INTEGRATED ELECTRICAL SERVICES INC - 10-K Annual Report

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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, 2001

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 December 10, 2001, there were outstanding 39,694,095 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 $121.2 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 February 6, 2002.

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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, and Section
21E of the Securities Exchange Act of 1934, as amended. 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 relating to estimating future results, fluctuations in operating
results because of downturns in levels of construction, incorrect estimates used
in entering into fixed price contracts, difficulty in managing the operation and
growth of existing and newly acquired businesses, the high level of competition
in the construction industry and due to seasonality (see "Business-Risk
Factors"). Although the Company believes that 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.

2

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 is not a calendar year
and ends on September 30.

We are the second largest provider of electrical contracting services in
the United States. We are also a growing provider of solutions in the data
communications and utilities markets. We provide a broad range of services
including designing, building and maintaining 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 and end use equipment and fixtures.
Our data communications solutions include design and installation of external
cables for university and corporate campuses and data centers and switching
stations for data communications companies. We also provide internal wiring of
buildings and individual businesses for communications services. 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, as well as service, maintenance and
certain renovation and upgrade work, which tends to either be recurring, to have
lower sensitivity to economic cycles or both.

Since 1997, we have developed a national footprint of more than 170
locations serving 47 states through the acquisition of established companies
operating in our core business areas. From 1996 to 2001, pro forma combined
revenues for our businesses (which include revenues generated by our
subsidiaries prior to their acquisition by us) increased at a compounded annual
growth rate of approximately 10%. In 2001, we focused internally to integrate
our information systems and management structure to enhance operating controls
at all levels of our organization. We still differentiate ourselves, however,
with our decentralized operating structure that encourages entrepreneurial
spirit and allows us to leverage our technical expertise and local knowledge in
individual regions and areas.

INDUSTRY OVERVIEW

According to the most recently available data, the electrical contracting
industry will generate estimated annual revenues in excess of $95 billion in
2001. This data also indicates that the electrical contracting industry is
highly fragmented, with more than 70,000 companies, most of which are small,
owner-operated businesses. We estimate that there are only 10 U.S. electrical
contractors with revenues in excess of $200 million. Multimedia
Telecommunications Market Review and Forecast cites overall spending in the U.S.
communications infrastructure market was approximately $168 billion in 2000, an
increase of 17% from 1999 and double the market size from 1997. U.S. Census data
indicates that total construction industry revenues have grown at an average
compound rate of approximately 6% from 1996 through 2001.

Virtually all construction and renovation in the United States generates
demand for electrical and communications design and build projects. We believe
that the types of services we provide account for:

- substantially all of the construction costs of outside infrastructure
projects;
- approximately 50% to 60% of total construction costs for switching
centers;
- approximately 8% to 12% of the total construction cost of commercial and
industrial projects; and
- approximately 5% to 10% of the total construction cost for residential
projects.

In recent years, electrical and communications contractors have experienced
a growing demand for their services due to more stringent electrical codes,
increased use of electrical power, increased drive toward outsourcing, demand
for increased bandwidth, demand for bundled services and construction of smart
houses with integrated computer, temperature control and safety systems.

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COMPETITIVE STRENGTHS

Our competitive strengths include the following:

- Geographic and customer diversity -- We have more than 170 locations,
operate in 47 states and have worked on more than 2,300 contracts over
$250,000 and more than 10,000 contracts overall in 2001. Our diverse
customer base includes general contractors, developers, facility owners
and managers of large retail establishments, manufacturing and processing
facilities, utilities, government agencies and national
telecommunications companies. There is a significant overlap between our
electrical and communications customers. No single customer accounted for
more than 5% of our revenues in the year ended September 30, 2001. We
believe that our geographic and 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
or region.

- Size and critical mass -- We believe the scale of our operations enables
us to provide services to national customers and undertake large, complex
projects which many of our competitors do not have the resources to
complete on a comparable timeline, if at all. For example, we recently
completed the $250 million multi-site installation of switching centers
for MCI Worldcom. We accomplished this job by coordinating 12 of our
locations in 10 states and utilizing approximately 640 of our
electricians.

- Expertise -- We have developed areas of expertise in condominium and
high-rise buildings, retail centers, hospitals, switching centers and
utility substations. Additionally, we believe we are one of the leading
prefabricating firms in the electrical contracting industry. We
prefabricate significant portions of an electrical installation off-site
and ship materials to the installation site in specific sequences to
optimize materials management and to minimize our employees' time on a
job site. We believe that our technical expertise provides us with (1)
access to higher margin design-and-build projects; (2) access to high
growth markets including data cabling, 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.

- Experienced and incentivized management -- Our regional and local
management have extensive experience and established 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 over 40% of our outstanding common stock.

STRATEGY

The key elements of our strategy are:

Implementing Best Practices. We continue to expand the services we offer
in our local markets by using the specialized technical and marketing strengths
of each of our subsidiaries. We regularly identify and share best practices that
have been developed at a local level and can be successfully implemented
throughout our operations. Areas of focus have included various aspects of our
operational, administrative, safety, hiring and training practices. For example,
we believe our prefabrication process allows us to complete work more quickly
and at a lower cost, and our billing and collections processes enable us to
receive payments from customers more timely and efficiently than our
subsidiaries were able to achieve in the past.

Operating on a Decentralized Basis. We believe that our decentralized
operating structure helps us retain the entrepreneurial spirit present in our
subsidiaries while maintaining operating and financial controls. We have
recently structured our company into regional operating divisions to more
efficiently share our businesses' considerable local and regional market
knowledge and customer relationships. By maintaining a local focus, we believe
we are able to continue to:

- maintain and strengthen relationships with general contractors and other
customers;
- build relationships with engineers and architects;
- address design preferences and code requirements; and
- respond quickly to customer demands.

Leveraging Cross-Selling between our Electrical and Communications
Customers. We believe that we have a significant opportunity to cross-sell
between our communications services customers and our electrical contracting
customers. Because many of our customers install electrical and communications
systems simultaneously, we position ourselves as a single-source solutions
provider for both types of projects.

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Attracting and Retaining Quality Employees. We are committed to providing
the highest level of customer service through the development of a highly
trained workforce. Our ability to attract and retain qualified electricians is a
critical competitive factor in an industry like ours, where there are local
shortages of skilled workers. We plan to continue to attract and train skilled
employees by:

- extending active recruiting programs and training programs;
- providing competitive compensation packages, including performance-based
compensation for key employees;
- offering expanded career paths and more stable income through a larger
public company; and
- providing opportunities to work on complex and challenging projects.

