.

COMPETITION

The electrical contracting industry is highly fragmented and competitive.
Most of our competitors are small, owner-operated companies that typically
operate in a limited geographic area. There are few public companies focused on
providing electrical contracting services. In the future, competition may be
encountered from new market entrants. Competitive factors in the electrical
contracting industry include:

- the availability of qualified and licensed electricians or qualified
technicians;
- safety record;
- cost structure;
- relationships with customers;
- geographic diversity;
- ability to reduce project costs;
- access to technology;
- experience in specialized markets; and
- ability to obtain bonding.

See "Risk Factors"

REGULATIONS

Our operations are subject to various federal, state and local laws and
regulations, including:

- licensing requirements applicable to electricians;
- building and electrical codes;

12

- regulations relating to consumer protection, including those governing
residential service agreements; and
- regulations relating to worker safety and protection of the environment.

We believe we have all licenses required to conduct our operations and are
in substantial compliance with applicable regulatory requirements. Our failure
to comply with applicable regulations could result in substantial fines or
revocation of our operating licenses or an inability to perform government work.

Many state and local regulations governing electricians require permits and
licenses to be held by individuals. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified activities
for all our electricians who work in the state or county that issued the permit
or license. It is our policy to ensure that, where possible, any permits or
licenses that may be material to our operations in a particular geographic area
are held by multiple IES employees within that area.

RISK MANAGEMENT AND INSURANCE

The primary risks in our operations include health, bodily injury, property
damage and injured workers' compensation. We maintain automobile and general
liability insurance for third party health, bodily injury and property damage
and workers' compensation coverage, which we consider appropriate to insure
against these risks. Our third-party insurance is subject to large deductibles
for which we establish reserves and, accordingly, we effectively self-insure for
much of our exposures.

EMPLOYEES

At September 30, 2003, we had approximately 13,000 employees. We are not a
party to any collective bargaining agreements with our employees. We believe
that our relationship with our employees is satisfactory.

AVAILABLE INFORMATION

We file our interim and annual financial reports, as well as other reports
required by the Securities Exchange Act of 1934 with the United States
Securities and Exchange Commission (the "SEC"). The public may read and copy any
materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The
SEC maintains a website at www.sec.gov that contains our filings. We make
available free of charge through our website at www.ies-co.com all filings with
the SEC as soon as it is reasonably practicable after such material is
electronically filed. Paper copies of these filings are also available free of
charge upon written request to us.

We have adopted a Code of Ethics for Financial Executives, a Code of
Business Conduct and Ethics for directors, officers and employees (the legal
Compliance and Corporate Policy Manual) and established Corporate Governance
Guidelines, copies of which may be found on our website at www.ies-co.com. Paper
copies of these documents are also available free of charge upon written request
to us. We have designated an "audit committee financial expert" as that term is
defined by the SEC. Further information about this designee may be found in the
Proxy Statement for the Annual Meeting of Stockholders of the Company.

13

RISK FACTORS

- - DOWNTURNS IN CONSTRUCTION COULD ADVERSELY AFFECT OUR BUSINESS BECAUSE MORE
THAN HALF OF OUR BUSINESS IS DEPENDENT ON LEVELS OF NEW CONSTRUCTION ACTIVITY.

More than half of our business is the installation of electrical systems in
newly constructed and renovated buildings, plants and residences. Downturns in
levels of construction or housing starts could have a material adverse effect on
our business, financial condition and results of operations. Our ability to
maintain or increase revenues from new installation services will depend on the
number of new construction starts and renovations, which will likely correlate
with the cyclical nature of the construction industry. The number of new
building starts will be affected by local economic conditions, changes in
interest rates and other factors, including the following:

- employment and income levels;
- interest rates and other factors affecting the availability and cost of
financing;
- tax implications for homebuyers and commercial construction;
- consumer confidence; and
- housing demand.

Additionally, a majority of our business is focused in the southeastern and
southwestern portions of the United Sates, concentrating our exposure to local
economic conditions in those regions. Downturns in levels of construction or
housing starts in these geographic areas could result in a material reduction in
our activity levels.

- - THE HIGHLY COMPETITIVE NATURE OF OUR INDUSTRY COULD AFFECT OUR PROFITABILITY
BY REDUCING OUR PROFIT MARGINS.

The electrical contracting industry is served by many small, owner-operated
private companies, public companies and several large regional companies. We
could also face competition in the future from new competitors entering these
markets. Some of our competitors offer a greater range of services, including
mechanical construction, facilities management, plumbing and heating,
ventilation and air conditioning services. Competition in our markets depends on
a number of factors, including price. Some of our competitors may have lower
overhead cost structures and may, therefore, be able to provide services
comparable to ours at lower rates than we do. If we are unable to offer our
services at competitive prices or if we have to reduce our prices to remain
competitive, our profitability would be impaired.

- - THERE IS CURRENTLY A SHORTAGE OF QUALIFIED ELECTRICIANS. SINCE THE MAJORITY OF
OUR WORK IS PERFORMED BY ELECTRICIANS, THIS SHORTAGE MAY NEGATIVELY IMPACT OUR
BUSINESS, INCLUDING OUR ABILITY TO GROW.

There is currently a shortage of qualified electricians in the United
States. In order to conduct our business, it is necessary to employ
electricians. While overall economic growth has diminished, our ability to
increase productivity and profitability may be limited by our ability to employ,
train and retain skilled electricians required to meet our needs. Accordingly
there can be no assurance, among other things, that:

- we will be able to maintain the skilled labor force necessary to operate
efficiently;
- our labor expenses will not increase as a result of a shortage in the
skilled labor supply; and
- we will not be able to grow as a result of labor shortages.

- - DUE TO SEASONALITY AND DIFFERING REGIONAL ECONOMIC CONDITIONS, OUR RESULTS MAY
FLUCTUATE FROM PERIOD TO PERIOD.

Our business is subject to seasonal variations in operations and demand
that affect the construction business, particularly in residential construction.
Our quarterly results may also be affected by the regional economic conditions.
Accordingly, our performance in any particular quarter may not be indicative of
the results that can be expected for any other quarter or for the entire year.

14

- - THE ESTIMATES WE USE IN PLACING BIDS COULD BE MATERIALLY INCORRECT. THE USE OF
INCORRECT ESTIMATES COULD RESULT IN LOSSES ON A FIXED PRICE CONTRACT. THESE
LOSSES COULD BE MATERIAL TO OUR BUSINESS.

We currently generate, and expect to continue to generate, more than half
of our revenues under fixed price contracts. The cost of labor and materials,
however, may vary from the costs we originally estimated. Variations from
estimated contract costs along with other risks inherent in performing fixed
price contracts may result in actual revenue and gross profits for a project
differing from those we originally estimated and could result in losses on
projects. Depending upon the size of a particular project, variations from
estimated contract costs can have a significant impact on our operating results
for any fiscal quarter or year. We must estimate the costs of completing a
particular project to bid for these fixed price contracts.

- - A SIGNIFICANT AMOUNT OF OUR HISTORIC GROWTH HAS OCCURRED THROUGH THE
ACQUISITION OF EXISTING BUSINESSES; HOWEVER, FUTURE ACQUISITIONS WILL BE MADE
ON A SELECTIVE BASIS AND MAY BE DIFFICULT TO IDENTIFY AND INTEGRATE AND MAY
DISRUPT OUR BUSINESS AND ADVERSELY AFFECT OUR OPERATING RESULTS.

Historically, a significant amount of our growth has come through
acquisitions. From April 1998 through December 2000, we made 71 acquisitions. We
made one acquisition in February 2003. We currently do not intend to grow
materially through acquisitions in the foreseeable future; however, we
continually evaluate acquisition prospects to complement and expand our existing
business platforms. The timing, size or success of any acquisition effort and
the associated potential capital commitments cannot be predicted. If we are
unable to find appropriate acquisitions, our future ability to grow our revenues
and profitability may be diminished. Each acquisition, however, involves a
number of risks. These risks include:

- the diversion of our management's attention from our existing businesses
to integrating the operations and personnel of the acquired business;
- possible adverse effects on our operating results during the integration
process; and
- our possible inability to achieve the intended objectives of the
combination.

We may seek to finance an acquisition through borrowings under our credit
facility or through the issuance of new debt or equity securities. There can be
no assurance that we will be able to secure this financing if and when it is
needed or on the terms we consider acceptable. If we should proceed with a
relatively large cash acquisition, we could deplete a substantial portion of our
financial resources to the possible detriment of our other operations. Any
future acquisitions could also dilute the equity interests of our stockholders,
require us to write off assets for accounting purposes or create other
undesirable accounting issues, such as significant exposure to impairments of
goodwill or other intangible assets.

- - WE MAY EXPERIENCE DIFFICULTIES IN MANAGING INTERNAL GROWTH.

In order to continue to grow internally, we expect to expend significant
time and effort managing and expanding existing operations. We cannot guarantee
that our systems, procedures and controls will be adequate to support our
expanding operations, including the timely receipt of financial information. Our
growth imposes significant added responsibilities on our senior management, such
as the need to identify, recruit and integrate new senior managers and
executives. If we are unable to manage our growth, or if we are unable to
attract and retain additional qualified management, our operations could be
materially adversely affected.

- - WE MAY EXPERIENCE DIFFICULTIES IN MANAGING OUR WORKING CAPITAL.

Our billings under fixed price contracts are generally based upon achieving
certain benchmarks and will be accepted by the customer once we demonstrate
those benchmarks have been met. If we are unable to show the compliance with
billing requests, or if we fail to issue a project billing, our likelihood of
collection could be delayed or impaired, which could have a materially adverse
effect on our operations.

15

- - TO SERVICE OUR INDEBTEDNESS AND TO FUND WORKING CAPITAL, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY
FACTORS.

Our ability to make payments on and to refinance our indebtedness and to
fund planned capital expenditures will depend on our ability to generate cash in
the future. This is subject to our operational performance, as well as general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. Our credit facility will expire in May 2006, and our
long-term senior subordinated notes are due in February 2009.

We cannot provide assurance that our business will generate sufficient cash
flow from operations or that future borrowings will be available to us under our
credit facility in an amount sufficient to enable us to pay our indebtedness, or
to fund our other liquidity needs. We may need to refinance all or a portion of
our indebtedness, on or before maturity. We cannot provide assurance that we
will be able to refinance any of our indebtedness on commercially reasonable
terms or at all. Our inability to refinance our debt on commercially reasonable
terms could materially adversely affect our business.

- - WE HAVE A SUBSTANTIAL AMOUNT OF DEBT. OUR CURRENT DEBT LEVEL COULD LIMIT OUR
ABILITY TO FUND FUTURE WORKING CAPITAL NEEDS AND INCREASE OUR EXPOSURE DURING
ADVERSE ECONOMIC CONDITIONS.

Our indebtedness could have important consequences. For example, it could:

- increase our vulnerability to adverse operational performance and
economic and industry conditions;
- limit our ability to fund future working capital, capital expenditures
and other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a disadvantage compared to a competitor that has less debt;
and
- limit our ability to borrow additional funds.

- - A SIGNIFICANT PORTION OF OUR BUSINESS DEPENDS ON OUR ABILITY TO PROVIDE SURETY
BONDS. THE INABILITY BY US TO OBTAIN SURETY BONDS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.

Surety market conditions are currently difficult as a result of significant
losses incurred by many sureties in recent periods, both in the construction
industry as well as in certain larger corporate bankruptcies. As a result, less
bonding capacity is available in the market and terms have become more
restrictive. Further, under standard terms in the surety market, sureties issue
bonds on a project by project basis, and can decline to issue bonds at any time.
Historically, approximately 30% of our fixed price contract business has
required bonds. While we have enjoyed a longstanding relationship with our
surety and have recently added another surety, current market conditions as well
as changes in our sureties' assessment of our operating and financial risk could
cause our sureties to decline to issue bonds for our work. If that were to
occur, our alternatives include doing more business that does not require bonds,
posting other forms of collateral for project performance such as letters of
credit or cash, and seeking bonding capacity from other sureties. There can be
no assurance that we could easily achieve these alternatives. Accordingly, if we
were to experience an interruption in the availability of bonding capacity, our
operating results could be adversely impacted.

- - WE HAVE ADOPTED TAX POSITIONS THAT A TAXING AUTHORITY MAY VIEW DIFFERENTLY. IF
A TAXING AUTHORITY DIFFERS WITH OUR TAX POSITIONS, OUR RESULTS MAY BE
ADVERSELY AFFECTED.

Our effective tax rate and cash paid for taxes are impacted by numerous tax
positions that we have adopted. Taxing authorities may not always agree with the
positions we have taken. We believe that we have adequate reserves in the event
that a taxing authority differs with positions we have taken, however there can
be no assurance that our results of operations will not be adversely affected.

- - OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED AS A RESULT OF GOODWILL
IMPAIRMENT WRITE-OFFS.

When we acquire a business, we record an asset called "goodwill" if the
amount we pay for the business, including liabilities assumed, is in excess of
the fair value of the assets of the business we acquire. We adopted

16

Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective October 1, 2001. Goodwill amortization for the
years ended September 30, 2002 and 2003 would have otherwise been $12.9 million
(before the impairment charge). Material amounts of recorded goodwill
attributable to each of our reporting units were tested for impairment by
comparing the fair value of each reporting unit with its carrying value. Fair
value was determined using discounted cash flows, market multiples and market
capitalization. These impairment tests are required to be performed at adoption
of SFAS No. 142 and at least annually thereafter. Significant estimates used in
the methodologies include estimates of future cash flows, future short-term and
long-term growth rates, weighted average cost of capital and estimates of market
multiples for each of the reportable units. On an ongoing basis (absent any
impairment indicators), we expect to perform impairment tests at least annually
during the first fiscal quarter of each year.

