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, 2002

OR

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

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

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

1800 WEST LOOP SOUTH
SUITE 500
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)

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

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

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

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

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

As of November 25, 2002, there were outstanding 39,445,954 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 $114.7 million.

DOCUMENT INCORPORATED BY REFERENCE

The information called for by Part III of this Form 10-K is incorporated by
reference from the Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held January 30, 2003.
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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 and the Private
Securities Litigation Act of 1995. Statements that include the words "except",
"intend", "plan", "believe", "project", "anticipate", "will", and similar
statements of a future or forward-looking nature identify "forward-looking"
statements. These statements are based on the Company's expectations and involve
risks and uncertainties that could cause the Company's actual results to differ
materially from those set forth in the statements. Such risks and uncertainties
include, but are not limited to, the inherent uncertainties in estimating future
results, fluctuations in operating results because of downturns in levels of
construction, changes in general economic condition in the areas we operate,
incorrect estimates used in entering into fixed price contracts, difficulty in
managing the operation and growth of existing businesses, the high level of
competition in the construction industry, changes in economic viability of
competitor companies bidding projects that can result in other companies bidding
projects under cost, changes in availability of bonding capacity necessary to
perform certain types of projects, availability and quality of existing
workforce and newly hired employees, weather changes, interest rates, ability to
manage companies in a decentralized structure 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. The Company specifically disclaims any duty or obligation to update
forward-looking statements based on later acquired information.

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PART I

ITEM 1. BUSINESS

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

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

Since 1997, we have developed a national footprint of approximately 150
locations currently serving 44 states through the acquisition and internal
growth of established companies operating in our core business areas. From 1997
to 2002, 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 8%. In 2002, we continued to
focus internally to integrate our information systems and a regionally based
management structure to enhance operating controls at all levels of our
organization as well as integrating a consolidated procurement program and
structure to manage customers and vendors on a national basis.

INDUSTRY OVERVIEW

According to the most recently available data, the electrical contracting
industry generated 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 12 U.S. electrical
contractors with revenues in excess of $200 million. U.S. Census data indicates
that total construction industry revenues have grown at an average compound rate
of approximately 5% from 1997 through 2002.

In recent years, electrical contractors have experienced a growing demand
for their services due to more stringent electrical codes, increased use of
electrical power, increased drive toward outsourcing, 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 approximately 150 locations,
currently operate in 44 states and have worked on more than 2,300
contracts over $250,000 and more than 10,000 contracts overall in 2002.
Our diverse customer base includes general contractors, property
developers and managers, facility owners and managers of large retail
establishments, manufacturing and processing facilities, utilities,
government agencies and homeowners. No single customer accounted for more
than 10% of our revenues in the year ended September 30, 2002. 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.

- Expertise -- We have developed areas of expertise in high-rise buildings
including hotels, condominiums and office buildings, retail centers,
hospitals, switching centers and utility substations and single-family
and multi-family residential. 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, to improve efficiency 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 approximately 27% of our outstanding common stock.

STRATEGY

The key elements of our strategy are:

Cost Control. We have and will continue to take steps to operate more
efficiently and reduce expenses in order to increase our profitability and
remain competitive within the industry. We continue to strengthen our
relationships with suppliers in an effort to reduce the costs of delivering
services. We have consolidated the administrative functions of many of our
businesses to streamline operations and plan to continue to do so where
appropriate. We believe that by focusing on cost reduction, we are better
positioned for success in the challenging business environment.

Implementing Best Practices. We continue to expand the services and
expertise 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 across the entire organization. Areas of focus include: leveraging
our market expertise in specific locations across the organization,
administrative practices, safety, and hiring and training practices. For
example, we believe our prefabrication process for high-rise buildings 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 other companies.

Operating on a Regional Basis. Our subsidiaries are managed on a regional
basis with six reporting regions, based on geography, reporting directly to our
Chief Operating Officer. We manage most aspects of our operations under this
structure. Our regional operating structure provides us a platform for strong
operating and financial controls, allows us to more efficiently manage the
business and fosters implementation of best practices

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across the organization. This structure also allows us to manage customer
relationships above the local level. We believe this structure enables us to:

- provide specialized market expertise on a regional and national level;
- maintain and strengthen relationships with general contractors and other
customers;
- build positive relationships with engineers and architects;
- address design preferences and code requirements across the nation;
- increase labor sharing and joint project execution; and
- respond quickly to customer demands.

Leveraging Cross-Selling between our Customers and our Subsidiaries. We
have begun to effectively utilize the regional and national structure to service
customers, both general contractors and end users. Today we are sharing customer
and referring work among our subsidiaries. We perform projects jointly with two
or more subsidiaries as well as performing numerous projects for a customer
through multiple locations. The regional structure has encouraged our
cross-selling initiative.

Procurement. Our procurement strategy involves forging relationships and
alliances with manufacturers, service providers and distributors. These
alliances include volume-based rebates, increased service commitments, funding
for our company-wide procurement catalog and partial sponsorship of company wide
events. As part of this procurement strategy we established a system for more
accurately tracking the goods and services we buy. We currently track
approximately 70% of our procurement spending.