Broadening Existing National Account Program. We currently have a number
of direct and indirect clients that operate on a regional or national basis,
including developers, contractors, homebuilders and owners of nationwide chains.
Our national presence enables us to offer these customers service in many, if
not all, required geographies. By utilizing best practices developed on
substantially similar projects, we believe we are able to configure and install
systems to their specifications on a more timely and cost-efficient basis than
other locally operated electrical and communications contractors. In addition,
we have the available resources to provide service for large-scale projects. In
order to capitalize on this opportunity, we have established a separate
marketing team that is responsible for establishing relationships with larger
customers and maintaining and expanding national contracts. We believe our
existing local and regional relationships and the expanded sales force will
enable us to capture additional revenues from national accounts and multi-site
projects.

Expansion. Our growth strategy is to expand our businesses primarily
through internal growth, with selective growth into other geographic markets. We
currently do not intend to grow materially through acquisitions in the
foreseeable future.

Cost Control. We have and will continue to take steps to control expenses
in costs of services and in selling, general and administrative costs. We intend
to strengthen our relationships with suppliers in an effort to reduce the costs
of delivering services. We have consolidated the administrative functions of
many of our businesses and intend to continue to do so where appropriate. We
believe that by focusing on cost reduction, we are better positioned for the
challenging economic environment.

THE MARKETS WE SERVE

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

- office buildings;
- high-rise apartments and condominiums;
- theaters;
- restaurants;
- hotels;
- hospitals;
- school districts;
- manufacturing and processing facilities;
- military installations;
- airports; and
- refineries, petrochemical and power plants.

Our commercial and industrial customers include:

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

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Demand for our commercial services is driven by construction and renovation
activity levels, as well as more stringent local and national electrical codes.
From fiscal 1996 through 2001 pro forma combined revenues from commercial work
have grown at a compound annual rate of approximately 8% per year and
represented approximately 40% of our revenues for the year ended September 30,
2001. Pro forma combined revenues include revenues generated by our subsidiaries
prior to their acquisition by us.

Our industrial revenues are derived from significant contracts for new
construction, upgrade, renovation and replacement service and maintenance work.
Demand for our industrial services if often driven by facility upgrades and
replacements. We also believe demand is driven by general activity levels in the
particular industries served, which is in turn affected by general economic
conditions. From fiscal 1996 through 2001, our pro forma combined revenues from
industrial work have grown at a compound annual rate of approximately 9% per
year and represented approximately 26% of our revenues for the year ended
September 30, 2001.

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 and then more detailed design
specifications, engineering drawings and cost estimates. Projects which we
design and build provide us with higher margins. Design and build is an approach
to installation projects in which the contractor is given full or partial
responsibility for the design specifications of the installation. Design and
build is an alternative to the traditional "plan and spec" model, in which the
contractor is required to build to the exact specifications of the architect and
engineer. We believe that design and build is the superior model because it
allows us to use past experience to install a project at a potentially lower
cost to the customer and 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 retainage 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 these phases, including:

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

Due to our size, we are effectively able to 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.

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 customers, which include 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 within
the residential construction industry and homebuilders and developers have
sought out service providers on whom they can rely for 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 15% from fiscal 1996 through 2001 and represented approximately
15% of our revenues for the year ended September 30, 2001.

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 along
with the builder's personnel. Payments for the project are generally obtained
within 30 days, at which time any mechanics' and materialmen's liens securing
these payments are released. Interim payments are often obtained to cover labor
and materials costs on larger projects.

Service and Maintenance Market. Our service and maintenance revenues are
derived from service calls and routine maintenance contracts and tend to be
recurring and less sensitive to economic fluctuations. Our pro forma

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combined revenues from the service and maintenance market have grown at a
compound annual rate of approximately 7% from fiscal 1996 through 2001 and
represented approximately 8% of our revenues for the year ended September 30,
2001.

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 client 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.

Most service work is warranted for thirty days.

Communications and Utilities Markets. We are a growing designer and
installer of communications and utility infrastructure systems. We provide three
types of telecommunication and utility infrastructure services to our customers:
network enterprise, switch networks and outside plant. Our revenues from the
communications and utilities market represented approximately 11% of our
revenues for the year ended September 30, 2001.

Network enterprise service includes installation, design and support
services and engineering to property owners or businesses requiring
infrastructure support of communication or network equipment related to
in-building wiring of local-area or wide-area configuration of industrial
commercial or residential buildings. These projects may range from the
networking of small, single-office, PC-based systems to wiring communications
networks for multi-site institutions such as large universities. As part of this
business, we provide extensive design and consulting services in order to
configure a system that will meet our customers' needs. The work is similar to
the installation of electrical wiring in commercial or residential structures.
However, because the materials and some of the methods used in the installation
of data cabling differ from those used in the installation of electrical wiring,
the work is typically performed by technicians who specialize in data cabling.
Large communications projects often include traditional electrical contracting
elements and create an opportunity for us to better serve the overall needs of
the customer and to capture a larger percentage of that project's contractor
expenditures. Large installation projects also provide the opportunity for
recurring service and, in some cases, monitoring revenues.

Switch networks include switching systems for established and newly started
local exchange carriers, regional and local Bell operating companies and long
distance providers. We provide services including equipment procurement and
installation, design needs and infrastructure support. Typically, greater than
50% of this work is electrical in nature and provided by our electricians.

Outside plant includes cables, wires, poles, towers, substations, and other
equipment located between a point at which operational control or ownership of
facilities changes from one organization entity to another. We provide
installation, maintenance, design and engineering services for outside plant
within both the telecommunications and electric power line markets. This work is
capital intensive, requiring the use of various pieces of heavy equipment.
Additionally, the electricians that perform power line work must be highly
skilled in order to work with the high voltage power lines. In addition to
running the lines, we often construct the towers that carry the lines as well as
electrical substations.

We believe the demand for our communications services will be 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 speed with which information can be retrieved from
the internet. 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.