Based on our impairment tests performed upon adoption of SFAS No. 142, we
recognized a charge of $283.3 million ($7.11 per share) in the first quarter of
2002 to reduce the carrying value of goodwill of our reporting units to its
implied fair value. This impairment is a result of adopting a fair value
approach, under SFAS No. 142, to testing impairment of goodwill as compared to
the previous method utilized in which evaluations of goodwill impairment were
made by us using the estimated future undiscounted cash flows compared to the
assets carrying amount. Under SFAS No. 142, the impairment adjustment recognized
at adoption of the new rules was reflected as a cumulative effect of change in
accounting principle in our first quarter 2003 statement of operations.
Impairment adjustments recognized after adoption, if any, generally are required
to be recognized as operating expenses. We cannot assure that we will not have
future impairment adjustments to our recorded goodwill.

- - OUR OPERATIONS ARE SUBJECT TO NUMEROUS PHYSICAL HAZARDS ASSOCIATED WITH THE
CONSTRUCTION OF ELECTRICAL SYSTEMS. IF AN ACCIDENT OCCURS, IT COULD RESULT IN
AN ADVERSE EFFECT ON OUR BUSINESS.

Hazards related to our industry include, but are not limited to,
electrocutions, fires, mechanical failures or transportation accidents. These
hazards can cause personal injury and loss of life, severe damage to or
destruction of property and equipment and may result in suspension of
operations. Our insurance does not cover all types or amounts of liabilities.
Our third-party insurance is subject to large deductibles for which we establish
reserves and, accordingly, we effectively self-insure for much of our exposures.
No assurance can be given either that our insurance or our provisions for
incurred claims and incurred but not reported claims will be adequate to cover
all losses or liabilities we may incur in our operations or that we will be able
to maintain adequate insurance at reasonable rates.

- - THE LOSS OF A GROUP OF KEY PERSONNEL, EITHER AT THE CORPORATE OR OPERATING
LEVEL, COULD ADVERSELY AFFECT OUR BUSINESS.

The loss of key personnel or the inability to hire and retain qualified
employees could have an adverse effect on our business, financial condition and
results of operations. Our operations depend on the continued efforts of our
current and future executive officers, senior management and management
personnel at the companies we have acquired. A criterion we use in evaluating
acquisition candidates is the quality of their management. We cannot guarantee
that any member of management at the corporate or subsidiary level will continue
in their capacity for any particular period of time. If we lose a group of key
personnel, our operations could be adversely affected. We do not maintain key
man life insurance.

- - THE LOSS OF PRODUCTIVITY, EITHER AT THE CORPORATE OFFICE OR OPERATING LEVEL,
COULD ADVERSELY AFFECT OUR BUSINESS.

Our business is primarily driven by labor. The ability to perform contracts
at acceptable margins depends on our ability to deliver substantial labor
productivity. We cannot guarantee that productivity will continue at acceptable
levels at corporate and our operating subsidiaries for a particular period of
time. The loss of productivity could adversely affect the margins on existing
contracts or the ability to obtain new contracts.

17

ITEM 2. PROPERTIES

We operate a fleet of owned and leased service trucks, vans and support
vehicles. We believe these vehicles generally are adequate for our current
operations.

At September 30, 2003, we maintained branch offices, warehouses, sales
facilities and administrative offices at approximately 140 locations.
Substantially all of our facilities are leased. We lease our corporate office
located in Houston, Texas.

Our properties are generally adequate for our present needs, and we believe
that suitable additional or replacement space will be available as required.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various legal proceedings that have arisen in the
ordinary course of business. While it is not possible to predict the outcome of
these proceedings with certainty and it is possible that the results of legal
proceedings may materially adversely affect us, in our opinion, these
proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability which would have a material
adverse effect on our financial position, liquidity or results of operations.

No legal proceeding individually rises to the level of materiality, nor do
any groups of litigation. The judicial system allows a lawsuit to be filed for
reasons or amounts that may bear little or no relationship to the facts. We have
been subject to such high damage claim lawsuits. We believe that we have valid
defenses and that the damage claimed is not an accurate reflection of any
reasonably expected outcome based on the facts we have.

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

None.

ITEM 4A. EXECUTIVE OFFICERS

Herbert "Roddy" Allen, 63, has been Chief Executive Officer and President
of the Company since October 2002. From May 2002 to October 2002, Mr. Allen was
Chief Operating Officer of the Company. From January 2000 to May 2002, Mr. Allen
was Senior Vice President -- Eastern Operations and served as a Regional
Operating Officer of the Company from June 1998 to January 2000. Prior to
September 2000, Mr. Allen served as the President of H.R. Allen, Inc., one of
the Company's subsidiaries.

Richard China, 45, has been Chief Operating Officer of the Company since
October 2002. From May 2002 to October 2002, Mr. China was President of IES
Communications, Inc. From August 1999 to May 2002, Mr. China served as a
Regional Operating Officer of the Company. Prior to August 1999, Mr. China
served as the President of Primo Electric Company, Inc., one of the Company's
subsidiaries.

William W. Reynolds, 45, has been the Chief Financial Officer and Executive
Vice President of the Company since June 2000. Mr. Reynolds joined IES after
having served as Vice President and Treasurer of Peoples Energy Corporation in
Chicago, Illinois from 1998 to 2000. Prior to his appointment with Peoples
Energy Corporation, Mr. Reynolds was Vice President and Project Finance
Corporate Officer for MCN Energy Group, Inc. in Detroit, Michigan from 1997 to
1998. Prior to 1997, Mr. Reynolds spent seventeen years with BP Amoco
Corporation serving in a variety of positions both internationally and
domestically.

Britton L. Rice, 55, has been the Chief Technology and Procurement Officer
and Senior Vice President of the Company since 2000. Mr. Rice also serves as the
President of Britt Rice Electric, L.P., one of the Company's subsidiaries.

Margery Harris, 43, has been the Senior Vice President of Human Resources
of the Company since October 2000. From 1995 to 2000, Ms. Harris was employed by
Santa Fe Snyder Corporation, a large global independent exploration and
production company, serving most recently as Vice President of Human Resources.
Prior to that Ms. Harris was a lead consultant with Hewitt Associates, a premier
total compensation consulting firm.

18

Curt L. Warnock, 48, has been Vice President, Law of the Company since
October 2002. From July 2001 to October 2002, Mr. Warnock served as Assistant
General Counsel of the Company. Prior to July 2001, Mr. Warnock spent sixteen
years with Burlington Resources Inc., a large independent NYSE oil and gas
company, serving in various positions. Prior to that, Mr. Warnock served as
in-house counsel to Pogo Producing Company, a NYSE oil and gas company; before
that, he was in private practice. Mr. Warnock is licensed in Texas and before
the Fifth Circuit and before the United States Supreme Court.

David A. Miller, 33, has been Vice President and Chief Accounting Officer
of the Company since October 2002. Between January 1998 and October 2002, Mr.
Miller held the positions of Financial Reporting Manager, Assistant Controller,
Controller and Chief Accounting Officer with the Company. Prior to January 1998,
Mr. Miller held various positions in public accounting and private industry. Mr.
Miller is a Certified Public Accountant.

19

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock trades on the NYSE under the symbol "IES." The
following table presents the quarterly high and low sales prices for the
Company's Common Stock on the NYSE since October 2001.

As of November 20, 2003, the market price of the Company's Common Stock was
$7.25 per share and there were approximately 1,440 holders of record.

We do not anticipate paying cash dividends on our common stock in the
foreseeable future. We expect that we will utilize all available earnings
generated by our operations for the development and growth of our business, as
well as to retire some of our outstanding debt and common stock. Any future
determination as to the payment of dividends will be made at the discretion of
our Board of Directors and will depend upon the Company's operating results,
financial condition, capital requirements, general business conditions and such
other factors as the Board of Directors deems relevant. Our debt instruments
restrict us from paying cash dividends on the common stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

20

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated historical financial information for
IES should be read in conjunction with the audited historical consolidated
financial statements of Integrated Electrical Services, Inc. and subsidiaries
and the notes thereto included in Item 8, "Financial Statements and
Supplementary Data."

- ---------------

(1) The ratio of earnings to fixed charges is calculated by dividing the fixed
charges into net income before taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of offering discounts on debt,
amortization of debt issuance costs and the estimated interest component of
rent expense.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes appearing elsewhere in
the Form 10-K. See "Disclosure Regarding Forward-Looking Statements."

21

GENERAL

Our electrical contracting business is operated in two segments: (1)
commercial and industrial and (2) residential. See Note 10 of "Notes to
Consolidated Financial Statements" for a description of these reportable
segments.

In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified the
accounting principles which we believe are most critical to our reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to revenue recognition, the assessment
of goodwill impairment, our allowance for doubtful accounts receivable, the
recording of our self-insurance liabilities and our estimation of the valuation
allowance for deferred tax assets. These accounting policies, as well as others,
are described in the Note 2 of "Notes to Consolidated Financial Statements."

We enter into contracts principally on the basis of competitive bids. We
frequently negotiate the final terms and prices of those contracts with the
customer. Although the terms of our contracts vary considerably, most are made
on either a fixed price or unit price basis in which we agree to do the work for
a fixed amount for the entire project (fixed price) or for units of work
performed (unit price). We also perform services on a cost-plus or time and
materials basis. We are generally able to achieve higher margins on fixed price
and unit price than on cost-plus contracts. We currently generate, and expect to
continue to generate, more than half of our revenues under fixed price
contracts. Our most significant cost drivers are the cost of labor, the cost of
materials and the cost of casualty and health insurance. These costs may vary
from the costs we originally estimated. Variations from estimated contract costs
along with other risks inherent in performing fixed price and unit price
contracts may result in actual revenue and gross profits for a project differing
from those we originally estimated and could result in losses on projects.
Depending on the size of a particular project, variations from estimated project
costs could have a significant impact on our operating results for any fiscal
quarter or year. We believe our exposure to losses on fixed price contracts is
limited in aggregate by the high volume and relatively short duration of the
fixed price contracts we undertake. Additionally, we derive a significant amount
of our revenues from new construction and from the southern part of the United
States. Downturns in new construction activity or in construction in the
southern United States could affect our results.

We complete most projects within one year. We frequently provide service
and maintenance work under open-ended, unit price master service agreements
which are renewable annually. We recognize revenue on service and time and
material work when services are performed. Work performed under a construction
contract generally provides that the customers accept completion of progress to
date and compensate us for services rendered measured in terms of units
installed, hours expended or some other measure of progress. Revenues from
construction contracts are recognized on the percentage-of-completion method in
accordance with the American Institute of Certified Public Accountants Statement
of Position 81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Percentage-of-completion for construction contracts
is measured principally by the percentage of costs incurred and accrued to date
for each contract to the estimated total costs for each contract at completion.
We generally consider contracts to be substantially complete upon departure from
the work site and acceptance by the customer. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. Changes in job performance, job conditions, estimated contract costs and
profitability and final contract settlements may result in revisions to costs
and income and the effects of these revisions are recognized in the period in
which the revisions are determined. Provisions for total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.

We evaluate goodwill for potential impairment in accordance with Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Included in this evaluation are certain assumptions and estimates to
determine the fair values of reporting units such as estimates of future cash
flows, discount rates, as well as assumptions and estimates related to the
valuation of other identified intangible assets. Changes in these assumptions
and estimates or significant changes to the market value of our common stock
could materially impact our results of operations or financial position.

22

We provide an allowance for doubtful accounts for unknown collection issues
in addition to reserves for specific accounts receivable where collection is
considered doubtful. Inherent in the assessment of the allowance for doubtful
accounts are certain judgments and estimates including, among others, our
customers' access to capital, our customers' willingness to pay, general
economic conditions and the ongoing relationships with our customers.

We are insured for workers' compensation, automobile liability, general
liability and employee-related health care claims, subject to large deductibles.
Our general liability program provides coverage for bodily injury and property
damage neither expected nor intended. Losses up to the deductible amounts are
accrued based upon our estimates of the liability for claims incurred and an
estimate of claims incurred but not reported. The accruals are derived from
actuarial studies, known facts, historical trends and industry averages
utilizing the assistance of an actuary to determine the best estimate of the
ultimate expected loss. We believe such accruals to be adequate. However,
insurance liabilities are difficult to assess and estimate due to unknown
factors, including the severity of an injury, the determination of our liability
in proportion to other parties, the number of incidents not reported and the
effectiveness of our safety program. Therefore, if actual experience differs
from than the assumptions used in the actuarial valuation, adjustments to the
reserve may be required and would be recorded in the period that the experience
becomes known.

We regularly evaluate valuation allowances established for deferred tax
assets for which future realization is uncertain. We perform this evaluation at
least annually at the end of each fiscal year. The estimation of required
valuation allowances includes estimates of future taxable income. In assessing
the realizability of deferred tax assets at September 30, 2003, we considered
whether it was more likely than not that some portion or all of the deferred tax
assets would not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. We consider the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. If actual future taxable income
differs from our estimates, our results could be affected.

23

RESULTS OF OPERATIONS

The following table presents selected historical results of operations of
IES and subsidiaries with dollar amounts in thousands. These historical
statements of operations include the results of operations for businesses
acquired through purchases beginning on their respective dates of acquisition.

YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO YEAR ENDED SEPTEMBER 30, 2002

REVENUES

Revenues decreased $26.8 million, or 2%, from $1,475.4 million for the year
ended September 30, 2002 to $1,448.6 million for the year ended September 30,
2003. The decrease in total revenues is the result of $41.6 million in lost
revenues on divested or closed companies that were included in revenues for the
year ended September 30, 2002, but not during the year ended September 30, 2003.
These lost revenues were partially offset by $32.2 million of revenues from an
acquisition during the year ended September 30, 2003. The decline in commercial
and industrial revenues is attributable to $29.4 million decline in
communications work due to market contractions, particularly in California,
Colorado, Washington, D.C. and Virginia. The decrease in residential revenues is
attributable to a $36.9 million decline in multi-family residential construction
projects, primarily in Colorado and Maryland, offset by a $31.0 million increase
in single-family construction spending. We believe record low interest rates
during the last 12-18 months is driving demand for new homes, leading to record
levels of single-family residential construction spending. As families move into
their new single-family homes, the demand for multi-family housing has dropped.