Financial Reporting and Planning. The implementation of our internal
integrated financial reporting system is more than 65% complete and is targeted
for completion by the end of calendar year 2003. We have also implemented a
consolidated financial analysis and planning system compatible with our
financial reporting system. These systems provide real-time access to financial
records, increased ability to do analysis of subsidiary performance, improved
project management systems and more uniform data which should improve the
overall management of the business.

THE MARKETS WE SERVE

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

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

Our commercial and industrial customers include:

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

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Demand for our commercial and industrial services is driven by construction
and renovation activity levels, as well as more stringent local and national
electrical codes. From fiscal 1997 through 2002 pro forma combined revenues from
commercial and industrial work have grown at a compound annual rate of
approximately 5% per year and represented approximately 81% of our revenues for
the year ended September 30, 2002. Pro forma combined revenues include revenues
generated by our subsidiaries prior to their acquisition by us.

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

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

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

Our service and maintenance revenues are derived from service calls and
routine maintenance contracts and tend to be recurring and less sensitive to
economic fluctuations. Service and maintenance is supplied on a long-term and
per-call basis. Long-term service and maintenance is provided through contracts
that require the customer to pay an annual or semiannual fee for periodic
diagnostic services at a specific discount from standard prices for repair and
replacement services. Per-call service and maintenance is initiated when a
customer requests emergency repair service. Service technicians are scheduled
for the call or routed to the customer's residence or business by the
dispatcher. We will then follow up with the 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
immediately.

Most service work is warranted for thirty days.

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

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supply and delivery requirements. Demand for our low voltage systems is driven
by the construction industry growth rate and our ability to cross-sell among our
customers.

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

We are currently one of the largest providers of electrical contracting
services to the U.S. residential construction market. Our residential business
has experienced significant growth. Our pro forma combined revenues from
residential electrical contracting have grown at a compound annual rate of
approximately 21% from fiscal 1997 through 2002 and represented approximately
19% of our revenues for the year ended September 30, 2002.

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 builders' 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.

CUSTOMERS

Major Customers. We have a diverse customer base. During the year ended
September 30, 2002, no single customer accounted for more than 10% 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:

3M Hyatt Corporation Nissan
Albertsons Home Depot Nordstrom
Beers Construction, Inc. Intel SBC
Best Buy JPI Apartment Construction Six Continents
Bovis, Inc. Kohl's Target
Brasfield & Gorie Lowe's The Shaw Group
Centex Construction Lucent Technologies Verizon
Costco Marriott International Wal-Mart
Federal Express May Department Stores Walgreen's
Four Seasons Hotel MB Kahn

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

COMPANY OPERATIONS

Employee Screening, Training and Development. We are committed to providing
the highest level of customer service through the development of a highly
trained workforce. Employees are encouraged to complete a progressive training
program to advance their technical competencies and to ensure that they
understand and follow the applicable codes, our safety practices and other
internal policies. We support and fund continuing education for our employees,
as well as apprenticeship training for technicians under the Bureau of
Apprentice-

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ship and Training of the Department of Labor and similar state agencies.
Employees who train as apprentices for four years may seek to become journeymen
electricians and, after additional years of experience, master electricians. We
pay progressive increases in compensation to employees who acquire this
additional training, and more highly trained employees serve as foremen,
estimators and project managers. Our master electricians are licensed in one or
more cities or other jurisdictions in order to obtain the permits required in
our business. Some employees have also obtained specialized licenses in areas
including security systems and fire alarm installation. In some areas, licensing
boards have set continuing education requirements for maintenance of licenses.
Because of the lengthy and difficult training and licensing process for
electricians, we believe that the number, skills and licenses of our employees
constitute a competitive strength in the industry.

We actively recruit and screen applicants for our technical positions and
have established programs in some locations to recruit apprentice technicians
directly from high schools and vocational technical schools. Prior to hiring new
employees, we assess their technical competence level, confirm background
references and conduct drug testing.

Materials and Supplies. As a result of economies of scale, we believe we
have been able to purchase equipment, parts and supplies at discounts to prices
at which stand-alone companies can purchase. In addition, as a result of our
size, we are able to lower our costs for (i) the purchase or lease of vehicles;
(ii) bonding, (iii) property, casualty and liability insurance; (iv) health
insurance and related benefits; (v) retirement benefits administration; and (vi)
office and computer equipment.

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

Control and Information Systems. We are committed to performing those
controls and procedures that improve our efficiency and the monitoring of our
operations. We are 65% complete in deploying a standard Enterprise Resource
Planning ("ERP") software to all of our operating companies. ERP applications
are paramount to a growing business with our diverse geographic platform.
Additionally, we have implemented a financial reporting and planning application
to complement the ERP application that provides a uniform structure and
analytical tools to the reporting process. This application was utilized for our
2003 planning process. We expect to have the implementation completed by
December 2003. Implementation of this ERP system and financial reporting
application allows us to obtain more timely operating performance and perform
more detailed analysis. In addition to our ERP system, other controls and
procedures which we have in place include:

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

COMPETITION

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

- the availability of qualified and licensed electricians or qualified
technicians;
- safety record;
- cost structure;

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- relationships with customers;
- geographic diversity;
- ability to reduce project costs;
- access to technology;
- experience in specialized markets; and
- ability to obtain bonding.