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CUSTOMERS

Major Customers. We have a diverse customer base. During the year ended
September 30, 2001, no single customer accounted for more than 5% of our
revenues. As a result of 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 have
recently worked on projects for the following customers:

American Airlines HOK Sport Perry Homes
Baltimore Ravens Home Depot Pittsburgh Steelers
Beers Construction, Inc. Intel Public Service of Colorado
Bell Atlantic JPI Apartment Construction Qwest
Bovis, Inc. Lennar Homes SBC
Dell Computer Lowe's Texaco
Dow Chemical Lucent Technologies The Shaw Group
Federal Express MB Kahn Verizon
General Telephone MCI Worldcom Wal-Mart
George Washington University Nevada Power Company Western Area Power Admin.
H&W Construction Omaha Public Power District

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

National Accounts. We currently have a number of clients that operate on a
regional or national basis, including developers, contractors, homebuilders and
owners of nationwide chains. We are able to leverage our national footprint to
offer these customers service in many, if not all, required geographies. Our
understanding of the demands and needs of our customers from prior,
substantially similar projects, enables us to configure and install systems to
their specifications on a more timely and cost-efficient basis than other
locally operated electrical contractors through the utilization of best
practices. These best practices result in higher gross profit margins. In
addition, we have the available resources to provide service for large-scale
projects. In order to capitalize on this opportunity, we have established a
separate marketing team that is responsible for obtaining and developing
national contracts. We believe our existing local and regional relationships and
the expanded sales force will enable us to capture additional revenues from
national accounts.

We believe that significant demand exists from these companies for the
services of a single electrical and communications solutions provider from whom
they can obtain consistent service that meets their quality requirements. This
demand is at least partially driven by the recent consolidation among a number
of our principal customers. Our national accounts program targets additional
communications projects and actively pursues relationships with the regional
Bell operating companies, competitive local exchange carriers and building local
exchange carriers.

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 five 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. Prior to hiring

8

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, casualty and liability insurance; (iii) health insurance and
related benefits; (iv) retirement benefits administration; and (v) 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 of these outside sources.

Control and Information Systems. We are committed to performing those
controls and procedures that improve our efficiency and the monitoring of our
operations. Some of the controls and procedures which we have in place are:

- Bidding and estimating of a job to specific levels based on the dollar
size of the job. 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 regional or
senior approvals must be obtained, depending on the size of the project.

- An automated monthly reporting package which includes internal checks and
cross references to ensure completeness and accuracy of the monthly
financial results. This "formalized" reporting package also requires
discussion of individual subsidiary results.

- A series of "home and away" quarterly reviews which involve our senior
management team and the individual company presidents. Every other
quarter, company presidents conduct these meetings at or near their
"home" locations and on remaining quarters attend an "away" meeting at
the home office in Houston. The content of such meetings includes
discussing 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.

We have begun deploying Enterprise Resource Planning ("ERP") software to
all of our operating companies. ERP applications are paramount to a growing
business with a diverse geographic platform. Additionally, we have selected a
financial reporting and financial application to complement the ERP application
and provide increased structure and analytical tools to the reporting process.
We plan an estimated total cost of $10 to $12 million for a rollout that began
during the first quarter of fiscal 2001 and is currently scheduled to be
completed by December 2003. Implementing a new ERP system with a financial
reporting application will allow us to obtain real time operating performance
and perform detailed analysis.

COMPETITION

The electrical contracting and communications solutions industries are
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 and
communications solutions 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"

9

REGULATIONS

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

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

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
region are held by at least two IES employees within that region.

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, 2001, we had approximately 15,300 employees. We are not a
party to any collective bargaining agreements with our employees. We believe
that our relationship with our employees is satisfactory.

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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 be
correlated 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;
- 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 could result in a material reduction in our activity levels.

- - 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.

- - 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.

- - 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. Over the last few years, the growth of the U.S. economy has
increased the demand for electricians making it difficult for us to attract,
hire and retain competent 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.

11

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

Our business can be 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.

- - 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 new credit facility will expire in May 2004.

We cannot assure you 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 assure you 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.

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

The electrical contracting industry is served by small, owner-operated
private companies, public companies and several large regional companies. We
could also face competition in the future from other competitors entering these
markets. Some of our competitors offer a greater range of services, including
mechanical construction, 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.

- - 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.

- - 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.

12

- - 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.

- - 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" equal to
the excess amount we pay for the business, including liabilities assumed, over
the fair value of the assets of the business we acquire. On June 30, 2001 the
Financial Standards Accounting Board adopted Statement of Financial Accounting
Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill no longer be amortized but be subject to an annual
assessment for impairment based on a fair value test. Because we have made
numerous acquisitions since our inception, we carry significant amounts of
goodwill on our books. We expect to adopt SFAS No. 142 for our first fiscal
quarter of 2002. We believe the impairment charge upon adoption will be
material, and based on current market capitalization could equate to a
substantial amount of our recorded goodwill. We do not believe this adoption
will impact our free cash flows, operating income or compliance with our debt
instruments.

- - 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 to our last significant acquisition in December
2000, we made 71 acquisitions. 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.

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, 2001, we maintained branch offices, warehouses, sales
facilities and administrative offices at more than 170 locations. Substantially
all of our facilities are leased. We lease our home office located in Houston,
Texas.

13

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

Our 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 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.

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

None.

ITEM 4A. EXECUTIVE OFFICERS

Herbert "Roddy" Allen has been Chief Executive Officer and President of the
Company since October 2001. From May 2001 to October 2001, Mr. Allen was Chief
Operating Officer of the Company. From January 2000 to May 2001, 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 has been Chief Operating Officer of the Company since October
2001. From May 2001 to October 2001, Mr. China was President of IES
Communications, Inc. From August 1999 to May 2001, 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 has been the Chief Financial Officer and Executive Vice
President of the Company since June 2000. Mr. Reynolds joined IES after having
most recently 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.

John F. Wombwell has been Executive Vice President, General Counsel and
Secretary of IES since November 1999. From January 1998 to November 1999, Mr.
Wombwell was Senior Vice President, General Counsel and Secretary of IES. Prior
to that time, Mr. Wombwell was a partner at Andrews & Kurth L.L.P., where he
practiced law in the area of corporate and securities matters.

Bob Weik has been President -- Western Area of our operations since January
2000 and served as a Regional Operating Officer of the Company since May 1998
and as President of BW Consolidated, Inc. and related entities
("Bexar-Calhoun"), one of the Company's subsidiaries.

Dan Petro has been President -- Eastern Area of our operations since May
2001 and served as a Regional Operating Officer of the Company from June 1998 to
May 2001. Prior to June 1998, Mr. Petro served as the President of Amber
Electric, Inc., one of the Company's subsidiaries.