24

GROSS MARGIN

Gross profit decreased $14.4 million, or 7% from $221.6 million for the
year ended September 30, 2002 to $207.2 million for the year ended September 30,
2003. The decline in commercial and industrial gross profit was due to lower
revenues earned year over year as discussed and due to a shift in the type of
commercial and industrial work performed during the year ended September 30,
2003. The related service and maintenance work for commercial and industrial
customers, which tends to earn higher gross margins than fixed price contracts,
declined $6.0 million in gross profit during the year. This decline was
moderated by a $87.1 million increase in larger project work awarded during the
year, particularly industrial contracts in excess of $1 million. These larger
projects produce gross profits but tend to earn lower gross margins as a
percentage of revenue due to the competitive bidding procedures in place to be
awarded this type of work. The shift of project work from small projects such as
the service and maintenance work to larger projects in excess of $1 million
impacted gross profits by approximately $9.2 million.

Overall gross margin as a percentage of revenues decreased approximately 1%
from 15% for the year ended September 30, 2002 to 14% for the year ended
September 30, 2003. Had we earned last year's gross margin of 15%, gross profit
for the year ended September 30, 2003 would have been $217.3 million, an
increase of $10.1 million. The decline in gross margin during the year ended
September 30, 2003 was due to the shift in type of commercial and industrial
work performed and due to the increased competition for available residential
work. We believe record low interest rates during the last 12-18 months is
driving demand for new homes, leading to record levels of single-family
residential construction spending. This increased demand for residential
construction has increased pricing pressure for available work, particularly
affecting our operating units that perform limited amounts of residential work
in addition to their commercial and industrial contract expertise.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased $20.5 million, or
12%, from $174.2 million for the year ended September 30, 2002 to $153.7 million
for the year ended September 30, 2003. This decline is due to the organizational
restructuring that occurred during the year ended September 30, 2002. In the
last 12 months, we have combined administrative offices and functions, leading
to a decline in operating locations from approximately 150 locations to
approximately 140 locations. We also divested or closed non-performing
companies, which decreased our selling, general and administrative cost
structure by approximately $7.9 million. Finally, we streamlined our
administrative cost structure, yielding savings of $14.3 million in salaries and
benefits. As a result of these changes, selling, general and administrative
expenses as a percent of revenue decreased 2% from 12% for the year ended
September 30, 2002 to 10% for the year ended September 30, 2003.

RESTRUCTURING CHARGES

In October 2001 we began implementation of a workforce reduction program.
The purpose of this program was to cut costs by reducing the number of
administrative staff both in the field and at the home office. The total number
of terminated employees was approximately 450. As a result of the program
implementation, we recorded pre-tax restructuring charges of $5.6 million
associated with 45 employees during the year ended September 30, 2002 and
presented these charges as a separate component of our results of operations for
the period then ended. No restructuring charges were incurred for the year ended
September 30, 2003. The charges were based on the costs of the workforce
reduction program and include severance and other special termination

25

benefits. We believe the reduction of these personnel resulted in annual savings
of approximately $4.1 million in salaries and benefits. At September 30, 2002,
approximately $2.0 million of these charges that related to five individuals had
not been paid and were included in accounts payable and accrued expenses. At
September 30, 2003, approximately $1.3 million of these charges that relate to
three individuals have not been paid and are included in accounts payable and
accrued expenses. We anticipate making the remaining payments accrued under this
restructuring during the year ended September 30, 2004.

INCOME FROM OPERATIONS

Income from operations increased $11.8 million, or 28%, from $41.8 million
for the year ended September 30, 2002 to $53.6 million for the year ended
September 30, 2003. As a percentage of revenues, income from operations
increased from 3% for the year ended September 30, 2002 to 4% for the year ended
September 30, 2003. This increase in income from operations was primarily
attributed to $5.6 million in restructuring charges recorded during the year
ended September 30, 2002, and a $20.5 million decrease selling, general and
administrative expenses year over year, offset by a $14.4 million decline in
gross profits earned during the year ended September 30, 2003.

INTEREST AND OTHER EXPENSE, NET

Interest and other expense, net decreased $0.7 million, or 3%, from $25.7
million in 2002 to $25.0 million in 2003. The decrease was primarily the result
of a $1.0 million decrease in interest expense during the year ended September
30, 2003 due to a lower amount of average debt outstanding during the year ended
September 30, 2003 compared to the year ended September 30, 2002. Other expense,
net included a $0.4 million gain from the sale of certain subsidiaries. This was
a decrease from last year's other expense, net, which included $1.0 million gain
resulting from the retirement of $27.1 million of our 9 3/8% senior subordinated
notes due February 1, 2009 in the last quarter of the year ended September 30,
2002, a $1.5 million net gain resulting from the sale of certain subsidiaries
and offset by a $0.6 million loss recorded on our investment in Energy
Photovoltaics, Inc. and losses on sales of assets of $0.9 million.

PROVISION FOR INCOME TAXES

Our effective tax rate decreased from 38% for the year ended September 30,
2002 to 29% for the year ended September 30, 2003. This decrease is attributable
to the release of $2.8 million of tax effected valuation allowances that were
included in income during the year ended September 30, 2003. We released these
valuation allowances because we believe that we will now realize a portion of
the deferred tax assets for which they were established. Without the impact of
these valuation allowance releases, our effective tax rate for the year ended
September 30, 2003 was 38.5%.

YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO YEAR ENDED SEPTEMBER 30, 2001

REVENUES

Revenues decreased $217.8 million, or 13%, from $1,693.2 million for the
year ended September 30, 2001 to $1,475.4 million for the year ended September
30, 2002. The decrease in commercial and industrial revenues was primarily the
result of $71.3 million in non-recurring work performed for one customer during
the year ended September 30, 2001, a $58.8 million decrease in revenues from
communications work due to market

26

contractions, particularly in California, Colorado and Arizona. We also
experienced a decrease in commercial and industrial revenues, which we attribute
to increased competition for available work during the year ended September 30,
2002. This decline most significantly impacted our operations in Georgia, North
Carolina and Virginia, where revenues decreased $76.4 million during the year
ended September 30, 2002.

GROSS MARGIN

Gross profit decreased $86.0 million, or 28% from $307.6 million for the
year ended September 30, 2001 to $221.6 million for the year ended September 30,
2002. The overall decrease in gross profit was due to decreased gross profits of
$39.2 million associated with the $217.8 million decline in revenues earned
during the year ended September 30, 2002 compared to the year ended September
30, 2001. Commercial and industrial gross profit was also decreased by $8.9
million associated with companies divested during the year ended September 30,
2002, a $23.7 million decline in gross profits earned on communications work due
to a decline in work performed and lower margins earned on that work due to the
decrease in market demand, and $6.1 million in additional funding for our
insurance reserves.

Overall gross margin as a percentage of revenues decreased approximately 3%
from 18% for the year ended September 30, 2001 to 15% for the year ended
September 30, 2002. Had we earned the 2001 gross margin of 18%, gross profit for
the year ended September 30, 2002 would have been $265.6 million, an increase of
$44.0 million. The decline in gross margin as a percentage of revenues was the
result of increased competition due to decreased construction spending during
the year ended September 30, 2002, a 25% decrease on gross margins earned on
communications work due to a decrease in market demand and $6.1 million in
additional funding for our self-insurance reserves.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased $39.9 million, or
19%, from $214.1 million for the year ended September 30, 2001 to $174.2 million
for the year ended September 30, 2002. Selling, general and administrative
expenses as a percent of revenue remained the same at 12% for 2001 and 2002. The
decrease in the dollar amount of selling, general and administrative expenses
was primarily the result of the termination of certain administrative field and
home office personnel during the year ended September 30, 2002. Overall
administrative personnel headcount declined by approximately 800 employees
during the year ended September 30, 2002, which led to a decrease of
approximately $39.0 million in salaries and benefits expenses for such
personnel.

RESTRUCTURING CHARGES

In October 2001 we began implementation of a workforce reduction program.
The purpose of this program was to cut costs by reducing the number of
administrative staff both in the field and at the home office. The total number
of terminated employees was approximately 450. As a result of the program
implementation, we recorded pre-tax restructuring charges of $5.6 million
associated with 45 employees during the year ended September 30, 2002 and
presented these charges as a separate component of our results of operations for
the period then ended. The charges were based on the costs of the workforce
reduction program and include severance and other special termination benefits.
We believe the reduction of these personnel resulted in annual savings of
approximately $4.1 million in salaries and benefits. At September 30, 2002,
approximately

27

$2.0 million of these charges that related to five individuals had not been paid
and were included in accounts payable and accrued expenses.

INCOME FROM OPERATIONS

Income from operations decreased $38.8 million, or 48%, from $80.6 million
for the year ended September 30, 2001 to $41.8 million for the year ended
September 30, 2002. As a percentage of revenues, income from operations
decreased from 5% for the year ended September 30, 2001 to 3% for the year ended
September 30, 2002. This decrease in income from operations was primarily
attributed to a $217.8 million decrease in revenues year over year, a 3% decline
in margins earned on those revenues, funding for insurance reserves and
restructuring charges of $5.6 million incurred during the year ended September
30, 2002, partially offset by a $39.9 million decrease in selling, general and
administrative expenses and non-recurring goodwill amortization of $12.9 million
incurred during the year ended September 30, 2001 in accordance with the current
accounting standard.

INTEREST AND OTHER EXPENSE, NET

Interest and other expense, net decreased $0.5 million, or 2%, from $26.2
million in 2001 to $25.7 million in 2002. The decrease was primarily the result
of a $1.0 million gain resulting from the retirement of $27.1 million of our
9 3/8% senior subordinated notes due February 1, 2009 in the last quarter of the
year ended September 30, 2002, a $1.5 million net gain resulting from the sale
of certain subsidiaries and offset by a $0.6 million loss recorded on our
investment in Energy Photovoltaics, Inc. and losses on sales of assets of $0.9
million. These amounts were offset by increased interest expenses associated
with decreased average borrowings during the year ended September 30, 2002 as
compared to the year ended September 30, 2001.

PROVISION FOR INCOME TAXES

Our effective tax rate decreased from 47% for the year ended September 30,
2001 to 38% for the year ended September 30, 2002. The effective tax rate for
the year ended September 30, 2001 included a provision for non-deductible
goodwill amortization expense while the effective tax rate for the year ended
September 30, 2002 includes the effect of the projected utilization of certain
net operating loss carryforwards.

COST DRIVERS

As a service business, our cost structure is highly variable. Our primary
costs include labor, materials and insurance. Approximately 40% of our costs are
derived from labor and related expenses. For the years ended September 30, 2001,
2002 and 2003, our labor-related expenses totaled $610.6 million, $568.0 million
and $553.5 million, respectively. As of September 30, 2003, we had approximately
13,000 employees. Approximately 11,000 employees were field electricians, the
number of which fluctuates depending upon the number and size of the projects
undertaken by us at any particular time. Approximately 2,000 employees were
project managers, job superintendents and administrative and management
personnel, including executive officers, estimators or engineers, office staff
and clerical personnel. We provide a health, welfare and benefit plan for all
employees subject to eligibility requirements. We have a 401(k) plan pursuant to
which eligible employees may make contributions through a payroll deduction. We
make matching cash contributions of 25% of each employee's contribution up to 6%
of that employee's salary. We also have an employee stock purchase plan that
provides that eligible employees may contribute up to 100% of their cash
compensation, up to $21,250 annually, toward the annual purchase of our common
stock at a discounted price. Over 750 of our employees participated in the
employee stock purchase plan during the year ended September 30, 2003.

Approximately 40% of our costs incurred are for materials installed on
projects. This component of our expense structure is variable based on the
demand for our services. We generally incur costs for materials once we begin
work on a project. We generally order materials when needed, ship them directly
to the jobsite and install them within 30 days. Materials consist of
commodity-based items such as conduit, wire and fuses as well as specialty items
such as fixtures, switchgear and control panels. For the years ended September
30, 2001, 2002

28

and 2003, our materials expenses (net of rebates received) totaled $592.1
million, $531.5 million and $542.0 million, respectively.

We are insured for workers' compensation, employer's liability, auto
liability, general liability and health insurance, subject to large deductibles.
Losses up to the deductible amounts are accrued based upon actuarial studies and
our estimates of the ultimate liability for claims incurred and an estimate of
claims incurred but not reported. The accruals are based upon known facts and
historical trends and management believes such accruals to be adequate. Expenses
for claims administration, claims funding and reserves funding totaled $39.9
million, $49.3 million and $40.8 million for the years ended September 30, 2001,
2002 and 2003, respectively.

WORKING CAPITAL

Total current assets increased $9.0 million, or 2%, from $437.7 million for
the year ended September 30, 2002 to $446.7 million for the year ended September
30, 2003. This increase is primarily the result of a $7.4 million increase in
cash and cash equivalents due to $39.3 million in cash provided by operations
during the year ended September 30, 2003 offset by $7.9 million in cash used in
investing activities and $24.0 million used in financing activities. See
"Liquidity and Capital Resources" below for further information. Current assets
were further increased by an $8.3 million increase in trade accounts receivable,
net due to the timing of collections, a $6.3 million increase in retainage due
to the timing of retention billings and a $1.9 million increase in costs and
estimated earnings in excess of billings on uncompleted contracts due to the
timing of billings on projects in progress. Current assets were reduced by an
$11.7 million decrease in prepaids and other current assets due to an $8.6
million decrease in short term deferred tax assets due to the recognition of
deferred tax assets existing at September 30, 2002 and a $3.1 million decrease
in other prepaid expenses due to the amortization of prepaid expenses
outstanding as of September 30, 2002. Current assets were further reduced by a
$3.2 million decrease in inventories due to the installation of purchased
materials at September 30, 2002 for certain projects in progress during the year
ended September 30, 2003.

Total current liabilities decreased $13.2 million, or 7%, from $193.5
million for the year ended September 30, 2002 to $180.3 million for the year
ended September 30, 2003. This decrease is primarily the result of a $9.6
million decrease in billings in excess of costs and estimated earnings on
uncompleted projects due to the

29

timing of billings on projects in progress, a $3.3 million decrease in accounts
payable and accrued expenses due to the timing of payments made and a $0.3
million decrease in current maturities of long-term debt due to payments made on
short-term debt.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2003, we had cash and cash equivalents of $40.2
million, working capital of $266.4 million, no borrowings under our credit
facility, $247.9 million outstanding of senior subordinated notes, $27.4 million
of letters of credit outstanding and available borrowing capacity under our
credit facility of $97.6 million.