See "Risk Factors'

REGULATIONS

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

- licensing requirements applicable to electricians;
- building and electrical codes;
- regulations relating to consumer protection, including those governing
residential service agreements; and
- regulations relating to worker safety and protection of the environment.

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

Many state and local regulations governing electricians require permits and
licenses to be held by individuals. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified activities
for all our electricians who work in the state or county that issued the permit
or license. It is our policy to ensure that, where possible, any permits or
licenses that may be material to our operations in a particular geographic
region are held by multiple 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, 2002, we had approximately 13,500 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 in these geographic areas 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. While overall economic growth has diminished, our ability to
increase productivity and profitability may be limited by our ability to employ,
train and retain skilled electricians required to meet our needs. Accordingly
there can be no assurance, among other things, that:

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

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

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

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

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

- - 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

11

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

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

- - 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.

12

At September 30, 2002, we maintained branch offices, warehouses, sales
facilities and administrative offices at approximately 150 locations.
Substantially all of our facilities are leased. We lease our corporate office
located in Houston, Texas.

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

ITEM 3. LEGAL PROCEEDINGS

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

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

None.

ITEM 4A. EXECUTIVE OFFICERS

Herbert "Roddy" Allen, 62, 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, 44, 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, 44, has been the Chief Financial Officer and Executive
Vice President of the Company since June 2000. Mr. Reynolds joined IES after
having served as Vice President and Treasurer of Peoples Energy Corporation in
Chicago, Illinois from 1998 to 2000. Prior to his appointment with Peoples
Energy Corporation, Mr. Reynolds was Vice President and Project Finance
Corporate Officer for MCN Energy Group, Inc. in Detroit, Michigan from 1997 to
1998. Prior to 1997, Mr. Reynolds spent seventeen years with BP Amoco
Corporation serving in a variety of positions both internationally and
domestically.

Britton L. Rice, 57, has been the Chief Technology and Procurement Officer
and Senior Vice President of the Company since 2000. Mr. Rice also serves as the
President of Britt Rice Electric, L.P., one of the Company's subsidiaries.

Margery Harris, 42, has been the Senior Vice President of Human Resources
of the Company since October 2000. From 1995 to 2000, Ms. Harris was employed by
Santa Fe Snyder Corporation, a large global independent exploration and
production company, serving most recently as Vice President of Human Resources.
Prior to that Ms. Harris was a lead consultant with Hewitt Associates, a premier
total compensation consulting firm.

Curt L. Warnock, 47, has been Vice President, Law of the Company since
October 2002. From July 2001 to October 2002, Mr. Warnock served as Assistant
General Counsel of the Company. Prior to July 2001, Mr. Warnock spent sixteen
years with Burlington Resources Inc., a large independent NYSE oil and gas
company, serving in various positions. Mr. Warnock is licensed in Texas.

David A. Miller, 32, has been Vice President and Chief Accounting Officer
of the Company since October 2002. Between January 1998 and October 2002, Mr.
Miller held the positions of Financial Reporting Manager, Assistant Controller,
Controller and Chief Accounting Officer with the Company. Prior to January 1998,
Mr. Miller held various positions in public accounting and private industry. Mr.
Miller is a Certified Public Accountant.

13

PART II

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

The Company's common stock trades on the NYSE under the symbol "IES." The
following table presents the quarterly high and low sales prices for the
Company's Common Stock on the NYSE since October 2000.

As of November 25, 2002, the market price of the Company's Common Stock was
$4.00 per share and there were approximately 1,717 holders of record.

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

14

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.

15

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

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

GENERAL

Our electrical contracting business is operated in two segments: (1)
commercial and industrial and (2) residential. See Note 9 of "Notes to
Consolidated Financial Statements" for a description of these reportable
segments.

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

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

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

We evaluate goodwill for potential impairment in accordance with Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Included in this evaluation are certain assumptions and estimates to
determine the fair values of reporting units such as estimates of future cash
flows,
16

discount rates, as well as assumptions and estimates related to the valuation of
other identified intangible assets. Changes in these assumptions and estimates
or significant changes to the market value of our common stock could materially
impact our results of operations or financial position.

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

We are self-insured for workers' compensation, auto liability, general
liability and employee-related health care claims, subject to large deductibles.
Losses up to the deductible amounts are accrued based upon our estimates of the
liability for claims incurred and an estimate of claims incurred but not
reported. The accruals are derived from known facts, historical trends and
industry averages utilizing the assistance of an actuary to determine the best
estimate of the ultimate expected loss. We believe such accruals to be adequate.
However, insurance liabilities are difficult to assess and estimate due to
unknown factors, including the severity of an injury, the determination of our
liability in proportion to other parties, the number of incidents not reported
and the effectiveness of our safety program. Therefore, if actual experience
differs from than the assumptions used in the actuarial valuation, adjustments
to the reserve may be required and would be recorded in the period that the
experience becomes known.

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.