14

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 "IEE." The
following table presents the quarterly high and low sales prices for the
Company's Common Stock on the NYSE since October 1999.

As of December 10, 2001, the market price of the Company's Common Stock was
$3.66 per share and there were approximately 1,369 holders of record.

We do not anticipate paying cash dividends on our common stock in the
foreseeable future. We expect that we will retain all available earnings
generated by our operations for the development and growth of our business. 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."

15

ITEM 6. SELECTED FINANCIAL DATA

On January 30, 1998, we completed our initial public offering of common
stock. In accordance with the SEC's Staff Accounting Bulletin No. 97, IES'
results of operations for periods prior to January 30, 1998 reflect the
historical accounts of the accounting acquirer restated for the effect of the
acquisition accounted for as a pooling of interests. The results of operations
for businesses acquired subsequent to January 29, 1998 are included in the
results of operations beginning on their respective dates of acquisition. The
accounting acquirer's results of operations through January 30, 1998 include a
non-cash, non-recurring compensation charge of approximately $17.0 million
required by the SEC in connection with a note receivable and rights held by the
accounting acquirer which were exchanged for cash and shares of our common
stock. 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 OPERATION

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".

16

GENERAL

The Company's electrical contracting business is operated in three
segments: commercial and industrial, residential and service and maintenance.
Additionally, the Company operates a communications solutions business. See Note
9 of "Notes to Consolidated Financial Statements" for a description of these
reportable segments.

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.

REVENUES

Revenues increased $20.9 million, or 1%, from $1,672.3 million for the year
ended September 30, 2000 to $1,693.2 million for the year ended September 30,
2001. The revenue decline in the commercial and industrial segment is the result
of revenues earned on the MCI Worldcom contract during the year ended September
30, 2000. The revenue growth within the other operating segments and the change
in proportion in revenues among the segments was the result of increased
construction and communications activity in the markets we serve.

Revenues increased $636.4 million, or 61%, from $1,035.9 million for the
year ended September 30, 1999 to $1,672.3 million for the year ended September
30, 2000. Total same store revenues increased approximately $229.9 million, or
23%, from $988.6 million for the fiscal year ended September 30, 1999, to
$1,218.5 million for the fiscal year ended September 30, 2000. The revenue
growth within, and change in proportions in revenue among operating segments,
were the result of acquisitions and increased construction and communications
activity in the markets we serve.

17

GROSS MARGIN

Gross profit increased $7.8 million, or 3%, from $299.8 million for the
year ended September 30, 2000 to $307.6 million for the year ended September 30,
2001. Overall gross margin as a percentage of revenue remained constant for the
years ended September 30, 2000 and 2001. Margins remained flat as a result of
increased bidders on certain fixed price commercial and industrial and
communications solutions projects and the impact such bidders had on margins in
these segments, and were further impacted by project delays, project
cancellations and decreased productivity following the terrorist attacks of
September 11, 2001.

Gross profit increased $80.6 million, or 37%, from $219.2 million for the
year ended September 30, 1999 to $299.8 million for the year ended September 30,
2000. Overall gross margin as a percentage of revenue decreased approximately 3%
from 21% for the year ended September 30, 1999 to 18% for the year ended
September 30, 2000. The overall decrease in gross profit as a percentage of
revenue is primarily the result of losses recorded on certain fixed price
commercial projects, a shift in the mix of work toward lower margin bid work
versus negotiated contract work, the completion of certain contracts at lower
than planned gross margins and the recording of additional claims reserves for
our self-insured healthcare plan resulting from a higher level of employee
participation. Gross margins decreased in our service and maintenance segment as
a result of costs associated with establishing additional service locations
broadening the scope of our services which include lower margin services.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased $7.4 million, or 3%,
from $221.5 million for the year ended September 30, 2000 to $214.1 million for
the year ended September 30, 2001. Selling, general and administrative expenses
as a percentage of revenue decreased from 13% in 2000 to 12% in 2001. The
decrease in selling, general and administrative expenses primarily results from
the occurrence of certain costs incurred in the year ended September 30, 2000
which were not incurred in the year ended September 30, 2001 including the
write-off, net of recoveries of $6.8 million of costs associated with the our
decision to curtail the development of an information system and the non-cash
compensation charge of $5.4 million associated with the restricted stock awards,
offset by increased infrastructure costs in 2001.

Selling, general and administrative expenses increased $107.6 million, or
95%, from $113.9 million for the year ended September 30, 1999 to $221.5 million
for the year ended September 30, 2000. Selling, general and administrative
expenses as a percentage of revenue increased from 11% in 1999 to 13% in 2000.
The increase in selling, general and administrative expenses related to acquired
companies was approximately $45.5 million. Other increased selling, general and
administrative costs primarily resulted from the need for additional
infrastructure growth to support operational initiatives, including various
incentive awards, claims reserves related to our self-insured health insurance
plan, the non-cash compensation charge associated with the restricted stock
awards of $5.4 million, and the write-off, net of recoveries of $6.8 million of
costs associated with the decision to change the technology being used in the
development of its information system.

INCOME FROM OPERATIONS

Income from operations increased $15.6 million, or 24%, from $65.0 million
for the year ended September 30, 2000 to $80.6 million for the year ended
September 30, 2001. This increase was primarily the result of lower selling,
general and administrative costs discussed above and gross profit earned on the
slightly higher revenues during the

18

year ended September 30, 2001. As a percentage of revenues, income from
operations increased from 4% for the year ended September 30, 2000 to 5% for the
year ended September 30, 2001.

Income from operations decreased $31.0 million, or 32%, from $96.0 million
for the year ended September 30, 1999 to $65.0 million for the year ended
September 30, 2000. This decrease was primarily the result of lower gross
margins and higher selling, general and administrative costs discussed above. As
a percentage of revenues, income from operations decreased from 9% for the year
ended September 30, 1999 to 4% for the year ended September 30, 2000.

INTEREST AND OTHER EXPENSE, NET

Interest and other expense, net increased from net expense of $22.2 million
in 2000 to $26.2 million in 2001, primarily as a result of increased interest
expense resulting from the issuance of $125.0 million 9 3/8% senior subordinated
notes due February 1, 2009 in May 2001.

Interest and other expense, net increased from net expense of $12.5 million
in 1999 to $22.2 million in 2000, primarily as a result of increased interest
expense on borrowings to fund our acquisitions and a full twelve months of
interest expense on the $150.0 million 9 3/8% senior subordinated notes due
February 1, 2009 that were issued in 1999.