During the year ended September 30, 2003, we generated $39.3 million of net
cash from operating activities. This net cash from operating activities was
comprised of net income of $20.4 million, increased by $18.6 million of non-cash
charges and $8.2 million of deferred income taxes and decreased by $7.9 million
in working capital changes. Non-cash charges included depreciation and
amortization expense, provision for allowance for doubtful accounts, changes in
deferred income taxes and losses on sales of property and equipment. Working
capital changes consisted of a $13.1 million decrease in billings in excess of
costs and estimated earnings on uncompleted projects and a $1.5 million increase
in cost and estimated earnings in excess of billings on uncompleted contracts.
These working capital changes were offset by a $3.0 million decrease in
inventory and a $2.6 million decrease in payables offset by a $2.7 million
decrease in receivables as a result of the timing of collections, with the
balance of the change due to other working capital changes. Net cash used in
investing activities was $7.9 million, including $8.7 million used for capital
expenditures and $2.7 million used for the acquisition of a business, net of
cash acquired, offset by $3.5 million provided from divestitures and other. Net
cash used by financing activities was $24.0 million, resulting primarily from
$16.3 in repayments of debt and the repurchase of the senior subordinated notes
and $10.2 million for the acquisition of treasury stock.

During the year ended September 30, 2003, we completed a 2 million share
repurchase program. We used approximately $10.2 million in cash generated from
operations to repurchase shares during the year ended September 30, 2003.

On November 5, 2003, we commenced a $13 million share repurchase plan which
we expect to complete primarily through open market purchases during the year
ended September 30, 2004. We expect to fund this program with existing cash and
cash flow from operations.

On May 27, 2003, we amended our $150.0 million revolving credit facility to
a $125.0 million revolving credit facility with a syndicate of lending
institutions to be used for working capital, capital expenditure, acquisitions
and other corporate purposes that matures May 22, 2006, as amended. Amounts
borrowed under the credit facility bear interest at an annual rate equal to
either (a) the London interbank offered rate (LIBOR) plus 1.75 percent to 3.50
percent, as determined by the ratio of our total funded debt to EBITDA (as
defined in the credit facility) or (b) the higher of (i) the bank's prime rate
or (ii) the Federal funds rate plus 0.50 percent plus an additional 0.25 percent
to 2.00 percent, as determined by the ratio of our total funded debt to EBITDA.
Commitment fees of 0.375 percent to 0.50 percent are assessed on any unused
borrowing capacity under the credit facility. Our existing and future
subsidiaries guarantee the repayment of all amounts due under the facility, and
the facility is secured by the capital stock of those subsidiaries and the
accounts receivable of the company and those subsidiaries. Borrowings under the
credit facility are limited to 66 2/3% of outstanding receivables (as defined in
the agreement). The credit facility requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of cash dividends on the common stock, restricts our ability to
repurchase shares of common stock or to retire senior subordinated notes,
restricts our ability to incur other indebtedness and requires us to comply with
various affirmative and negative covenants including certain financial
covenants, some of which become more restrictive over time. Among other
restrictions, the financial covenants include a minimum net worth requirement, a
maximum total consolidated funded debt to EBITDA ratio, a maximum senior
consolidated debt to EBITDA ratio and a minimum interest coverage ratio. For
more information regarding the covenants to our credit facility, as amended, see
our filing on Form 8-K dated May 28, 2003. We were in compliance with the
financial covenants of our credit facility, as amended, at September 30, 2003.
As of November 24, 2003, we had no outstanding borrowings on our credit
facility.

30

On January 25, 1999 and May 29, 2001, we completed our offerings of $150.0
million and $125.0 million senior subordinated notes, respectively. The offering
completed on May 29, 2001 yielded $117.0 million in proceeds, net of a $4.2
million discount and $3.9 million in offering costs. The proceeds from the May
29, 2001 offering were used primarily to repay amounts outstanding under our
credit facility. The notes bear interest at 9 3/8% and will mature on February
1, 2009. We pay interest on the notes on February 1 and August 1 of each year.
The notes are unsecured senior subordinated obligations and are subordinated to
all of our existing and future senior indebtedness. The notes are guaranteed on
a senior subordinated basis by all of our subsidiaries. Under the terms of the
notes, we are required to comply with various affirmative and negative covenants
including (1) restrictions on additional indebtedness, and (2) restrictions on
liens, guarantees and dividends. During the year ended September 30, 2002, we
retired approximately $27.1 million of these senior subordinated notes. In
connection with these transactions, we recorded a gain of $1.0 million. This
gain is recorded in interest and other expense, net during the year ended
September 30, 2002 in accordance with SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which we adopted July 1, 2002. At September 30, 2003, we had
$247.9 million in outstanding senior subordinated notes.

In August 2001 we entered into an interest rate swap contract that had a
notional amount of $100.0 million and was established to manage the interest
rate risk of the senior subordinated note obligations. We terminated this
contract in February 2002. We received cash equal to the fair value of this
derivative of $1.5 million, which is being amortized over the remaining life of
the bonds.

In February 2002 we entered into a new interest rate swap contract that had
a notional amount of $100.0 million and was established to manage the interest
rate risk of the senior subordinated note obligations. We terminated this
contract in August 2002. We received cash equal to the fair value of this
derivative of $2.5 million, which is being amortized over the remaining life of
the bonds. At September 30, 2002 and 2003 we had no outstanding interest rate
swap contracts.

Effective October 1, 2001, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective October 1, 2001. Goodwill amortization for the
years ended September 30, 2002 and 2003 would have otherwise been $12.9 million
(before the impairment charge). Goodwill attributable to each of our reporting
units was tested for impairment by comparing the fair value of each reporting
unit with its carrying value. Fair value was determined using discounted cash
flows, market multiples and market capitalization. These impairment tests are
required to be performed at adoption of SFAS No. 142 and at least annually
thereafter. Significant estimates used in the methodologies include estimates of
future cash flows, future short-term and long-term growth rates, weighted
average cost of capital and estimates of market multiples for each of the
reportable units. On an ongoing basis (absent any impairment indicators), we
expect to perform our impairment tests annually during the first fiscal quarter.

Based on our impairment tests performed upon adoption of SFAS No. 142, we
recognized a charge of $283.3 million ($7.11 per share) in the first quarter of
2002 to reduce the carrying value of goodwill of our reporting units to its
implied fair value. This impairment is a result of adopting a fair value
approach, under SFAS No. 142, to testing impairment of goodwill as compared to
the previous method utilized in which evaluations of goodwill impairment were
made using the estimated future undiscounted cash flows compared to the assets
carrying amount.

31

The impairment was the result of lower forecasted future operating income
at the point of adoption than we anticipated to result from decreased spending
in the construction industry in all of our markets. The impairment related to
our operating regions follows (amounts in millions):

Southeast................................................... $ 89.2
Northeast................................................... 35.2
Gulf Plains................................................. 47.4
Central..................................................... 80.8
West........................................................ 21.0
Residential................................................. 2.6
Divested after adoption..................................... 7.1
------
Total....................................................... $283.3
======

Under SFAS No. 142, the impairment adjustment recognized at adoption of the
new rules was reflected as a cumulative effect of change in accounting principle
in the statement of operations for the year ended September 30, 2002. Impairment
adjustments recognized after adoption, if any, generally are required to be
recognized as operating expenses.

On February 27, 2003 we acquired substantially all of the operating assets
of Riviera Electric LLC ("Riviera") out of a bankruptcy auction of a prior
competitor. Riviera provides electrical contracting services in the state of
Colorado. The purchase price consisted of approximately $2.7 million of cash,
net of cash acquired. The cash used in this acquisition was funded by
operations.

In December 2000, we made an investment in Energy Photovoltaics, Inc.
(EPV), based in Lawrenceville, New Jersey. EPV is a privately held developer and
provider of proprietary thin film processes and equipment for manufacturing
photovoltaic modules to provide solar energy. At September 30, 2003, we had a
carrying value of our under 20% interest in EPV of $3.6 million and a $1.8
million debt investment in EPV. We performed a discounted cash flow analysis at
September 30, 2003 and determined that no impairment to this investment existed.
This investment involves certain risks involving demand for photovoltaic
services. If EPV is unable to deliver on its business plan, we could deem this
investment impaired and would record a charge to other expense in the period
such impairment, if any, is determined.

All of our operating income and cash flows are generated by our wholly
owned subsidiaries, which are the subsidiary guarantors of our outstanding
9 3/8% Senior Subordinated Notes due 2009 (the "Senior Subordinated Notes"). We
are structured as a holding company and substantially all of our assets and
operations are held by our subsidiaries. There are currently no significant
restrictions on our ability to obtain funds from our subsidiaries by dividend or
loan. The parent holding company's independent assets, revenues, income before
taxes and operating cash flows are less than 3% of the consolidated total. The
separate financial statements of the subsidiary guarantors are not included
herein because (i) the subsidiary guarantors are all of the direct and indirect
subsidiaries of the company; (ii) the subsidiary guarantors have fully and
unconditionally, jointly and severally guaranteed the Senior Subordinated Notes;
and (iii) the aggregate assets, liabilities, earnings, and equity of the
subsidiary guarantors is substantially equivalent to the assets, liabilities,
earnings and equity of the company on a consolidated basis. As a result, the
presentation of separate financial statements and other disclosures concerning
the subsidiary guarantors is not deemed material.

OTHER COMMITMENTS

As is common in our industry, we have entered into certain off balance
sheet arrangements that expose us to increased risk. Our significant off balance
sheet transactions include commitments associated with noncancelable operating
leases, letter of credit obligations and surety guarantees.

We enter into noncancelable 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 or equipment and we pay a monthly lease rental fee. At the end of the
lease, we have no further obligation to the lessor. We may determine to cancel
or terminate a

32

lease before the end of its term. Typically we are liable to the lessor for
various lease cancellation or termination costs and the difference between the
then fair market value of the leased asset and the implied book value of the
leased asset as calculated in accordance with the lease agreement.

Some of our customers require us to post letters of credit as a means of
guaranteeing performance under our contracts and ensuring payment by us to
subcontractors and vendors. If our customer has reasonable cause to effect
payment under a letter of credit, we would be required to reimburse our creditor
for the letter of credit. Depending on the circumstances surrounding a
reimbursement to our creditor, we may have a charge to earnings in that period.
To date we have not had a situation where a customer has had reasonable cause to
effect payment under a letter of credit. At September 30, 2003, $2.7 million of
our outstanding letters of credit were to collateralize our customers.

Some of the underwriters of our casualty insurance program require us to
post letters of credit as collateral. This is common in the insurance industry.
To date we have not had a situation where an underwriter has had reasonable
cause to effect payment under a letter of credit. At September 30, 2003, $25.7
million of our outstanding letters of credit were to collateralize our insurance
program.

Many of our customers 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 a contract and that we will pay subcontractors and vendors.
In the event that we fail to perform under a contract or pay subcontractors and
vendors, the customer may demand the surety to pay or perform under our bond.
Our relationship with our sureties is such that we will indemnify the sureties
for any expenses they incur in connection with any of the bonds they issues on
our behalf. To date, we have not incurred significant costs to indemnify our
sureties for expenses they incurred on our behalf. As of September 30, 2003, our
cost to complete projects covered by surety bonds was approximately $227.9
million.

In April 2000, we committed to invest up to $5.0 million in EnerTech
Capital Partners II L.P. (EnerTech). EnerTech is a private equity firm
specializing in investment opportunities emerging from the deregulation and
resulting convergence of the energy, utility and telecommunications industries.
Through September 30, 2003, we had invested $2.7 million under our commitment to
EnerTech. At September 30, 2003, the carrying value of our investment in
EnerTech was $2.5 million. Our investment in EnerTech is accounted for on the
cost basis of accounting and, accordingly, we do not record unrealized losses on
investments within the EnerTech investment that we believe are temporary in
nature. At September 30, 2003, the unrealized losses related to our share of the
EnerTech fund amounted to approximately $0.9 million which we believe to be
temporary in nature. If facts arise that lead us to determine that such
unrealized losses are not temporary, we would write down our investment in
EnerTech through a charge to other expense during the period of such
determination.

Our future contractual obligations include (in thousands)(1):

- ---------------

(1) Debt and capital lease obligations are presented without interest.

Our other commercial commitments expire as follows (in thousands):

- ---------------

(2) Balance of investment commitment in EnerTech.

33

OUTLOOK

Economic conditions across the country are challenging. We continue to
focus on collecting receivables and reducing days sales outstanding. To improve
our position for continued success, we continue to take steps to reduce costs.
We have made significant cuts in administrative overhead at the home office and
in the field. The economic outlook for fiscal 2004 is still somewhat uncertain.
We expect earnings in the first quarter of fiscal 2004 to range between $0.10
and $0.15 per share. For the year ended September 30, 2004, we expect earnings
to range between $0.55 and $0.75 per share excluding any potential goodwill
impairment charges.

We expect to generate cash flow from operations. Our cash flows from
operations tend to track with the seasonality of our business and historically
have improved in the latter part of our fiscal year. We anticipate that our cash
flow from operations will provide sufficient cash to enable us to meet our
working capital needs, debt service requirements and capital expenditures for
property and equipment through the next twelve months. We expect capital
expenditures of approximately $12 million for the fiscal year ended September
30, 2004. Our ability to generate cash flow from operations is dependent on many
factors, including demand for our products and services, the availability of
work at margins acceptable to us and the ultimate collectibility of our
receivables. See "Disclosure Regarding Forward-Looking Statements."

SEASONALITY AND CYCLICAL FLUCTUATIONS

Our results of operations from residential construction are seasonal,
depending on weather trends, with typically higher revenues generated during
spring and summer and lower revenues during fall and winter. The commercial and
industrial aspect of our business is less subject to seasonal trends, as this
work generally is performed inside structures protected from the weather. Our
service and maintenance business is generally not affected by seasonality. In
addition, the construction industry has historically been highly cyclical. Our
volume of business may be adversely affected by declines in construction
projects resulting from adverse regional or national economic conditions.
Quarterly results may also be materially affected by the timing of new
construction projects, acquisitions and the timing and magnitude of acquisition
assimilation costs. Accordingly, operating results for any fiscal period are not
necessarily indicative of results that may be achieved for any subsequent fiscal
period.