17

REVENUES

Revenues decreased $217.8 million, or 13%, from $1,693.2 million for the
year ended September 30, 2001 to $1,475.4 million for the year ended September
30, 2002. The decrease in commercial and industrial revenues was primarily the
result of non-recurring work performed for one customer during the year ended
September 30, 2001, a decrease in revenues from communications work and a
decrease of non-residential revenues in the Midwest, as well as increased
competition across the country for available work during the year ended
September 30, 2002.

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 growth within the operating segments and the change in
proportion in revenues among the segments were the result of increased
construction and communications activity in the markets we serve.

GROSS MARGIN

Gross profit decreased $86.0 million, or 28% from $307.6 million for the
year ended September 30, 2001 to $221.6 million for the year ended September 30,
2002. Overall gross margin as a percentage of revenues decreased approximately
3% from 18% for the year ended September 30, 2001 to 15% for the year ended
September 30, 2002. The overall decrease in gross profit as a percentage of
revenue was primarily the result of increased competition for available work,
project fade recorded on fixed price contracts at some of our subsidiaries
during the year ended September 30, 2002, lower margins on work in the
communications market and charges associated with increasing our estimated
self-insurance liabilities.

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 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.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased $39.9 million, or
19%, from $214.1 million for the year ended September 30, 2001 to $174.2 million
for the year ended September 30, 2002. Selling, general and administrative
expenses as a percent of revenue remained the same at 12% for 2001 and 2002. The
decrease in the dollar amount of selling, general and administrative expenses
was primarily the result of the termination of certain administrative field and
home office personnel during the year ended September 30, 2002.

18

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 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.

RESTRUCTURING CHARGES

In October 2001 we began implementation of a workforce reduction program.
The purpose of this program was to cut costs by reducing the number of
administrative staff both in the field and at the home office. The total number
of terminated employees was approximately 450. As a result of the program
implementation, we recorded pre-tax restructuring charges of $5.6 million
associated with 45 employees during the year ended September 30, 2002. The
charges were based on the costs of the workforce reduction program and include
severance and other special termination benefits. At September 30, 2002,
approximately $1.2 million of these charges have not been paid and are included
in accounts payable and accrued expenses.

INCOME FROM OPERATIONS

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

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 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.

INTEREST AND OTHER EXPENSE, NET

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

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.

PROVISION FOR INCOME TAXES

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

19

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.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2002, we had cash and cash equivalents of $32.8
million, working capital of $244.2 million, no borrowings under our credit
facility, $18.7 million of letters of credit outstanding and available borrowing
capacity under our credit facility of $131.3 million.

During the year ended September 30, 2002, we generated $53.4 million of net
cash from operating activities. This net cash from operating activities was
comprised of net loss of $273.4 million, increased by $313.3 million of non-cash
charges and increased by $13.5 million in working capital changes. Non-cash
charges included cumulative effect of change in accounting principle,
depreciation and amortization expense, restricted stock compensation charges,
provision for allowance for doubtful accounts, changes in deferred income taxes
and losses on sales of property and equipment. Working capital changes consisted
of a $30.9 million decrease in receivables as a result of the timing of
collections offset by a $37.7 million decrease in payables. Working capital
changes were further increased by a $14.5 million decrease in cost and estimated
earnings in excess of billings on uncompleted contracts, a $11.3 million
increase in other noncurrent liabilities and offset by a $9.8 million increase
in prepaid expenses and other current assets, with the balance of the change due
to other working capital changes. Net cash used in investing activities was $4.3
million, including $11.9 million used for capital expenditures and $7.6 million
provided from divestitures and other. Net cash used by financing activities was
$19.7 million, resulting primarily from the repurchase of the senior
subordinated notes and the repayments of amounts outstanding on our credit
facility at September 30, 2001.

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
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 November 21, 2002, we had no outstanding borrowings 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 $3.9 million in offering costs. The proceeds from the May
29, 2001 offering were used primarily to repay amounts outstanding under our
credit facility. The notes bear interest at 9 3/8% and will mature on February
1, 2009. We pay interest on the notes on February 1 and August 1 of each year.
The notes are unsecured senior subordinated obligations and are subordinated to
all of our existing and future senior indebtedness. The notes are guaranteed on
a senior subordinated basis by all of our subsidiaries. Under the terms of the
notes, we are required to comply with various affirmative and negative covenants
including (1) restrictions on additional indebtedness, and (2) restrictions on
liens, guarantees and dividends. During the fourth quarter of the year ended
September 30, 2002, we retired approximately $27.1 million of these senior
subordinated notes. In connection with these transactions, we recorded a gain of
$1.0 million. This gain is
20

recorded in interest and other expense, net in accordance with SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections," which we adopted July 1, 2002.

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 was included in other
noncurrent assets. We terminated this contract in February 2002. We received
cash equal to the fair value of this derivative of $1.5 million, which is being
amortized over the remaining life of the bonds.

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

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

Based on our impairment tests performed upon adoption of SFAS No. 142, we
recognized a charge of $283.3 million ($7.11 per share) in the first quarter of
2002 to reduce the carrying value of goodwill of our reporting units to its
implied fair value. This impairment is a result of adopting a fair value
approach, under SFAS No. 142, to testing impairment of goodwill as compared to
the previous method utilized in which evaluations of goodwill impairment were
made using the estimated future undiscounted cash flows compared to the assets
carrying amount. Under SFAS No. 142, the impairment adjustment recognized at
adoption of the new rules was reflected as a cumulative effect of change in
accounting principle in the statement of operations for the year ended September
30, 2002. Impairment adjustments recognized after adoption, if any, generally
are required to be recognized as operating expenses.