PROVISION FOR INCOME TAXES

Our effective tax rate decreased from 51% for the year ended September 30,
2000 to 47% for the year ended September 30, 2001 primarily as a result of
non-deductible goodwill amortization representing a smaller percentage of our
income before income taxes in 2001.

Our effective tax rate increased from 42% for the year ended September 30,
1999 to 51% for the year ended September 30, 2000. The higher effective tax rate
in 2000 is primarily as a result of non-deductible goodwill amortization and the
non-deductible portion of the compensation expense associated with the
restricted stock awards in 2000 representing a larger percentage of our income
before income taxes in 2000.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2001, we had cash and cash equivalents of $3.5 million,
working capital of $236.6 million, borrowings of $12.0 million under our credit
facility, $0.9 million of letters of credit outstanding, and available borrowing
capacity under our credit facility of $137.1 million.

During the year ended September 30, 2001, we generated $8.6 million of net
cash from operating activities. This net cash from operating activities is
comprised of net income of $28.7 million, increased by $26.6 million of non-cash
items and decreased by $46.7 million in working capital changes. Non-cash items
included depreciation and amortization expense, restricted stock compensation
charges, provision for allowance for doubtful accounts, changes in deferred
income taxes and gains on sales of property and equipment. Working capital
changes consisted of a $26.2 million decrease in receivables as a result of the
timing of collections offset by a $37.8 million decrease in payables and further
decreased by a $15.6 million increase in prepaids and other current assets, with
the balance of the change due to other working capital changes. Net cash used in
investing activities was $31.4 million, including $25.8 million of capital
expenditures and $5.6 million of investments in marketable securities and other.
Net cash provided by financing activities was $25.5 million, resulting primarily
from the offering of the senior subordinated notes, net of repayments on the
credit facility.

On May 22, 2001, we replaced our $175.0 million credit facility with a new
$150.0 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, 2004. Amounts borrowed under
our credit facility bear interest at an annual rate equal to either (a) the
London interbank offered rate (LIBOR) plus 1.75 percent to 2.75 percent, as
determined by the ratio of our total funded debt to EBITDA (as defined in our
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 1.25
percent, as determined by the ratio of our total funded debt to EBITDA.
Commitment fees of 0.50 percent are assessed on any unused borrowing capacity
under our credit facility. Our existing and future subsidiaries guarantee the
repayment of all amounts due under our facility, and our facility is secured by
the capital stock of those subsidiaries, our accounts receivable and the
accounts receivable of those subsidiaries. Borrowings under our credit facility
are limited to 66 2/3% of outstanding receivables (as defined in the agreement).
Our credit facility requires the consent of the lenders for acquisitions

19

exceeding a certain level of cash consideration, prohibits the payment of cash
dividends on our common stock, restricts our ability to repurchase shares of
common stock, to incur other indebtedness and requires us to comply with various
affirmative and negative covenants including certain financial covenants. Among
other restrictions, the financial covenants include minimum net worth
requirements, a maximum total consolidated funded debt to EBITDA ratio, a
maximum senior consolidated debt to EBITDA ratio, and a minimum interest
coverage ratio. At December 13, 2001, we had outstanding borrowings of $25.0
million on our credit facility.

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 $3.8 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.

All of our operating income and cash flows are generated by our wholly
owned subsidiaries, which are the subsidiary guarantors of our outstanding
senior subordinated notes. 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; (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;
and (iv) the presentation of separate financial statements and other disclosures
concerning the subsidiary guarantors is not deemed material.

In August 2001, we entered into an interest rate swap contract that has a
notional amount of $100.0 million and was established to manage the interest
rate risk of the senior subordinated note obligations. At September 30, 2001,
the fair value of this derivative was $3.2 million and is included in other
noncurrent assets. Under the hedge method of accounting for these types of
derivatives, the change in the fair value of the interest rate swap contract is
recorded with an offsetting adjustment to the carrying value of the hedged
instrument and is thus included in the senior subordinated notes classification
as of September 30, 2001.

Outlook. Economic conditions across the country, especially subsequent to
the terrorist attacks of September 11, 2001 are extremely challenging. To
improve our position for continued success, we have taken steps to reduce costs.
We have made significant cuts in selling, general and administrative costs
resulting in a 15% to 20% cost reduction at the corporate office and have
targeted a 5% to 10% cost reduction in the field. In connection with these cuts,
we will incur associated costs of approximately $4.0 million to $4.5 million in
our first fiscal quarter of 2002.

We anticipate that our cash flow from operations and proceeds from our
credit facility will provide sufficient cash to enable us to meet our working
capital needs, debt service requirements and planned capital expenditures for
property and equipment through the next twelve months. Further, based on current
internal projections, we expect to be in compliance with our debt instruments
through at least the next twelve months. 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 and 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.

20

INFLATION

Due to the relatively low levels of inflation experienced in fiscal 1999,
2000 and 2001, 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

In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 (SAB 101). SAB 101 reflects the basic principles of
revenue recognition in existing accounting principles generally accepted in the
United States. SAB 101 does not supersede any existing authoritative literature.
We recognize revenue from construction contracts 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". The adoption of SAB 101 did not have an
impact on our results of operations.

Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and
138, was effective for IES on October 1, 2000. These statements require that all
derivative instruments (such as an interest rate swap contract), be recorded as
either assets or liabilities measured at fair value. Changes in the derivative's
fair value are to be recognized currently in earnings unless specific hedge
accounting criteria are met. The criteria for cash flow and fair value hedges
require that hedging relationships must be designated and documented upon
inception. The documentation must include the consideration of the hedged item,
the specific risk being hedged, identification of the hedging instrument, the
company's risk management strategy, and how effectiveness will be assessed. The
effectiveness assessment must have a historical basis that supports the
assertion that the hedge will be effective prospectively. At the date of
adoption, there was no financial impact on our consolidated financial statements
as we were not a party to any derivative instruments. In August 2001, we entered
into an interest rate swap contract to manage specific interest rate risks.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS No. 141
also requires that acquired intangible assets be recognized as assets apart from
goodwill if they meet one of two specified criteria. Additionally, the statement
adds certain disclosure requirements to those required by APB 16, including
disclosure of the primary reasons for the business combination and the
allocation of the purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. This statement is required to be applied
to all business combinations initiated after June 30, 2001 and to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. Use of the pooling-of-interests method is
prohibited. The adoption of SFAS No. 141 did not have an impact on our financial
condition or results of operations.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142, which must be applied to fiscal years beginning after
December 15, 2001, modifies the accounting and reporting of goodwill and
intangible assets. The pronouncement requires entities to discontinue the
amortization of goodwill, reallocate all existing goodwill among its reporting
segments based on criteria set by SFAS No. 142 and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Any impairment at the initial adoption date shall be recognized as the
effect of a change in accounting principle. Subsequent to the initial adoption,
goodwill shall be tested for impairment annually or more frequently if
circumstances indicate a possible impairment.