INFLATION

Due to the relatively low levels of inflation experienced in fiscal 2001,
2002 and 2003, inflation did not have a significant effect on our results in
those fiscal years, or on any of the acquired businesses during similar periods.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective October 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The adoption had no impact
on the our financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 establishes
requirements for recognition of a liability for a cost associated with an exit
or disposal activity based with an objective of recording the initial liability
at fair value. We adopted SFAS No 146 effective January 1, 2003. The adoption
had no impact on our financial position or results of operations.

In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which
amends SFAS No. 123, "Accounting for Stock-Based Compensation," by providing
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock options and other stock-based employee
compensation. We adopted SFAS 148 on

34

January 1, 2003. The adoption of SFAS 148 did not have a material impact on our
financial position or results of operations.

Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including indirect
Guarantees of Indebtedness of Others," ("Interpretation 45"), will significantly
change current practice in accounting for, and disclosure of, guarantees.
Interpretation 45 requires a guarantor to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. Interpretation 45 also expands the disclosures required
to be made by a guarantor about its obligations under certain guarantees that it
has issued. Interpretation 45's disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002, while the initial recognition and initial measurement provisions are
applicable on prospective basis to guarantees issued or modified after December
31, 2002. The types of guarantees that we are party to include surety bonds and
letters of credit. We adopted Interpretation 45 effective January 1, 2003. The
adoption does not have a material impact on our results of operations or
financial position.

In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities,"
("Interpretation 46"). The objective of Interpretation 46 is to improve the
financial reporting by companies involved with variable interest entities. Until
now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interest.
Interpretation 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period ending after December
15, 2003. Certain of disclosure requirements apply to all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. We have minority interests in two firms, EnerTech Capital
Partners II, L.P. and Energy Photovoltaics, Inc., and a joint venture that may
fall under this interpretation. We do not believe the adoption of this statement
will have a material impact on our results of operations or financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity," ("SFAS 150"). SFAS 150 requires that mandatorily
redeemable financial instruments issued in the form of shares be classified as
liabilities, and specifies certain measurement and disclosure requirements for
such instruments. The provisions of SFAS 150 were effective at the beginning of
the first interim period beginning after June 15, 2003. We adopted the
requirements of SFAS 150 as of July 1, 2003. The adoption did not have a
material impact on our results of operations or financial position.

35

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management is actively involved in monitoring exposure to market risk and
continues to develop and utilize appropriate risk management techniques. We are
not exposed to any significant market risks from commodity price risk or foreign
currency exchange risk. Our exposure to significant market risks include
outstanding borrowings under our floating rate credit facility. We did not have
any outstanding borrowings under our credit facility as of September 30, 2003.
Management does not use derivative financial instruments for trading purposes or
to speculate on changes in interest rates or commodity prices.

As a result, our exposure to changes in interest rates results from our
short-term and long-term debt with both fixed and floating interest rates. The
following table presents principal or notional amounts (stated in thousands) and
related interest rates by year of maturity for our debt obligations and their
indicated fair market value at September 30, 2003:

36

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

37

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Integrated Electrical Services, Inc.

We have audited the accompanying consolidated balance sheets of Integrated
Electrical Services, Inc. and subsidiaries as of September 30, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Integrated Electrical Services, Inc. for the year ended September
30, 2001 were audited by other auditors who have ceased operations and whose
report dated November 12, 2001, expressed an unqualified opinion on those
statements.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Electrical Services, Inc. and subsidiaries at September 30, 2003 and 2002, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States.

As discussed in Note 2 to the consolidated financial statements, effective
October 1, 2001, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("FAS 142").

As discussed above, the consolidated financial statements of Integrated
Electrical Services, Inc. for the year ended September 30, 2001 were audited by
other auditors who have ceased operations. As described in Notes 2 and 10, these
consolidated financial statements have been revised. We audited the adjustments
described in Note 10 that were applied to revise the 2001 consolidated financial
statements relating to changes in segments. We also applied procedures with
respect to the disclosures in Note 2 pertaining to financial statement revisions
to include the transitional disclosures required by FAS 142. In our opinion, the
adjustments to Note 10 are appropriate and have been properly applied. In
addition, in our opinion, the FAS 142 disclosures for 2001 in Note 2 are
appropriate. However, we were not engaged to audit, review or apply any
procedures to the 2001 consolidated financial statements of the Company other
than with respect to such adjustments and accordingly, we do not express an
opinion or any other form of assurance on the 2001 consolidated financial
statements as a whole.

ERNST & YOUNG LLP

Houston, Texas
October 31, 2003

38

[This is a copy of the audit report previously issued by Arthur Andersen
LLP in connection with Integrated Electrical Services, Inc.'s filing on Form
10-K for the year ended September 30, 2001. This audit report has not been
reissued by Arthur Andersen LLP in connection with this filing on Form 10-K for
the year ended September 30, 2003. Integrated Electrical Services, Inc.'s
consolidated balance sheet as of September 30, 2000, and the consolidated
statements of operations, stockholder's equity and cash flows for the two years
ended September 30, 2000 are not required to be presented and are not included
in this Form 10-K.]

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Integrated Electrical Services, Inc.:

We have audited the accompanying consolidated balance sheets of Integrated
Electrical Services, Inc. (a Delaware corporation), and subsidiaries as of
September 30, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three fiscal
years in the period ended September 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Electrical Services, Inc., and subsidiaries as of September 30, 2000 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended September 30, 2001, in conformity
with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
November 12, 2001

39

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

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

40

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

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

41

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

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

42

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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

43

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS:

Integrated Electrical Services, Inc. (the "Company" or "IES"), a Delaware
corporation, was founded in June 1997 to create a leading national provider of
electrical services, focusing primarily on the commercial and industrial,
residential, low voltage and service and maintenance markets.

In the course of its operations, the Company is subject to certain risk
factors, including but not limited to: exposure to downturns in the economy,
risks related to its acquisition strategy, risks related to management of
internal growth and execution of strategy, management of external growth,
availability of qualified employees, competition, seasonality, risks associated
with contracts, significant fluctuations in quarterly results, recoverability of
goodwill, collectibility of receivables, dependence on key personnel and risks
associated with the availability of capital and with debt service.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
IES, its wholly owned subsidiaries, and certain investments. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the segment data for the fiscal year
ended September 30, 2001 to conform to the presentation used for the years ended
September 30, 2002 and 2003 (See note 10).

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

Inventories

Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued by the Company at the lower of cost or market
generally using the first-in, first-out (FIFO) method.

Securities and Equity Investment

At September 30, 2001, the Company had a 20.6% equity interest in Energy
Photovoltaics, Inc. (EPV) of $4.9 million which was included in other noncurrent
assets. The Company accounted for this investment under the equity method of
accounting in accordance with Accounting Principles Board Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock." During the years
ended September 30, 2001 and 2002, the Company recognized losses of $0.4 million
and $0.6 million, respectively, as its portion of this investment's losses. This
amount is included as a component of other expense in the Company's consolidated
statement of operations. During the year ended September 30, 2002, the Company
distributed out a portion of its investment in EPV to a former officer of the
Company, bringing its interest below 20%. Accordingly, at September 30, 2002 and
September 30, 2003, the Company accounts for its interest in EPV under the cost
method of accounting for investments. Additionally, the Company has notes
receivable totaling approximately $1.8 million with EPV at September 30, 2002
and September 30, 2003. See note 14 for further commitments.

During the year ended September 30, 2001, the Company disposed of one of
its cost method investments for approximately $0.3 million and realized a loss
of $0.7 million. Such loss is included as a component of other expense in the
Company's consolidated statement of operations for the year ended September 30,
2001. Through September 30, 2003, the Company had invested $2.7 million under
its commitment to EnerTech Capital Partners II L.P. (EnerTech) (See note 14).
The carrying value of the EnerTech investment at September 30, 2003 was $2.5
million. This investment is accounted for on the cost basis of accounting and,
accordingly, the Company
44

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

does not record unrealized losses on investments within the EnerTech investment
that it believes are temporary in nature. At September 30, 2003, the unrealized
losses related to the Company's share of the EnerTech fund amounted to
approximately $0.9 million which it believes are temporary in nature.

At September 30, 2002 and 2003, the Company's cost method investments in
securities have a carrying value of $5.1 million and $6.1 million, respectively.
The fair values of the Company's investments at September 30, 2002 and 2003 are
$4.7 and $5.2 million, respectively. The difference between the carrying values
and fair values at September 30, 2002 and 2003 are unrealized losses on the
EnerTech investment which the Company believes are temporary in nature. The
Company uses available information and may perform discounted cash flow analyses
to determine impairment of its investments, if any.

Property and Equipment

Additions of property and equipment are recorded at cost, and depreciation
is computed using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are capitalized and amortized over the lesser
of the life of the lease or the estimated useful life of the asset. Depreciation
expense was approximately $15.8 million, $16.9 million and $14.6 million for the
years ended September 30, 2001, 2002 and 2003, respectively.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations in the caption Other, net.

Goodwill

Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which establishes new accounting and reporting
requirements for goodwill and other intangible assets. Under SFAS No. 142, all
goodwill amortization ceased effective October 1, 2001. Goodwill amortization
for each of the years ended September 30, 2002 and September 30, 2003 would have
otherwise been $12.9 million (before the impairment charge). Goodwill
attributable to each of the Company's reporting units was tested for impairment
by comparing the fair value of each reporting unit with its carrying value. Fair
value was determined using discounted cash flows, market multiples and market
capitalization. These impairment tests are required to be performed at adoption
of SFAS No. 142 and at least annually thereafter. Significant estimates used in
the methodologies include estimates of future cash flows, future short-term and
long-term growth rates, weighted average cost of capital and estimates of market
multiples for each of the reportable units. On an ongoing basis (absent any
impairment indicators), the Company expects to perform our impairment tests
annually during the first fiscal quarter.

Based on the Company's impairment tests performed upon adoption of SFAS No.
142, it recognized a charge of $283.3 million ($7.11 per share) in the first
quarter of 2002 to reduce the carrying value of goodwill of its reporting units
to its implied fair value. This charge resulted in the recording of a deferred
tax asset totaling $14.6 million for which the Company provided a full valuation
allowance because at the time of adoption it was not deemed more likely than not
that the deferred tax asset would be realized. The future scheduled reversal of
the asset is dependent upon many factors, including projected future taxable
income, the scheduled reversal of deferred tax liabilities and tax planning
strategies. At September 30, 2003, this deferred tax asset, net of valuation
allowance totaled $2.8 million. This impairment is a result of adopting a fair
value approach, under SFAS No. 142, to testing impairment of goodwill as
compared to the previous method utilized in which evaluations of goodwill
impairment were made by the Company using the estimated future undiscounted cash
flows compared to the assets' carrying amount. Under SFAS No. 142, the
impairment adjustment recognized at adoption of the new rules was reflected as a
cumulative effect of change in accounting principle in the Company's first
quarter
45

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2002 statement of operations. The impairment was the result of lower forecasted
future operating income at the point of adoption than were anticipated to result
from decreased spending in the construction industry in all of the Company's
markets except Residential. The impairment related to the Company's current
operating regions follows (amounts in millions):

Southeast................................................... $ 89.2
Northeast................................................... 35.2
Gulf Plains................................................. 47.4
Central..................................................... 80.8
West........................................................ 21.0
Residential................................................. 2.6
Divested after adoption..................................... 7.1
------
Total....................................................... $283.3
======

46

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The audited results of operations presented below for the year ended
September 30, 2003 and adjusted results of operations for the years ended
September 30, 2001 and 2002 reflect the operations of the Company had we adopted
the non-amortization provisions of SFAS No. 142 effective October 1, 2000:

Debt Issuance Costs

Debt issuance costs related to the Company's credit facility and the senior
subordinated notes are included in other noncurrent assets and are amortized to
interest expense over the scheduled maturity of the debt. As of September 30,
2002 and 2003, accumulated amortization of debt issuance costs were
approximately $3.7 million and $5.3 million, respectively. During the year ended
September 30, 2003, the Company capitalized approximately $0.7 million of
issuance costs incurred in connection with amending its credit facility.

Revenue Recognition

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Such contracts generally
provide that the customers accept completion of progress to date and compensate
the Company for services rendered measured in terms of units installed, hours
expended or some other measure of progress. Revenues from construction contracts
are recognized on the percentage-of-completion method in accordance with the
American Institute of Certified Public Accountants Statement of Position (SOP)
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." The Company recognizes revenue on signed contracts
and change orders. The Company recognizes revenue on unsigned, verbally
approved, change orders where collection is deemed probable.
Percentage-of-completion for construction contracts is measured principally by
the percentage of costs incurred and accrued to date for each contract to the
estimated total costs for each contract at completion. The Company generally
considers contracts to be substantially complete upon departure from the work
site and acceptance by the customer. Contract costs include all direct material,
labor and insurance costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. Changes in job performance, job conditions,

47

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

estimated contract costs and profitability and final contract settlements may
result in revisions to costs and income and the effects of these revisions are
recognized in the period in which the revisions are determined. Provisions for
total estimated losses on uncompleted contracts are made in the period in which
such losses are determined.

The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.

The current asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed which management believes will be billed and collected within the
subsequent year. The current liability "Billings in excess of costs and
estimated earnings on uncompleted contracts" represents billings in excess of
revenues recognized.

Accounts Receivable and Provision for Doubtful Accounts

The Company provides an allowance for doubtful accounts for specific
accounts receivable where collection is considered doubtful as well as for
unknown collection issues based on historical trends.

Income Taxes

The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred income tax assets and
liabilities are recorded for the future income tax consequences of temporary
differences between the financial reporting and income tax bases of assets and
liabilities, and are measured using enacted tax rates and laws.