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.

OTHER COMMITMENTS

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

We enter into noncancelable operating leases for many of our vehicle and
equipment needs. These leases allow us to retain our cash when we do not own the
vehicles or equipment and we pay a monthly lease rental fee. At the end of the
lease, we have no further obligation to the lessor. We may determine to cancel
or terminate a

21

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

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

Many of our customers require us to post performance and payment bonds
issued by a surety. Those bonds guarantee the customer that we will perform
under the terms of a contract and that we will pay subcontractors and vendors.
In the event that we fail to perform under a contract or pay subcontractors and
vendors, the customer may demand the surety to pay or perform under our bond.
Our relationship with our surety is such that we will indemnify the surety for
any expenses it incurs in connection with any of the bonds it issues on our
behalf. To date, we have not incurred significant expenses to indemnify our
surety for expenses it incurred on our behalf.

We have 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 deregulation and resulting convergence of
the energy, utility and telecommunications industries. Through September 30,
2002, we had invested $1.8 million under our commitment to EnerTech.

Our future contractual obligations include (in thousands):

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

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

(1) Balance of investment commitment in EnerTech.

OUTLOOK

Economic conditions across the country are challenging. We continue to
focus on collecting receivables and reducing days sales outstanding. To improve
our position for continued success, we continue to take steps to reduce costs.
We have made significant cuts in administrative overhead at the home office and
in the field. Although we have seen signs of improvement in our quarter ended
September 30, 2002, the economic outlook for fiscal 2003 is still somewhat
uncertain. We expect earnings per share in the first quarter of fiscal 2003 to
range between $0.06 and $0.10 per share. For the year ended September 30, 2003,
we expect earnings to range between $0.53 and $0.60 per share excluding any
potential goodwill impairment charges.

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

22

SEASONALITY AND CYCLICAL FLUCTUATIONS

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

INFLATION

Due to the relatively low levels of inflation experienced in fiscal 2000,
2001 and 2002, 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

Statement of Financial Accounting Standards (SFAS) No. 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 and
February 2002, we entered into interest rate swap contracts to manage specific
interest rate risks. These interest rate swap contracts were terminated prior to
September 30, 2002.

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 Accounting Principles
Board ("APB") Opinion No. 16, "Business Combinations," 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.

23

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 $12.9 million. We adopted SFAS No. 142 in our
first fiscal quarter of 2002. The impairment charge upon adoption was $283.3
million, and was equal to a substantial amount of our recorded goodwill. This
adoption did not 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 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.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Additionally,
companies must reclassify in all prior periods presented those items that do not
meet the criteria under the Statement. SFAS No. 145 is effective for all
financial statements issued on or after May 15, 2002. We adopted SFAS No. 145 on
July 1, 2002. During July and August 2002, we repurchased $27.1 million of our
9 3/8% senior subordinated notes due February 1, 2009. In connection with this
sale, we fully amortized $0.7 million of offering costs and $0.5 million in
unamortized bond discounts and recognized a $1.0 million gain on extinguishment
of debt. The gain is recorded in interest and other expense, net as other
income.

SUBSEQUENT EVENT

On October 8, 2002, we sold one of our subsidiaries for approximately $1.3
million in cash and approximately 70,000 shares of common stock.

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. 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, 2002:

24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

25

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Integrated Electrical Services, Inc.

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

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

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

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

As discussed above, the consolidated financial statements of Integrated
Electrical Services, Inc. as of and for each of the two years in the period
ended September 30, 2001 were audited by other auditors who have ceased
operations. As described in Notes 2 and 9, these consolidated financial
statements have been revised. We audited the adjustments described in Note 9
that were applied to revise the 2001 and 2000 consolidated financial statements
relating to changes in segments. We also applied procedures with respect to the
disclosures in Note 2 pertaining to financial statement revisions to include the
transitional disclosures required by FAS 142. In our opinion, the adjustments to
Note 9 are appropriate and have been properly applied. In addition, in our
opinion, the FAS 142 disclosures for 2001 and 2000 in Note 2 are appropriate.
However, we were not engaged to audit, review or apply any procedures to the
2001 and 2000 consolidated financial statements of the Company other than with
respect to such adjustments and accordingly, we do not express an opinion or any
other form of assurance on the 2001 and 2000 consolidated financial statements
as a whole.

ERNST & YOUNG LLP

Houston, Texas
November 18, 2002

26

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

27

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

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

28

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

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

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

29

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

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

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

30

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS

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

31

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS:

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
IES, its wholly owned subsidiaries, and certain investments. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the presentation used in 2002.