Under SFAS No. 142, entities are required to determine the useful life of
other intangible assets and amortize the value over the useful life. If the
useful life is determined to be indefinite, no amortization will be recorded.
For intangible assets recognized prior to the adoption of SFAS No. 142, the
useful life should be reassessed. Other intangible assets are required to be
tested for impairment in a manner similar to goodwill. At September 30, 2001,
our net goodwill was approximately $482.7 million, and annual amortization of
such goodwill was approximately $13.0 million. We expect to adopt SFAS No. 142
for our first fiscal quarter of 2002. We believe the impairment charge upon
adoption will be material, and based on current market capitalization could
equate to a substantial amount of our recorded goodwill. We do not believe this
adoption will impact our free cash flows, our operating income or compliance
with our debt instruments.

In August 2001, the FASB issued 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

21

value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. We are in the process of assessing the impact that the
adoption of this standard will have on our financial position and results of
operations.

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 and interest rate
risks resulting from the use of an interest rate swap contract that we entered
into in August 2001. 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, 2001:

22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

23

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

24

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

25

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

26

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

27

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

28

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, communications solutions 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 prior year consolidated
financial statements to conform with the presentation used in 2001.

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.

Marketable Securities and Equity Investment

At September 30, 2001, the Company has a 20.6% equity interest in Energy
Photovoltaics, Inc. (EPV) of $4.9 million which is included in other noncurrent
assets. The Company accounts 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." In the year ended
September 30, 2001, the Company recognized a $0.4 million loss as its portion of
this investment's losses. This amount is included as a component of other
income/expense in the Company's consolidated statement of operations. None of
the Company's investments qualified for accounting treatment under the equity
method of accounting as of September 30, 2000. Additionally, the Company has
notes receivable totaling approximately $1.3 million with EPV at September 30,
2001. See Note 13 for further commitments.

The Company accounts for all other marketable securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation at each
balance sheet date. The Company has certain marketable securities that are
categorized as "available for sale" and are carried at fair value and included
in other noncurrent assets. Unrealized holding gains and losses, net of taxes,
are reflected in accumulated other comprehensive income (loss) included in
stockholders' equity until realized. During the year ended September 30, 2001,
the Company disposed of one of its' available for sale investments for
approximately $0.3 million and realized a loss of $0.7 million. Such loss is
included as a component of other income/expense in the Company's consolidated
statement of operations for the year ended September 30, 2001. At September 30,
2000 and 2001, the Company's investments in marketable securities have fair
values of $1.7 million and $1.5 million (cost of $1.7 million and $1.4 million),
respectively.

29

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property and Equipment

Additions of property and equipment are stated 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 $6,728,000, $17,970,000 and $15,757,000 for the years
ended September 30, 1999, 2000 and 2001, respectively.

In accordance with its ongoing review of capitalized software, during 2000,
the Company curtailed the development of a complex and proprietary information
system. This comprehensive information system had been under development for
approximately one year. After a period of field-testing, the Company determined
that it was necessary to significantly alter the technological architecture of
the system in order to reduce ongoing support, maintenance and communications
costs. Accordingly, the Company recorded a pretax charge of approximately $6.8
million, of which $5.7 million was included in depreciation expense for the
year, to write-off the carrying value of the software costs, development costs
and certain hardware and network infrastructure costs.

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.

Goodwill

Goodwill represents the excess of the aggregate of purchase price paid by
the Company in the acquisition of businesses accounted for as purchases over the
estimated fair market value of the net assets acquired. Goodwill is amortized on
a straight-line basis over 40 years. As of September 30, 2000 and 2001,
accumulated amortization was approximately $25,761,000 and $38,744,000,
respectively.

The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset will be compared to the asset's carrying amount
to determine if such an impairment exists.

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,
2000 and 2001, accumulated amortization of debt issuance costs were
approximately $2,458,000 and $1,871,000, respectively. Debt issuance costs of
$1,918,000 associated with the Company's previous credit facility, as amended,
were fully amortized during the year ended September 30, 2001. During the year
ended September 30, 2001, the Company capitalized $5.4 million of offering costs
incurred in connection with the issuance of the senior subordinated notes and
obtaining its new 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." 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 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

30

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 unknown
collection issues in addition to reserves for specific accounts receivable where
collection is considered doubtful.

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 files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to their
respective acquisition dates. The acquired businesses file "short period"
federal income tax returns for the period from their last fiscal year through
their respective acquisition dates.

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 and self insured claims liability.

Self-Insurance

The Company retains the risk for worker's compensation, employer's
liability, auto liability, general liability and employee group health claims,
resulting from uninsured deductibles per accident or occurrence which are
subject to annual aggregate limits. Losses up to the deductible amounts are
accrued based upon the Company's known 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.

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.

31

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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 5% of its
revenues for the year ended September 30, 2001. During the year ended September
30, 2000, the Company had one customer that represented 11% of its revenues.
Excluding that customer, the Company had no single customer accounting for more
than 5% of its revenues. During the year ended September 30, 1999, the Company
had no single customer accounting for more than 5% of its revenues.

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 an interest rate swap agreement. The Company's senior
subordinated notes had a carrying value, excluding unamortized discount, at
September 30, 2000 and 2001 of $150.0 million and $275.0 million, respectively.
The fair value of the Company's senior subordinated notes at September 30, 2000
and 2001 was $132.4 million and $242.1 million, respectively. The fair value of
the Company's interest rate swap at September 30, 2001 was $3.2 million. Other
than the senior subordinated notes and the interest rate swap agreement, the
Company believes that the carrying value of financial instruments on the
accompanying consolidated balance sheets approximates their fair value.

Subsidiary Guaranties

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 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.