The Company regularly evaluates valuation allowances established for
deferred tax assets for which future realization is uncertain. The Company
performs this evaluation at least annually at the end of each fiscal year. The
estimation of required valuation allowances includes estimates of future taxable
income. In assessing the realizability of deferred tax assets at September 30,
2003, the Company considers whether it was more likely than not that some
portion or all of the deferred tax assets would not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. The Company considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. If actual future taxable income differs from our
estimates, the Company's results could be affected.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used in the Company's revenue recognition of construction in progress,
allowance for doubtful accounts, realizability of deferred tax assets and
self-insured claims liability.

Self-Insurance

The Company retains the risk for workers' compensation, employer's
liability, automobile liability, general liability and employee group health
claims, resulting from uninsured deductibles per accident or occurrence which
are subject to annual aggregate limits. The Company's general liability program
provides coverage for bodily injury and property damage neither expected nor
intended. Losses up to the deductible amounts are
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INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accrued based upon the Company's known claims incurred and an estimate of claims
incurred but not reported. For the year ended September 30, 2003, management has
compiled its historical data pertaining to the self-insurance experiences and
has utilized the services of an actuary to assist in the determination of the
ultimate loss associated with the Company's self-insurance programs for workers'
compensation, auto and general liability. Management believes that the actuarial
valuation provides the best estimate of the ultimate losses to be expected under
these programs and has recorded the present value of the actuarial determined
ultimate losses under its workers compensation, auto and general liability
programs of $13.2 million and $13.0 million at September 30, 2002 and 2003,
respectively. The present value is based on the expected cash flow to be paid
out under the workers' compensation, automobile and general liability programs
discounted at 5% on those claims not expected to be paid within twelve months.
The undiscounted ultimate losses related to the workers' compensation,
automobile and general liability programs are $14.6 million and $14.3 million at
September 30, 2002 and 2003, respectively. The utilization of the actuarial
valuation resulted in an increase in reserves for self-insurance losses during
the year ended September 30, 2002. The Company recorded a charge associated with
this change in estimate of approximately $6.1 million during the fourth quarter
of the year ended September 30, 2002. Insurance expense for these programs was
approximately $39.9 million, $49.4 million and $40.8 million for the years ended
September 30, 2001, 2002 and 2003, respectively. The present value of all
self-insurance reserves for the health, property and casualty programs recorded
at September 30, 2002 and 2003 is $19.5 million and $18.2 million, respectively.
The undiscounted ultimate losses of all self-insurance reserves at September 30,
2002 and 2003 was $20.8 million and $19.4 million, respectively. Based on
historical payment patterns, the Company expects payments of undiscounted
ultimate losses to be made as follows (amounts in thousands):

YEAR ENDED SEPTEMBER 30,
2004........................................................ $10,349
2005........................................................ 3,371
2006........................................................ 2,138
2007........................................................ 1,337
2008........................................................ 843
Thereafter.................................................. 1,382
-------
Total............................................. $19,420
=======

The Company had restricted cash of $3.5 million and letters of credit of
$25.7 million outstanding at September 30, 2003 to collateralize its
self-insurance obligations.

Realization of Long-Lived Assets

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
evaluates the recoverability of property and equipment or other assets, if facts
and circumstances indicate that any of those assets might be impaired. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if an
impairment of such property has occurred. The effect of any impairment would be
to expense the difference between the fair value of such property and its
carrying value. To date, the Company has not recorded any such impairments.

Risk Concentration

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash deposits and trade
accounts receivable. The Company grants credit, generally without collateral, to
its customers, which are generally contractors and homebuilders throughout the
United States. Consequently, the Company is subject to potential credit risk
related to changes in business and economic factors

49

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

throughout the United States within the construction and home-building market.
However, the Company generally is entitled to payment for work performed and has
certain lien rights in that work. Further, management believes that its contract
acceptance, billing and collection policies are adequate to manage potential
credit risk. The Company routinely maintains cash balances in financial
institutions in excess of federally insured limits.

The Company had no single customer accounting for more than 10% of its
revenues for the years ended September 30, 2001, 2002 and 2003.

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, retainage receivables,
notes receivable, accounts payable, a line of credit, notes and bonds payable,
long-term debt and interest rate swap agreements. The Company's senior
subordinated notes had a carrying value, excluding unamortized discount, at
September 30, 2002 and 2003 $247.9 million. The fair value of the Company's
senior subordinated notes at September 30, 2002 and 2003 was $218.1 million and
$255.3 million, respectively. The Company utilizes quoted market prices to
determine the fair value of its debt. Other than the senior subordinated notes,
the Company believes that the carrying value of financial instruments on the
accompanying consolidated balance sheets approximates their fair value.

Subsidiary Guarantees

All of the Company's operating income and cash flows are generated by its
wholly owned subsidiaries, which are the subsidiary guarantors of the Company's
outstanding 9 3/8% Senior Subordinated Notes due 2009 (the "Senior Subordinated
Notes"). The Company is structured as a holding company and substantially all of
its assets and operations are held by its subsidiaries. There are currently no
significant restrictions on the Company's ability to obtain funds from its
subsidiaries by dividend or loan. The parent holding company's independent
assets, revenues, income before taxes and operating cash flows are less than 3%
of the consolidated total. The separate financial statements of the subsidiary
guarantors are not included herein because (i) the subsidiary guarantors are all
of the direct and indirect subsidiaries of the Company; (ii) the subsidiary
guarantors have fully and unconditionally, jointly and severally guaranteed the
Senior Subordinated Notes; and (iii) the aggregate assets, liabilities,
earnings, and equity of the subsidiary guarantors is substantially equivalent to
the assets, liabilities, earnings and equity of the Company on a consolidated
basis. As a result, the presentation of separate financial statements and other
disclosures concerning the subsidiary guarantors is not deemed material.

50

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Earnings per Share

The following table reconciles the components of the basic and diluted
earnings (loss) per share for the three years ended September 30, 2001, 2002 and
2003 (in thousands, except share information):

For the years ended September 30, 2001, 2002 and 2003, exercisable stock
options of 4.4 million, 5.6 million and 4.2 million, respectively, were excluded
from the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the Company's common stock.

Stock Based Compensation

The Company accounts for its stock-based compensation arrangements using
the intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25 -- "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations. Under APB 25, if the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. The Company's stock
options have all been granted with exercise prices at fair value, therefore no
compensation expense has been recognized under APB 25. During the years ended
September 30, 2001 and 2002, the Company recorded compensation expense of $568
and $1,422 in connection with a restricted stock award (See note 11).

51

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table illustrates the effect on net income and earnings per
share assuming the compensation costs for IES' stock option and purchase plans
had been determined using the fair value method at the grant dates amortized on
a pro rata basis over the vesting period as required under SFAS No.
123 -- "Accounting for Stock-Based Compensation" for the years ended September
30, 2001, 2002 and 2003 (in thousands, except for per share data):

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

The pro forma disclosures for the years ended September 30, 2001 and 2002
have been adjusted to reflect the impact of cancellations and forfeitures of
stock options issued prior to September 30, 2003. The effects of applying SFAS
No. 123 in the pro forma disclosure may not be indicative of future amounts as
additional awards in future years are anticipated and because the Black-Scholes
option-pricing model involves subjective assumptions which may be materially
different than actual amounts.

New Accounting Pronouncements

Effective October 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The adoption had no impact
on the Company's financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 establishes
requirements for recognition of a liability for a cost associated with an exit
or disposal activity based with an objective of recording the initial liability
at fair value. The Company adopted

52

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No 146 effective January 1, 2003. The adoption had no impact on the
Company's financial position or results of operations.

In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which
amends SFAS No. 123, "Accounting for Stock-Based Compensation," by providing
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock options and other stock-based employee
compensation. The Company adopted SFAS 148 on January 1, 2003. The adoption of
SFAS 148 did not have a material impact on the Company's financial position or
results of operations.

Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including indirect
Guarantees of Indebtedness of Others," ("Interpretation 45"), will significantly
change current practice in accounting for, and disclosure of, guarantees.
Interpretation 45 requires a guarantor to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. Interpretation 45 also expands the disclosures required
to be made by a guarantor about its obligations under certain guarantees that it
has issued. Interpretation 45's disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002, while the initial recognition and initial measurement provisions are
applicable on prospective basis to guarantees issued or modified after December
31, 2002. The types of guarantees that the Company is party to include surety
bonds and letters of credit. The Company adopted Interpretation 45 effective
January 1, 2003. The adoption did not have a material impact on the Company's
results of operations or financial position.

In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities,"
("Interpretation 46"). The objective of Interpretation 46 is to improve the
financial reporting by companies involved with variable interest entities. Until
now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interest.
Interpretation 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period ending after December
15, 2003. Certain of disclosure requirements apply to all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. The Company has minority interests in two firms, EnerTech
Capital Partners II, L.P. and Energy Photovoltaics, Inc., and a joint venture
that may fall under this interpretation. The Company does not believe the
adoption of this statement will have a material impact on its results of
operations or financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity," ("SFAS 150"). SFAS 150 requires that mandatorily
redeemable financial instruments issued in the form of shares be classified as
liabilities, and specifies certain measurement and disclosure requirements for
such instruments. The provisions of SFAS 150 were effective at the beginning of
the first interim period beginning after June 15, 2003. The Company adopted the
requirements of SFAS 150 as of July 1, 2003. The adoption did not have a
material impact on the Company's results of operations or financial position.

3. BUSINESS COMBINATIONS:

Purchases

On February 27, 2003, the Company purchased the assets of Riviera Electric
LLC, an electrical contractor located in the state of Colorado out of a
bankruptcy auction of a prior competitor. The total consideration paid in this
transaction was approximately $2.7 million, comprised entirely of cash, net of
cash acquired. The fair value

53

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the tangible net assets acquired exceeded the total consideration paid. As a
result, the long-term fixed assets of the acquisition were reduced to zero. The
accompanying balance sheets include allocations of the purchase price to the
assets acquired and liabilities assumed based on estimates of fair value and are
subject to final adjustment during the second fiscal quarter of the year ended
September 30, 2004. The purchase price was allocated as follows (amounts in
thousands):

The results of operations of Riviera are included in the Company's
consolidated financial statements from February 27, 2003 through September 30,
2003.

Pro Forma Presentation

The unaudited pro forma data presented below reflect the results of
operations of IES and the acquisition of Riviera Electric LLC assuming the
transaction was completed on October 1, 2001 (in thousands):

The unaudited pro forma data summarized above also reflects pro forma
adjustments primarily related to: reductions in general and administrative
expenses for contractually agreed reductions in compensation programs and
additional income tax expense based on the Company's effective income tax rate.
The unaudited pro forma financial data does not purport to represent what the
Company's combined results of operations would actually have been if such
transactions had in fact occurred on October 1, 2001, and are not necessarily
representative of the Company's results of operations for any future period.

54

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Divestitures

On July 25, 2002, the Company sold all of the stock of two of its operating
companies. The proceeds from the sale were $7.5 million in cash and 241,224
shares of the Company's common stock. The Company recorded a pre-tax gain of
$2.1 million associated with this sale that is recorded in other income.

On October 8, 2002, the Company sold all of the stock of one of its
operating companies. The proceeds from the sale were $1.1 million in cash and
70,330 shares of the Company's common stock. The Company recorded a pre-tax gain
of less than $0.1 million associated with this sale that is recorded in other
income.

On July 1, 2003, the Company sold all of the stock of one of its operating
companies. The proceeds from the sale were $1.1 million in cash. The Company
recorded a pre-tax gain of $0.4 million associated with this sale that is
recorded in other income.

In connection with the dispositions discussed above, the net pre-tax gain
was determined as follows for the years ended September 30, 2002 and 2003 (in
thousands):

Had the dispositions discussed above been completed on October 1, 2001, the
results of the Company for the years ended September 30, 2002 and 2003 would
have excluded revenues of $33.0 million and $0.1 million, respectively and
losses from operations of $0.3 million and $0.0 million, respectively.

4. RESTRUCTURING CHARGES

In October 2001, the Company began implementation of a workforce reduction
program. The purpose of this program was to cut costs by reducing the number of
administrative staff both in the field and at the home office. The total number
of terminated employees was approximately 450. As a result of the program
implementation, the Company recorded pre-tax restructuring charges of $5.6
million associated with 45 employees during the year ended September 30, 2002
and presented these charges as a separate component of the Company's results of
operations for the period then ended. The charges were based on the costs of the
workforce reduction program and include severance and other special termination
benefits. The Company believes the reduction of these personnel resulted in
annual savings of approximately $4.1 million in salaries and benefits. At
September 30, 2002, approximately $2.0 million of these charges that related to
five individuals had not been paid and were included in accounts payable and
accrued expenses. At September 30, 2003, approximately $1.3 million of these
charges that relate to three individuals have not been paid and are included in
accounts payable and accrued expenses. The Company anticipates making the
remaining payments accrued under this restructuring during the year ended
September 30, 2004.

55

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following (in thousands):

6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):

Accounts payable and accrued expenses consist of the following (in
thousands):

56

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Contracts in progress are as follows (in thousands):

7. DEBT:

Debt consists of the following (in thousands):

Future payments due on debt at September 30, 2003 are as follows (in
thousands):

2004........................................................ $ 256
2005........................................................ 114
2006........................................................ 63
2007........................................................ 15
2008........................................................ 3
Thereafter.................................................. 247,885
--------
Total..................................................... $248,336
========

Credit Facility

On May 27, 2003, the Company amended its $150.0 million revolving credit
facility to a $125.0 million revolving credit facility with a syndicate of
lending institutions to be used for working capital, capital

57

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expenditures, acquisitions and other corporate purposes that matures May 22,
2006, as amended (the "Credit Facility"). Amounts borrowed under the Credit
Facility bear interest at an annual rate equal to either (a) the London
interbank offered rate (LIBOR) plus 1.75 percent to 3.50 percent, as determined
by the ratio of the Company's total funded debt to EBITDA (as defined in the
Credit Facility) or (b) the higher of (i) the bank's prime rate or (ii) the
Federal funds rate plus 0.50 percent plus an additional 0.25 percent to 2.00
percent, as determined by the ratio of the Company's total funded debt to
EBITDA. Commitment fees of 0.375 percent to 0.50 percent are assessed on any
unused borrowing capacity under the Credit Facility. The Company's existing and
future subsidiaries guarantee the repayment of all amounts due under the
facility, and the facility is secured by the capital stock of those subsidiaries
and the accounts receivable of the Company and those subsidiaries. Borrowings
under the Credit Facility are limited to 66 2/3% of outstanding receivables (as
defined in the agreement). The Credit Facility requires the consent of the
lenders for acquisitions exceeding a certain level of cash consideration,
prohibits the payment of cash dividends on the common stock, restricts the
ability of the Company to repurchase shares of common stock or to retire its
Senior Subordinated Notes, restricts the ability of the Company to incur other
indebtedness and requires the Company to comply with various affirmative and
negative covenants including certain financial covenants, some of which become
more restrictive over time. Among other restrictions, the financial covenants
include a minimum net worth requirement, a maximum total consolidated funded
debt to EBITDA ratio, a maximum senior consolidated debt to EBITDA ratio and a
minimum interest coverage ratio. For more information regarding the Covenants to
its Credit Facility, as amended, see the Company's filing on Form 8-K dated May
28, 2003. The Company was in compliance with the financial covenants of its
Credit Facility, as amended, at September 30, 2003. As of September 30, 2003,
the Company had no borrowings outstanding under its Credit Facility, letters of
credit outstanding under its Credit Facility of $27.4 million, $0.5 million of
other borrowings and available borrowing capacity under its Credit Facility of
$97.6 million.