Cash and Cash Equivalents

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

Inventories

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

Securities and Equity Investment

At September 30, 2001, the Company had a 20.6% equity interest in Energy
Photovoltaics, Inc. (EPV) of $4.9 million which was included in other noncurrent
assets. The Company accounted for this investment under the equity method of
accounting in accordance with Accounting Principles Board Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock." During the years
ended September 30, 2001 and 2002, the Company recognized losses of $0.4 million
and $0.6 million, respectively, as its portion of this investment's losses. This
amount is included as a component of other expense in the Company's consolidated
statements of operations. During the year ended September 30, 2002, the Company
distributed out a portion of its investment in EPV, bringing its interest below
20%. Accordingly, at September 30, 2002, the Company accounts for its interest
in EPV under the cost method of accounting for investments. Additionally, the
Company has notes receivable totaling approximately $1.3 million and $1.8
million with EPV at September 30, 2001 and September 30, 2002, respectively. See
Note 13 for further commitments.

During the year ended September 30, 2001, the Company disposed of one of
its cost method investments for approximately $0.3 million and realized a loss
of $0.7 million. Such loss is included as a component of other expense in the
Company's consolidated statement of operations for the year ended September 30,
2001. At September 30, 2001 and 2002, the Company's cost method investments in
securities have a fair value of $1.5 million and $5.1 million (cost of $1.4
million and $5.0 million), respectively.

32

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 $18.0 million, $15.8 million and $16.9 million for the
years ended September 30, 2000, 2001 and 2002, 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

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

Based on the Company's impairment tests performed upon adoption of SFAS No.
142, it recognized a charge of $283.3 million ($7.11 per share) in the first
quarter of 2002 to reduce the carrying value of goodwill of its reporting units
to its implied fair value. This charge resulted in the recording of a deferred
tax asset for which the Company provided a full valuation allowance. At
September 30, 2002, this asset totaled $13.1 million. This impairment is a
result of adopting a fair value approach, under SFAS No. 142, to testing
impairment of goodwill as compared to the previous method utilized in which
evaluations of goodwill impairment were made by the Company using the estimated
future undiscounted cash flows compared to the assets' carrying amount. Under
SFAS No. 142, the impairment adjustment recognized at adoption of the new rules
was reflected as a cumulative effect of change in accounting principle in the
Company's first quarter 2002 statement of operations. Impairment adjustments
recognized after adoption, if any, generally are required to be recognized as
operating expenses.

33

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of September 30, 2001 and 2002, accumulated amortization was
approximately $38.7 million and $37.4 million, respectively. The carrying amount
of goodwill attributable to each reportable operating unit with goodwill
balances and changes therein follows:

The audited results of operations presented below for the year ended
September 30, 2002 and adjusted results of operations for the years ended
September 30, 2000 and 2001 reflect the operations of the Company had we adopted
the non-amortization provisions of SFAS No. 142 effective October 1, 1999:

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,
2001 and 2002, accumulated amortization of debt issuance costs were
approximately $1.9 million and $3.7 million, respectively. Debt issuance costs
of approximately $2.0 million 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, 2002, the Company amortized
approximately $1.8 million of offering costs incurred in connection with the
issuance of the senior subordinated notes and its credit facility. The Company
retired $27.1 million of its senior subordinated notes during the year ended
September 30, 2002 and amortized an additional $0.7 million of offering costs in
connection with this retirement.

34

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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.

35

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 workers' 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. For the year ended September 30, 2002, management has
compiled its historical data pertaining to the self-insurance experiences and
has utilized the services of an actuary to assist in the determination of the
ultimate loss associated with the Company's self-insurance programs for workers'
compensation, auto and general liability. Management believes that the actuarial
valuation provides the best estimate of the ultimate losses to be expected under
these programs and has recorded the present value of the actuarial determined
ultimate losses of $13.2 million. The present value is based on the expected
cash flow to be paid out under the workers' compensation, auto and general
liability programs discounted at 5%. The undiscounted ultimate losses related to
the workers' compensation, auto and general liability programs are $14.6
million. The utilization of the actuarial valuation resulted in an increase in
reserves for self-insurance losses. The Company recorded a charge associated
with this change in estimate of approximately $6.1 million during the fourth
quarter of the year ended September 30, 2002. The impact of this charge on net
income was $3.9 million or $0.10 earnings per share for the year ended September
30, 2002. The present value of all self-insurance reserves recorded at September
30, 2002 is $19.5 million and the undiscounted ultimate losses total $20.8
million. The Company had restricted cash of $3.5 million and letters of credit
of $16.5 million outstanding at September 30, 2002 to collateralize its
self-insurance obligations.

Realization of Long-Lived Assets

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

Risk Concentration

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash deposits and trade
accounts receivable. The Company grants credit, generally without collateral, to
its customers, which are generally contractors and homebuilders throughout the
United States. Consequently, the Company is subject to potential credit risk
related to changes in business and economic factors throughout the United States
within the construction and home-building market. However, the Company generally
is entitled to payment for work performed and has certain lien rights in that
work. Further, management believes that its contract acceptance, billing and
collection policies are adequate to manage potential credit risk. The Company
routinely maintains cash balances in financial institutions in excess of
federally insured limits.