32

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 per share for the three years ended September 30, 1999, 2000 and 2001
(in thousands, except share information):

For the years ended September 30, 1999, 2000 and 2001, exercisable stock
options of 1.0 million, 4.4 million and 4.4 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.

New Accounting Pronouncements

In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 (SAB 101). SAB 101 reflects the basic principles of
revenue recognition in existing accounting principles generally accepted in the
United States. SAB 101 does not supersede any existing authoritative literature.
The Company recognizes revenue from construction contracts 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". The
adoption of SAB 101 did not have an impact on the results of operations of the
Company.

Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and
138, was effective for the Company on October 1, 2000. These statements require
that all derivative instruments (such as an interest rate swap contract), be
recorded as either assets or liabilities measured at fair value. Changes in the
derivative's fair value are to be recognized currently in earnings unless
specific hedge accounting criteria are met. The criteria for cash flow and fair
value hedges require that hedging relationships must be designated and
documented upon inception. The documentation must include the consideration of
the hedged item, the specific risk being hedged, identification of the hedging
instrument, the Company's risk management strategy, and how effectiveness will
be assessed. The effectiveness assessment must have a historical basis that
supports the assertion that the hedge will be effective prospectively. At the
date of adoption, there was no financial impact on the Company's consolidated
financial statements as the Company was not a party to any derivative
instruments. In August 2001, the Company entered into an interest rate swap
contract to manage specific interest rate risks. See Note 6.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS No. 141
also requires that acquired intangible assets be recognized as assets apart from
goodwill if they meet one of two specified criteria. Additionally, the statement
adds certain disclosure requirements to those required by APB 16, including
disclosure of the primary reasons for the business combination and the
allocation of the purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. This statement is required to be applied
to all business combinations initiated after June 30, 2001 and to all business
combinations accounted for using the purchase method

33

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for which the date of acquisition is July 1, 2001 or later. Use of the
pooling-of-interests method is prohibited. The adoption of SFAS No. 141 did not
have an impact on the Company's financial condition or results of operations.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142, which must be applied to fiscal years beginning after
December 15, 2001, modifies the accounting and reporting of goodwill and
intangible assets. The pronouncement requires entities to discontinue the
amortization of goodwill, reallocate all existing goodwill among its reporting
segments based on criteria set by SFAS No. 142 and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Any impairment at the initial adoption date shall be recognized as the
effect of a change in accounting principle. Subsequent to the initial adoption,
goodwill shall be tested for impairment annually or more frequently if
circumstances indicate a possible impairment.

Under SFAS No. 142, entities are required to determine the useful life of
other intangible assets and amortize the value over the useful life. If the
useful life is determined to be indefinite, no amortization will be recorded.
For intangible assets recognized prior to the adoption of SFAS No. 142, the
useful life should be reassessed. Other intangible assets are required to be
tested for impairment in a manner similar to goodwill. At September 30, 2001,
the Company's net goodwill was approximately $482.7 million, and annual
amortization of such goodwill was approximately $13.0 million. The Company
expects to adopt SFAS No. 142 during its first fiscal quarter of 2002. The
Company believes the impairment charge upon adoption will be material, and based
on current market capitalization could equate to a substantial amount of its
recorded goodwill. The Company does not believe this adoption will impact its
free cash flows, its operating income or compliance with its debt instruments.

In August 2001, the FASB issued 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. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company is in the process of assessing the impact that the
adoption of this standard will have on its financial position and results of
operations.

3. BUSINESS COMBINATIONS:

Purchases

Subsequent to the IPO, and through September 30, 2001, IES has acquired 70
businesses in transactions accounted for as purchases. The total consideration
paid in these transactions was approximately $232.9 million in cash and 14.7
million shares of common stock.

In connection with the acquisitions discussed above, goodwill was
determined as follows for each of the years ending September 30, 1999, 2000 and
2001 (in thousands):

34

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pro Forma Presentation

The unaudited pro forma data presented below reflect the results of
operations of IES and the businesses acquired during fiscal 1999 and 2000
assuming the transactions were completed on October 1, 1998 (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 owners' compensation, estimated
goodwill amortization for the excess of consideration paid over the net assets
acquired assuming a 40-year amortization period, interest expense on borrowings
incurred to fund acquisitions, elimination of interest income, 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, 1998, and are not necessarily
representative of the Company's results of operations for any future period.

4. PROPERTY AND EQUIPMENT:

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

5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

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

35

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Contracts in progress are as follows (in thousands):

6. DEBT:

Debt consists of the following (in thousands):

Future payments due on debt at September 30, 2001 are as follows (in
thousands):

2002........................................................ $ 679
2003........................................................ 614
2004........................................................ 12,170
2005........................................................ 73
2006........................................................ 15
Thereafter.................................................. 275,000
--------
Total..................................................... $288,551
- -----------------------------------------------------------------------

36

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Credit Facility

On May 22, 2001, the Company replaced its $175.0 million credit facility
with a bank group, with a new $150.0 million revolving credit facility with a
group of lending institutions to be used for working capital, capital
expenditure, acquisitions and other corporate purposes, that matures May 22,
2004 (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 2.75 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 1.25 percent, as determined by the
ratio of the Company's total funded debt to EBITDA. Commitment fees of 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, to incur other indebtedness and requires the Company to comply with
various affirmative and negative covenants including certain financial
covenants. Among other restrictions, the financial covenants include minimum net
worth requirements, a maximum total consolidated funded debt to EBITDA ratio, a
maximum senior consolidated debt to EBITDA ratio, and a minimum interest
coverage ratio. The Company was in compliance with the financial covenants at
September 30, 2001. As of September 30, 2001, the Company had borrowings
outstanding under its Credit Facility of $12.0 million, letters of credit
outstanding under its Credit Facility of $0.9 million, $1.6 million of other
borrowings and available borrowing capacity under its Credit Facility of $137.1
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 $3.8 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.

Interest Rate Swap

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 has 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 pays the counterparty variable rate interest (3-month LIBOR plus
3.49%) and the counterparty pays 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 is 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 is that interest expense on the
portion of fixed-rate debt being hedged is generally recorded based on variable
interest rates. The interest rate swap is considered to be perfectly effective
because it qualifies for the "short-cut" method under SFAS No. 133 and therefore
there is no net change in fair value to be recognized in income. At September
30, 2001, the interest rate swap had a notional value of $100.0 million and a
fair value of $3.2 million.