Senior Subordinated Notes

On January 25, 1999 and May 29, 2001, the Company completed offerings of
$150.0 million and $125.0 million Senior Subordinated Notes, respectively. The
offering completed on May 29, 2001 yielded $117.0 million in proceeds to the
Company, net of a $4.2 million discount and $3.9 million in offering costs. The
proceeds from the May 29, 2001, offering were used primarily to repay amounts
outstanding under the Credit Facility. The Senior Subordinated Notes bear
interest at 9 3/8% and mature on February 1, 2009. The Company pays interest on
the Senior Subordinated Notes on February 1 and August 1 of each year. The
Senior Subordinated Notes are unsecured obligations and are subordinated to all
existing and future senior indebtedness. The Senior Subordinated Notes are
guaranteed on a senior subordinated basis by all of the Company's subsidiaries.
Under the terms of the Senior Subordinated Notes, the Company is required to
comply with various affirmative and negative covenants including: (i)
restrictions on additional indebtedness, and (ii) restrictions on liens,
guarantees and dividends. During the year ended September 30, 2002, the Company
retired approximately $27.1 million of these Senior Subordinated Notes. At
September 30, 2002, the cost basis of $15.6 million notional amount of the
retired senior subordinated notes were classified as part of accounts payable
and accrued expenses as the settlement date occurred subsequent to September 30,
2002. In connection with these transactions, the Company recorded a gain of $1.0
million during the year ended September 30, 2002. This gain is recorded in
interest and other expense, net in accordance with SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," which was adopted July 1, 2002.

Interest Rate Swaps

The Company entered into an interest rate swap agreement in August 2001,
designated as a fair value hedge, in order to minimize the risks and cost
associated with its financing activities. The interest rate swap agreement had a
notional amount of $100.0 million and was established to manage the interest
rate risk of the senior

58

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subordinated note obligations. Under the swap agreement, the Company paid the
counterparty variable rate interest (3-month LIBOR plus 3.49%) and the
counterparty paid the Company fixed rate interest of 9.375% on a semiannual
basis over the life of the instrument through February 1, 2009. Pursuant to SFAS
No. 133, as amended, such interest rate swap contract was reflected at fair
value on the Company's consolidated balance sheet and the related portion of
fixed-rate debt being hedged was reflected at an amount equal to the sum of its
carrying value plus an adjustment representing the change in fair value of the
debt obligation attributable to the interest rate being hedged. The net effect
of this accounting on the Company's operating results is that interest expense
on the portion of fixed-rate debt being hedged was generally recorded based on
variable interest rates. The interest rate swap was considered to be perfectly
effective because it qualified for the "short-cut" method under SFAS No. 133 and
therefore there was no net change in fair value to be recognized in income. At
September 30, 2001 the fair value of this derivative was $3.2 million and was
included in other noncurrent assets. The Company terminated this contract in
February 2002. The Company received cash equal to the fair value of this
derivative of $1.5 million, which is being amortized over the remaining life of
the bonds.

The Company entered into a new interest rate swap agreement in February
2002, designated as a fair value hedge, in order to minimize the risks and cost
associated with its financing activities. The interest rate swap agreement had a
notional amount of $100.0 million and was established to manage the interest
rate risk of the senior subordinated note obligations. Under the swap agreement,
the Company paid the counterparty variable rate interest (3-month trailing LIBOR
plus 3.49%) and the counterparty paid the Company fixed rate interest of 9.375%
on a semiannual basis over the life of the instrument. Pursuant to SFAS No. 133,
as amended, such interest rate swap contract was reflected at fair value on the
Company's consolidated balance sheet and the related portion of fixed-rate debt
being hedged is reflected at an amount equal to the sum of its carrying value
plus an adjustment representing the change in fair value of the debt obligation
attributable to the interest rate being hedged. The net effect of this
accounting on the Company's operating results was that interest expense on the
portion of fixed-rate debt being hedged was generally recorded based on variable
interest rates. The interest rate swap was considered to be perfectly effective
because it qualified for the "short-cut" method under SFAS No. 133 and therefore
there was no net change in fair value to be recognized in income. The Company
terminated this contract in August 2002. The Company received cash equal to the
fair value of this derivative of $2.5 million, which is being amortized over the
remaining life of the bonds. At September 30, 2002 and 2003 the Company had no
outstanding interest rate swap contracts.

The following table presents the balance sheet effect on the Senior
Subordinated Notes (in thousands):

8. LEASES:

The Company leases various facilities under noncancelable operating leases.
For a discussion of leases with certain related parties see Note 11. Rental
expense for the years ended September 30, 2001, 2002 and 2003 was

59

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $10.8 million, $15.4 million and $14.6 million respectively.
Future minimum lease payments under these noncancelable operating leases with
terms in excess of one year are as follows (in thousands):

Year Ended September 30,
2004........................................................ $12,679
2005........................................................ 10,316
2006........................................................ 6,411
2007........................................................ 4,035
2008........................................................ 2,439
Thereafter.................................................. 2,922
-------
Total............................................. $38,802
=======

9. INCOME TAXES:

Federal and state income tax provisions are as follows (in thousands):

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows (in thousands):

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INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for
income tax purposes. The income tax effects of these temporary differences,
representing deferred income tax assets and liabilities, result principally from
the following (in thousands):

At September 30, 2002 and 2003, the Company had $34.1 million and $28.5
million of deferred income tax asset related to tax deductible goodwill,
respectively. The impairment of goodwill recognized upon the adoption of SFAS
142 caused the tax basis in deductible goodwill to exceed book basis by $38.2
million and resulted in an additional deferred tax asset of $14.6 million. The
income tax effect of the $14.6 million additional deferred tax asset was
included in the cumulative effect of change in accounting principal, net of tax.
Subsequent to the adoption of SFAS 142, the Company adopted a tax accounting
method change that allowed it to deduct goodwill for income tax purposes that
had previously been classified as non-deductible. The tax accounting method
change resulted in additional tax basis in deductible goodwill. Tax basis for
deductible goodwill related to the tax accounting method change exceeded book
basis by $100.8 million and resulted in the recording of an additional $38.3
million deferred tax asset. The income tax effect of the $38.3 million
additional deferred tax asset was included in the provision for income taxes.
During the year ended September 30, 2002 and September 30, 2003, the Company had
income tax return activity that reduced the deferred tax by $18.5 million and
$5.6 million, respectively. Tax deductible goodwill is amortized over a 15-year
period. As of September 30, 2003, approximately 11 years remain to be amortized.

At September 30, 2003, the Company had available approximately $27.3
million of net tax operating loss carry forwards for federal income tax
purposes. This carry forward, which may provide future tax benefits, begins to
expire in 2020. The Company also had available approximately $97.8 million of
net tax operating loss carry forwards for state income tax purposes which will
begin to expire in 2013.

In assessing the realizability of deferred tax assets at September 30,
2003, the Company considered whether it was more likely than not that some
portion or all of the deferred tax assets would not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in

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INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

which those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon these
considerations, the Company provided a valuation allowance to reduce the
carrying value of certain of its deferred tax assets. Accordingly, valuation
allowances of $25.6 million and $1.5 million were recorded for deductible
goodwill and state net operating losses, respectively. During the year ended
September 30, 2003, the Company released $2.8 million of tax effected valuation
allowances because it believes it will now realize the deferred tax assets for
which they were established. The Company will evaluate the appropriateness of
its remaining valuation allowances on a periodic basis.

The Company has adopted positions that a taxing authority may view
differently. The Company believes its reserves of $26.1 million recorded in
other noncurrent liabilities are adequate in the event the positions are not
ultimately upheld. The timing of the payment of these reserves is not currently
known and would be based on the outcome of a possible review by a taxing
authority. Statutes of limitations will begin to expire June 15, 2006 and
thereafter.

The net deferred income tax assets and liabilities are comprised of the
following (in thousands):

10. OPERATING SEGMENTS

The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Certain information is disclosed, per SFAS
No. 131, based on the way management organizes financial information for making
operating decisions and assessing performance.

The Company's reportable segments are strategic business units that offer
products and services to two distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies. These segments, which contain different economic characteristics,
are managed through geographically-based regions.

During 2001, the Company managed and measured performance of its business
in four distinct operating segments: commercial and industrial, residential,
service and maintenance and communications solutions. During 2002, the Company
reorganized its business and measured performance into two distinctive operating
segments; commercial and industrial, and residential. As a result of this
reorganization, all reporting responsibilities along with operating
responsibilities were folded into the commercial and industrial operating
segment, and separate and distinct financial information is not reviewed by the
chief decision maker for the old service and maintenance and communications
solutions segments. Since 2002, the chief decision maker reviews operating
results of only two segments: commercial and industrial, and residential. The
Company considered this a change in its structure

62

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of internal organization, which caused its reportable segments to change and has
restated the prior periods in accordance with paragraph 34 of FAS 131.

The commercial and industrial segment provides electrical and
communications contracting, design, installation, renovation, engineering and
upgrades and maintenance and replacement services in facilities such as office
buildings, high-rise apartments and condominiums, theaters, restaurants, hotels,
hospitals and critical-care facilities, school districts, manufacturing and
processing facilities, military installations, airports, refineries,
petrochemical and power plants, outside plant, network enterprise and switch
network customers. The residential segment consists of electrical and
communications contracting, installation, replacement and renovation services in
single family and low-rise multifamily housing units. Corporate includes
expenses associated with the Company's home office and regional infrastructure.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on income from operations of the respective business units
prior to home office expenses. Management allocates costs between segments for
selling, general and administrative expenses, goodwill amortization,
depreciation expense, capital expenditures and total assets.

Segment information for the years ended September 30, 2001, 2002 and 2003
are as follows (in thousands):

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INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company does not have significant operations or long-lived assets in
countries outside of the United States.

11. STOCKHOLDERS' EQUITY:

Restricted Voting Common Stock

The shares of restricted voting common stock have rights similar to shares
of common stock except that such shares are entitled to elect one member of the
board of directors and to not otherwise vote with respect to the election of
directors and are entitled to one-half of one vote for each share held on all
other matters. Each share of restricted voting common stock will convert into
common stock upon disposition by the holder of such shares.

During the year ended September 30, 2003, the Company completed a 2 million
share repurchase program. The Company used approximately $10.2 million in cash
generated from operations to repurchase shares during the year ended September
30, 2003 for this program.

1997 Stock Plan

In September 1997, the Company's board of directors and stockholders
approved the Company's 1997 Stock Plan (the "Plan"), which provides for the
granting or awarding of incentive or nonqualified stock options, stock
appreciation rights, restricted or phantom stock and other incentive awards to
directors, officers, key employees and consultants of the Company. The number of
shares authorized and reserved for issuance under the Plan is 15 percent of the
aggregate number of shares of common stock outstanding. The terms of the option
awards will be established by the compensation committee of the Company's board
of directors. Options generally expire 10 years from the date of grant, one year
following termination of employment due to death or disability, or three months
following termination of employment by means other than death or disability.

Directors' Stock Plan

In September 1997, the Company's board of directors and stockholders
approved the 1997 Directors' Stock Plan (the "Directors' Plan"), which provides
for the granting or awarding of stock options to nonemployee directors. In May
2000, the Company's board of directors amended the Directors' Plan. The number
of shares authorized and reserved for issuance under the Directors' Plan is
250,000 shares. Each nonemployee director is granted options to purchase 3,000
shares at the time of an initial election of such director. In addition, each
director will be automatically granted options to purchase 3,000 shares annually
at each September 30 on which such director remains a director. All options have
an exercise price based on the fair market value at the date of

64

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

grant, are immediately vested and expire 10 years from the date of the grant. In
the event that the director ceases to serve as a member of the board for any
reason the options must be exercised within one year.

1999 Incentive Compensation Plan

In November 1999, the Company's board of directors adopted the 1999
Incentive Compensation Plan (the "1999 Plan"). The 1999 Plan, as amended,
authorizes the Compensation Committee of the Board of Directors or the Board of
Directors to grant eligible participants of the Company awards in the form of
options, stock appreciation rights, restricted stock or other stock based
awards. The Company has up to 5.5 million shares of common stock authorized for
issuance under the 1999 Plan.

In March 2000, the Company granted 400,000 restricted stock awards under
its stock plan to an employee. This award vested in equal installments on March
20th of each year through 2004, provided the recipient was still employed by the
Company. The market value of the underlying stock on the date of grant for this
award was $2.3 million, which was recognized as compensation expense over the
related vesting periods. During the year ended September 30, 2001, the Company
amortized $0.6 million to expense in connection with this award. The award
became fully vested and was fully amortized during the year ended September 30,
2002.

The following table summarizes activity under the Company's stock option
and incentive compensation plans:

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INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The table below summarizes options outstanding and exercisable at September
30, 2003:

Options granted during the years ended September 30, 2001, 2002 and 2003
had weighted average fair values per option of $3.55, $1.91 and $3.63,
respectively.