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

36

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, retainage receivables,
notes receivable, accounts payable, a line of credit, notes and bonds payable,
long-term debt and interest rate swap agreements. The Company's senior
subordinated notes had a carrying value, excluding unamortized discount, at
September 30, 2001 and 2002 of $275.0 million and $247.9 million, respectively.
The fair value of the Company's senior subordinated notes at September 30, 2001
and 2002 was $242.1 million and $218.1 million, respectively. The Company
utilizes quoted market prices to determine the fair value of its debt. The fair
value of the Company's interest rate swap at September 30, 2001 was $3.2
million. This interest rate swap and another interest rate swap contract entered
into during 2002 were terminated during the year ended September 30, 2002. The
Company received cash equal to the fair market value of these derivatives, which
is being amortized over the remaining life of the bonds. Other than the senior
subordinated notes and the interest rate swap agreements, 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.

Earnings per Share

The following table reconciles the components of the basic and diluted
earnings (loss) per share for the three years ended September 30, 2000, 2001 and
2002 (in thousands, except share information):

37

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For the years ended September 30, 2000, 2001 and 2002, exercisable stock
options of 4.4 million, 4.4 million and 5.6 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

Statement of Financial Accounting Standards (SFAS) No. 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 and February 2002, the Company entered into interest
rate swap contracts to manage specific interest rate risks. These interest rate
swap contracts were terminated prior to September 30, 2002. 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 Accounting Principles
Board ("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 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 $12.9 million. We adopted SFAS
No. 142 for our first fiscal quarter of 2002. The impairment charge upon
adoption was $283.3 million, and was equal to a substantial amount of our
recorded goodwill. This charge created a deferred tax asset for which the
Company has taken a full valuation allowance as the recoverability of such asset
was uncertain at the time of adoption. This adoption did not impact our free
cash flows, our operating income or compliance with our debt instruments.

38

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes 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.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Additionally,
companies must reclassify in all prior periods presented those items that do not
meet the criteria under the Statement. SFAS No. 145 is effective for all
financial statements issued on or after May 15, 2002. The Company adopted SFAS
No. 145 on July 1, 2002. During July and August 2002, the Company repurchased
$27.1 million of its 9 3/8% senior subordinated notes due February 1, 2009. In
connection with this sale, the Company fully amortized $0.7 million of offering
costs and $0.5 million in unamortized bond discounts and recognized a $1.0
million gain on extinguishment of debt. The gain is recorded in interest and
other expense, net as other income.

3. BUSINESS COMBINATIONS:

Purchases

Subsequent to the Initial Public Offering ("IPO") and through September 30,
2002, 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 ended September 30, 2000 and 2001
(in thousands):

No acquisitions were made during the year ended September 30, 2002.

Pro Forma Presentation

There was no significant difference between the unaudited pro forma results
of operations and the reported results of operations for the years ended
September 30, 2001 and 2002. The unaudited pro forma data presented

39

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

below reflect the results of operations of IES and the businesses acquired
during fiscal 2000 assuming the transactions were completed on October 1, 1999
(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, 1999, and are not necessarily
representative of the Company's results of operations for any future period.

Divestitures

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

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

Had the dispositions discussed above been completed on October 1, 2001, the
results of the Company would have excluded revenues of $22.3 million and income
from operations of $0.4 million.

40

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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):

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

41

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2002 are as follows (in
thousands):

2003........................................................ $ 570
2004........................................................ 352
2005........................................................ 125
2006........................................................ 27
2007........................................................ --
Thereafter.................................................. 247,885
--------
Total..................................................... $248,959
========

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
expenditures, acquisitions and other corporate purposes, that matures May 22,
2004 (the "Credit Facility").

42

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2002. As
of September 30, 2002, the Company had no borrowings outstanding under its
Credit Facility, letters of credit outstanding under its Credit Facility of
$18.7 million, $1.1 million of other borrowings and available borrowing capacity
under its Credit Facility of $131.3 million.

Senior Subordinated Notes

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

Interest Rate Swaps

The Company entered into an interest rate swap agreement in August 2001,
designated as a fair value hedge, in order to minimize the risks and cost
associated with its financing activities. The interest rate swap agreement had a
notional amount of $100.0 million and was established to manage the interest
rate risk of the senior subordinated note obligations. Under the swap agreement,
the Company paid the counterparty variable rate interest (3-month LIBOR plus
3.49%) and the counterparty paid the Company fixed rate interest of 9.375% on a
semiannual basis over the life of the instrument. Pursuant to SFAS No. 133, as
amended, such interest rate swap contract was reflected at fair value on the
Company's consolidated balance sheet and the related portion of fixed-rate debt
being hedged was reflected at an amount equal to the sum of its carrying value
plus an adjustment

43

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

representing the change in fair value of the debt obligation attributable to the
interest rate being hedged. The net effect of this accounting on the Company's
operating results is that interest expense on the portion of fixed-rate debt
being hedged was generally recorded based on variable interest rates. The
interest rate swap was considered to be perfectly effective because it qualified
for the "short-cut" method under SFAS No. 133 and therefore there was no net
change in fair value to be recognized in income. At September 30, 2001 the fair
value of this derivative was $3.2 million and was included in other noncurrent
assets. The Company terminated this contract in February 2002. The Company
received cash equal to the fair value of this derivative of $1.5 million, which
is being amortized over the remaining life of the bonds.