37

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of this contract is included in the balance sheet in other
noncurrent assets. The following table presents the balance sheet effect on the
Senior Subordinated Notes (in thousands):

7. 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, 1999, 2000 and 2001 was approximately
$4,849,000, $7,543,000 and $9,724,000, 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
- ----------------------------------------------------------------------
2002........................................................ $10,385
2003........................................................ 7,871
2004........................................................ 6,196
2005........................................................ 4,015
2006........................................................ 1,793
Thereafter.................................................. 2,830
-------
Total............................................... $33,090
- ----------------------------------------------------------------------

8. 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):

38

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):

The Company does not believe that a valuation allowance against the
deferred income tax assets is necessary as it believes the assets will be fully
realized.

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

9. 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 four distinct
customer groups. They are managed separately because each business requires
different operating and marketing strategies.

Prior to October 1, 2000, the Company was organized in a single segment.
During fiscal 2000, the Company aligned its operations among two complementary
core businesses: electrical contracting and communications solutions. Within the
electrical contracting business, the Company has three reportable segments:
commercial/industrial, residential and service and maintenance markets. The
commercial/industrial segment provides installations, renovations and upgrades
and replacement services in 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 and petrochemical and power plants. The
residential segment consists of installations, replacements and renovation
services in single family and low-rise multifamily housing units. The service
and maintenance segment provides maintenance and replacement services from
service calls and routine

39

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

maintenance contracts. The communications solutions business provides
installation, service and maintenance, design, engineering and support services
to infrastructure services customers.

The accounting policies of these reportable 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 unallocated home office expenses. No significant transactions
have occurred between the Company's business segments. Management intends to
continue to focus on its internal allocation methods for allocating results to
business segments.

Segment information for the years ended September 30, 1999, 2000 and 2001
are as follows (in thousands):

40

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.

10. 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.

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 grant and
vesting terms similar to options granted under the Directors' Plan discussed
above.

1999 Incentive Compensation Plan

In November 1999, the 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

41

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 December 1999 and March 2000, the Company granted restricted stock
awards of 609,306 and 400,000, respectively, under its stock plans to certain
employees. The December 1999 awards vested in equal installments on May 31, 2000
and August 31, 2000, provided the recipient was still employed by the Company.
The March 2000 award vests in equal installments on March 20th of each year
through 2004, provided the recipient is still employed by the Company. The
market value of the underlying stock on the date of grant for the December 1999
and March 2000 awards was $5.2 million and $2.3 million, respectively, which is
being recognized as compensation expense over the related vesting periods.
During the years ended September 30, 2000 and 2001, the Company amortized $5.4
million and $0.6 million, respectively, to expense in connection with these
awards. Through September 30, 2001, 678,269 shares of these common stock awards
vested and 31,037 shares of common stock were forfeited. To fund employee tax
liabilities, 234,234 of these awards were cancelled and 444,035 of these shares
were issued and are currently outstanding. At September 30, 2001, there were
300,000 shares of unvested common stock awards outstanding.

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

Unexercised options expire at various dates from January 27, 2008 through
September 30, 2011.

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:

42

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tables below summarizes options outstanding and exercisable at
September 30, 2001:

Options exercisable at September 30, 1999, 2000 and 2001 had weighted
average fair values per option of $9.45, $8.10 and $3.55, respectively.

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. As of September 30, 2000, there were
no shares purchased under the ESPP. During the year ended September 30, 2001,
the Company issued 207,642 shares pursuant to the ESPP. 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 Company follows Accounting Principles Board ("APB") Opinion No. 25 in
accounting for its stock-based compensation. Under APB Opinion No. 25, no
compensation expense is recognized in the consolidated statements of operations
if no intrinsic value exists at the date of grant. SFAS No. 123 requires that if
a company does not record compensation expense for stock options issued to
employees pursuant to APB Opinion No. 25, the company must also disclose the
effects on its results of operations as if the Company has adopted SFAS 123. Had
compensation costs for the Company's stock option plans, restricted stock awards
granted and the ESPP been determined consistent with SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts (in thousands, except per share information):

43

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

11. RELATED-PARTY TRANSACTIONS:

The Company has transactions in the normal course of business with certain
affiliated companies. Amounts due from related parties at September 30, 2000 and
2001 were $256,000 and $222,000, 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, 1999, 2000 and 2001 were $2,850,000, $4,180,000 and
$4,335,000, respectively. Future commitments with respect to these leases are
included in the schedule of minimum lease payments in Note 7.

12. 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 subsequent to completing six months 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 $1,460,000, $2,106,000 and $3,380,000 for the
years ended September 30, 1999, 2000 and 2001, respectively.

13. COMMITMENTS AND CONTINGENCIES:

Subsidiaries of the Company 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.

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 resulting
convergence of the energy, utility and telecommunications industries. Through
September 30, 2001, the Company had invested $1.5 million under its commitment
to EnerTech.

The Company has committed to advance EPV, an affiliate, up to $1.8 million
in the form of notes receivable. At September 30, 2001, the Company had notes
receivable totaling approximately $1.3 million. Subsequent to September 30,
2001, EPV was advanced the remaining $0.5 million under the Company's
commitment.

44

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

Quarterly financial information for the years ended September 30, 2000 and
2001 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.

15. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED):

During the first fiscal quarter of 2002, the Company implemented cost
reduction procedures and terminated certain positions at the corporate office
and field locations. The Company expects to incur approximately $4.0 million to
$4.5 million in associated costs.

45

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

None.

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) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders (the "Proxy Statement") to be filed with the Securities
and Exchange Commission no later than January 28, 2002.

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.

PART IV

ITEM 14. 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.

(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)

46

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 Employment Agreement (Incorporated by reference to
10.1 to the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
10.2 Form of Officer and Director Indemnification Agreement.
(Incorporated by reference to 10.2 to the Registration
Statement on Form S-1 (File No. 333-38715) of the Company)
*10.3 Integrated Electrical Services, Inc. 1997 Stock Plan, as
amended.
10.4 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)
10.5 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)
*10.6 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.
*10.7 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 Chase Manhattan Bank, as
administrative agent.
10.8 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)
*12 Ratio of Earnings to Fixed Charges.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Arthur Andersen LLP.
*24 Powers of Attorney

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

* Filed herewith.

(c) Reports on Form 8-K.

None.

47

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 December 13, 2001.

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 December 13, 2001.

48

INDEX TO EXHIBITS

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

* Filed herewith.