Unexercised options expire at various dates from January 27, 2008 through
September 30, 2012.

Employee Stock Purchase Plan

In February 2000, the Company's stockholders approved the Company's
Employee Stock Purchase Plan (the "ESPP"), which provides for the sale of common
stock to participants as defined at a price equal to the lower of 85% of the
Company's closing stock price at the beginning or end of the option period, as
defined. The number of shares of common stock authorized and reserved for
issuance under the ESPP is 1.0 million shares. The purpose of the ESPP is to
provide an incentive for employees of the Company to acquire a proprietary
interest in the Company through the purchase of shares of the Company's common
stock. The ESPP is intended to qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code").
The provisions of the ESPP are construed in a manner to be consistent with the
requirements of that section of the Code. During the years ended September 30,
2001, 2002 and 2003, the Company issued 207,642, 55,742 and 248,982 shares
pursuant to the ESPP, respectively. For purposes of SFAS No. 123, "Accounting
for Stock-Based Compensation," estimated compensation cost as it relates to the
ESPP was computed for the fair value of the employees' purchase rights using the
Black-Scholes option pricing model with the following assumptions for 2001:
expected dividend yield of 0.00%, expected stock price volatility of 60.99%,
weighted average risk free interest rate of 5.15% and an expected life of 0.5
years. The weighted average fair value per share of these purchase rights
granted in 2001 was approximately $1.52. The following assumptions were used for
2002: expected dividend yield of 0.00%, expected stock price volatility of
81.56%, weighted average risk free interest rate of 3.96% and an expected life
of 0.5 years. The weighted average fair value per share of these purchase rights
granted in 2002 was approximately $1.54. The following assumptions were used for
2003: expected dividend yield of 0.00%, expected stock price volatility of
51.94%, weighted average risk free interest rate of 3.21% and an expected life
of 0.5 years. The weighted average fair value per share of these purchase rights
granted in 2003 was approximately $0.89.

12. RELATED-PARTY TRANSACTIONS:

The Company has transactions in the normal course of business with certain
affiliated companies. The Company has a note receivable from an affiliate, EPV,
of $1.8 million as of September 30, 2002 and 2003. Amounts due from other
related parties at September 30, 2002 and 2003 were $0.2 million and $0.1
million, respectively. In connection with certain of the acquisitions,
subsidiaries of the Company have entered into a number of related party lease
arrangements for facilities. These lease agreements are for periods generally
ranging from three to five years. Related party lease expense for the years
ended September 30, 2001, 2002 and 2003 were $4.3 million, $4.2 million and $4.2
million, respectively. Future commitments with respect to these leases are
included in the schedule of minimum lease payments in note 8.

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INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. EMPLOYEE BENEFIT PLANS:

In November 1998, the Company established the Integrated Electrical
Services, Inc. 401(k) Retirement Savings Plan (the "401(k) Plan"). All IES
employees are eligible to participate on the first day of the month subsequent
to completing sixty days of service and attaining age twenty-one. Participants
become vested in Company matching contributions following three years of
service.

Certain subsidiaries of the Company do not participate in the 401(k) Plan,
but instead provide various defined contribution savings plans for their
employees (the "Plans"). The Plans cover substantially all full-time employees
of such subsidiaries. Participants vest at varying rates ranging from full
vesting upon participation to those that provide for vesting to begin after
three years of service and are fully vested after eight years. Certain plans
provide for a deferral option that allows employees to elect to contribute a
portion of their pay into the plan and provide for a discretionary profit
sharing contribution by the individual subsidiary. Generally the subsidiaries
match a portion of the amount deferred by participating employees. Contributions
for the profit sharing portion of the Plans are generally at the discretion of
the individual subsidiary. The aggregate contributions by the Company to the
401(k) Plan and the Plans were $3.4 million, $3.0 million and $3.0 million for
the years ended September 30, 2001, 2002 and 2003, respectively.

14. COMMITMENTS AND CONTINGENCIES:

The Company and its subsidiaries are involved in various legal proceedings
that have arisen in the ordinary course of business. While it is not possible to
predict the outcome of such proceedings with certainty and it is possible that
the results of legal proceedings may materially adversely affect us, in the
opinion of the Company, all such proceedings are either adequately covered by
insurance or, if not so covered, should not ultimately result in any liability
which would have a material adverse effect on the financial position, liquidity
or results of operations of the Company. The Company expenses routine legal
costs related to such proceedings as incurred.

Some of the Company's customers require the Company to post letters of
credit as a means of guaranteeing performance under its contracts and ensuring
payment by the Company to subcontractors and vendors. If the customer has
reasonable cause to effect payment under a letter of credit, the Company would
be required to reimburse its creditor for the letter of credit. Depending on the
circumstances surrounding a reimbursement to its creditor, the Company may have
a charge to earnings in that period. To date the Company has not had a situation
where a customer has had reasonable cause to effect payment under a letter of
credit. At September 30, 2003, $1.7 million of the Company's outstanding letters
of credit were to collateralize its customers.

Some of the underwriters of the Company's casualty insurance program
require it to post letters of credit as collateral. This is common in the
insurance industry. To date the Company has not had a situation where an
underwriter has had reasonable cause to effect payment under a letter of credit.
At September 30, 2003, $25.7 million of the Company's outstanding letters of
credit were to collateralize its insurance program.

Many of the Company's customers require us to post performance and payment
bonds issued by a surety. Those bonds guarantee the customer that the Company
will perform under the terms of a contract and that it will pay its
subcontractors and vendors. In the event that the Company fails to perform under
a contract or pay subcontractors and vendors, the customer may demand the surety
to pay or perform under the Company's bond. The Company's relationship with its
sureties is such that it will indemnify the sureties for any expenses they incur
in connection with any of the bonds they issues on the Company's behalf. To
date, the Company has not incurred significant expenses to indemnify its
sureties for expenses they incurred on the Company's behalf. As of September 30,
2003, the Company's cost to complete projects covered by surety bonds was
approximately $227.9 million.

The Company has committed to invest up to $5.0 million in EnerTech Capital
Partners II L.P. ("EnerTech"). EnerTech is a private equity firm specializing in
investment opportunities emerging from the deregulation and

67

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

resulting convergence of the energy, utility and telecommunications industries.
Through September 30, 2003, the Company had invested $2.7 million under its
commitment to EnerTech.

At September 30, 2003, the Company had reserves of $26.1 million recorded
in other noncurrent liabilities for tax positions adopted that a taxing
authority may view differently. The Company believes these reserves are adequate
in the event the positions are not ultimately upheld. The timing of the payments
of these reserves is not currently known and would be based on the outcome of a
possible review by a taxing authority.

15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

Quarterly financial information for the years ended September 30, 2002 and
2003 are summarized as follows (in thousands, except per share data):

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

68

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

As of September 30, 2003, an evaluation was performed under the supervision
and with the participation of the Company's management, including the CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of September 30, 2003 in providing
reasonable assurances that material information required to be disclosed is
included on a timely basis in the reports it files with the Securities and
Exchange Commission.

Since the date of the evaluation, there have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to the
sections entitled "Management" and Section 16(a) of the Securities Exchange Act
of 1934, and "Directors" in the Company's definitive Proxy Statement for its
2004 Annual Meeting of Stockholders (the "Proxy Statement") to be filed with the
Securities and Exchange Commission no later than January 28, 2004.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement. Nothing in
this report shall be construed to incorporate by reference the Board
Compensation Committee Report on Executive Compensation or the Performance
Graph, which are contained in the Proxy Statement, but expressly not
incorporated herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the
section entitled "Certain Relationships and Other Transactions" in the Proxy
Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the
section entitled "Audit Fees" in the Proxy Statement.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements and Supplementary Data, Financial Statement
Schedules and Exhibits.

See Index to Financial Statements under Item 8 of this report.

69

(b) Exhibits.

3.1 Amended and Restated Certificate of Incorporation as
amended. (Incorporated by reference to 3.1 to the
Registration Statement on Form S-1 (File No. 333-38715) of
the Company)
3.2 Bylaws, as amended (Incorporated by reference to 3.2 to the
Registration Statement on Form S-4 (File No. 333-65160) of
the Company)
4.1 Specimen Common Stock Certificate. (Incorporated by
reference to 4.1 to the Registration Statement on Form S-1
(File No. 333-38715) of the Company)
4.2 Indenture, dated January 28, 1999, by and among Integrated
Electrical Services, Inc. and the subsidiaries named therein
and State Street Bank and Trust Company covering up to
$150,000,000 9 3/8% Senior Subordinated Notes due 2009.
(Incorporated by reference to Exhibit 4.2 to Post-Effective
Amendment No. 3 to the Registration Statement on Form S-4
(File No. 333-50031) of the Company)
4.3 Form of Integrated Electrical Services, Inc. 9 3/8% Senior
Subordinated Note due 2009 (Series A) and (Series B).
(Included in Exhibit A to Exhibit 4.2 to Post-Effective
Amendment No. 3 to the Registration Statement on Form S-4
(File No. 333-50031) of the Company)
4.4 Indenture, dated May 29, 2001, by and among Integrated
Electrical Services, Inc. and the subsidiaries named therein
and State Street Bank and Trust Company covering up to
$125,000,000 9 3/8% Senior Subordinated Notes due 2009.
(Incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-4 (File No. 333-65160) of the Company)
4.5 Form of Integrated Electrical Services, Inc. 9 3/8% Senior
Subordinated Note due 2009 (Series C) and (Series D).
(Included in Exhibit A to Exhibit 4.3 to Registration
Statement on Form S-4 (File No. 333-65160) of the Company)
*10.1 Form of Amended and Restated Employment Agreement between
the Company and H. Roddy Allen entered into effect as of
January 30, 2003.
*10.2 Form of Amended and restated Employment Agreement between
the Company and Richard L. China entered into effective as
of August 12, 2003.
*10.3 Form of Amended and restated Employment Agreement either
currently in force or to be entered into between the Company
and direct reports to the Chief Executive Officer (other
than the Chief Operating Officer).
10.4 Form of Officer and Director Indemnification Agreement.
(Incorporated by reference to exhibit 10.2 to the Company's
Annual report on Form 10-K for the year ended September 30,
2002)
10.5 Integrated Electrical Services, Inc. 1997 Stock Plan, as
amended. (Incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 2001)
10.6 Integrated Electrical Services, Inc. 1997 Directors' Stock
Plan. (Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 2000)
10.7 Credit Agreement dated May 22, 2001, among the Company, as
borrower, the Financial Institutions named therein, as
banks, Credit Lyonnais and the Bank of Nova Scotia as
syndication agents, Toronto Dominion (Texas), Inc. as
documentation agent and the Chase Manhattan Bank, as
administrative agent. (Incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-4 (File No.
333-65160) of the Company)
10.8 Amendment No. 1 dated June 20, 2001, to the Credit Agreement
dated May 22, 2001, among the Company, as borrower, the
Financial Institutions named therein, as banks, Credit
Lyonnais and the Bank of Nova Scotia as syndication agents,
Toronto Dominion (Texas), Inc. as documentation agent and
the Chase Manhattan Bank, as administrative agent.
(Incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended September 30,
2001)

70

10.9 Amendment No. 2 dated November 30, 2001, to the Credit
Agreement dated May 22, 2001, among the Company, as
borrower, the Financial Institutions named therein, as
banks, Credit Lyonnais and the Bank of Nova Scotia as
syndication agents, Toronto Dominion (Texas), Inc. as
documentation agent and the JP Morgan Chase Bank, as
administrative agent. (Incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the
year ended September 30, 2001)
10.10 Integrated Electrical Services, Inc. 1999 Incentive
Compensation Plan. (Incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the
year ended September 30, 2000)
10.11 Amendment No. 3 dated February 4, 2002, to the Credit
Facility dated May 22, 2001, among the Company, as borrower,
the Financial Institutions named therein, as banks, Credit
Lyonnais and the Bank of Nova Scotia as syndication agents,
Toronto Dominion (Texas), Inc. as documentation agent and
the JP Morgan Chase Bank, as administrative agent.
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended December
31, 2002)
10.12 Amendment No. 4 dated July 12, 2002, to the Credit Agreement
dated May 22, 2001, among the Company, as borrower, the
financial Institutions named therein, as banks, Credit
Lyonnais and the Bank of Nova Scotia as syndication agents,
Toronto Dominion (Texas), Inc. as documentation agent and
the JP Morgan Chase Bank, as administrative agent.
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2002)
10.13 Amendment No. 5 dated May 27, 2003, to the Credit Agreement
dated May 22, 2001, among the Company, as borrower, the
financial Institutions named therein, as banks, Credit
Lyonnais and the Bank of Nova Scotia as syndication agents,
Toronto Dominion (Texas), Inc. as documentation agent and
the JP Morgan Chase Bank, as administrative agent.
(incorporated by reference to Exhibit 10.1 to the Company's
Current report on Form 8-K filed May 28, 2003)
*12 Ratio of Earnings to Fixed Charges.
16.1 Letter of Arthur Andersen LLP regarding a change in
certifying accountant. (Incorporated by reference to Exhibit
16.1 to the Company's Current Report on Form 8-K (File No.
011-13783) filed June 10, 2002)
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Ernst & Young LLP
*24 Powers of Attorney
*31.1 Certification of Herbert R. Allen, Chief Executive Officer,
pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
*31.2 Certification of William W. Reynolds, Chief Financial
Officer, pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002.
*32.1 Certification of Herbert R. Allen, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*32.2 Certification of William W. Reynolds, Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

- ---------------

* Filed herewith.

(c) Reports on Form 8-K.

On August 20, 2003 the Company filed a Current Report on Form 8-K in
connection with its press release dated August 20, 2003.

On September 17, 2003 the Company filed a Current Report on Form 8-K in
connection with its press release dated September 16, 2003.

71

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on November 24, 2003.

INTEGRATED ELECTRICAL SERVICES, INC.

By: /s/ HERBERT R. ALLEN*
------------------------------------
Herbert R. Allen
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on November 24, 2003.

72

INDEX TO EXHIBITS

- ---------------

* Filed herewith.

74