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

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, 2000, 2001 and 2002 was approximately
$7.5 million, $9.7 million and $10.0 million respectively. Future minimum lease
payments under these noncancelable operating leases with terms in excess of one
year are as follows (in thousands):

YEAR ENDED SEPTEMBER 30,
2003........................................................ $ 9,787
2004........................................................ 7,616
2005........................................................ 5,108
2006........................................................ 2,642
2007........................................................ 1,453
Thereafter.................................................. 2,284
-------
Total............................................. $28,890
=======

44

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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):

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

45

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

differences, representing deferred income tax assets and liabilities, result
principally from the following (in thousands):

At September 30, 2002, the Company had available approximately $26.1
million of net tax operating loss carry forwards for federal income tax
purposes. This carry forward, which may provide future tax benefits, begins to
expire in 2020. The Company also had available approximately $24.9 million of
net tax operating loss carry forwards for state income tax purposes which will
begin to expire in 2013.

In assessing the realizability of deferred tax assets at September 30,
2002, the Company considered whether it was more likely than not that some
portion or all of the deferred tax assets would not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. The Company considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon these considerations, the Company provided a
valuation allowance to reduce the carrying value of certain of its deferred tax
assets.

The Company has adopted positions that a taxing authority may view
differently. The Company believes its reserves of $21.2 million recorded in
other noncurrent liabilities are adequate in the event the positions are not
ultimately upheld.

46

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

During the year ended September 30, 2002, the Company aligned its
operations among two reportable segments: (1) commercial and industrial and (2)
residential. The commercial and industrial segment provides electrical and
communications contracting, design, installation, renovation, engineering and
upgrades and maintenance and replacement services in facilities such as office
buildings, high-rise apartments and condominiums, theaters, restaurants, hotels,
hospitals and critical-care facilities, school districts, manufacturing and
processing facilities, military installations, airports, refineries,
petrochemical and power plants, outside plant, network enterprise and switch
network customers. The residential segment consists of electrical and
communications contracting, installation, replacement and renovation services in
single family and low-rise multifamily housing units. Corporate includes
expenses associated with the Company's home office and regional infrastructure.

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

47

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Segment information for the years ended September 30, 2000, 2001 and 2002
are as follows (in thousands):

The Company's information for the years ended September 30, 2000 and 2001
has been restated for consistency with the current year presentation. The
Company does not have significant operations or long-lived assets in countries
outside of the United States.

48

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

1999 Incentive Compensation Plan

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

In 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 was
recognized as compensation expense over the related vesting periods. During the
year ended September 30, 2001, the Company amortized $0.6 million to expense in
connection with these awards. The award became fully vested and was fully
amortized during the year ended September 30, 2002.

49

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2012.

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

The tables below summarizes options outstanding and exercisable at
September 30, 2002:

Options granted during the years ended September 30, 2000, 2001 and 2002
had weighted average fair values per option of $8.10, $3.55 and $5.99,
respectively.

50

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. During the year ended
September 30, 2002, the Company issued 55,742 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 2002: expected dividend yield of 0.00%, expected
stock price volatility of 81.56%, weighted average risk free interest rate of
3.96% and an expected life of 0.5 years. The weighted average fair value per
share of these purchase rights granted in 2002 was approximately $1.54.

The 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):

The pro forma disclosure for the years ended September 30, 2000 and 2001
have been adjusted to reflect the impact of cancellations and forfeitures of
stock options issued prior to September 30, 2001. 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.

51

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2001 and
2002 were $0.2 million. 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, 2000, 2001 and 2002 were $4.2 million, $4.3 million and $4.2
million, 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 on the first day of the month subsequent
to completing sixty days of service and attaining age twenty-one. Participants
become vested in Company matching contributions following three years of
service.

Certain subsidiaries of the Company do not participate in the 401(k) Plan,
but instead provide various defined contribution savings plans for their
employees (the "Plans"). The Plans cover substantially all full-time employees
of such subsidiaries. Participants vest at varying rates ranging from full
vesting upon participation to those that provide for vesting to begin after
three years of service and are fully vested after eight years. Certain plans
provide for a deferral option that allows employees to elect to contribute a
portion of their pay into the plan and provide for a discretionary profit
sharing contribution by the individual subsidiary. Generally the subsidiaries
match a portion of the amount deferred by participating employees. Contributions
for the profit sharing portion of the Plans are generally at the discretion of
the individual subsidiary. The aggregate contributions by the Company to the
401(k) Plan and the Plans were $2.1 million, $3.4 million and $3.0 million for
the years ended September 30, 2000, 2001 and 2002, respectively.

13. COMMITMENTS AND CONTINGENCIES:

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

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, 2002, the Company had invested $1.8 million under its commitment
to EnerTech.

At September 30, 2002, the Company had notes receivable totaling
approximately $1.8 million from EPV, an affiliate.

52

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. SUBSEQUENT EVENT (UNAUDITED):

On October 8, 2002, the Company sold one of its subsidiaries for
approximately $1.3 million in cash and approximately 70,000 shares of common
stock.

53

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

Information concerning a change in accountants is included in the Company's
Form 8-K filed with the SEC on June 10, 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to the
sections entitled "Management" and Section 16(a) of the Securities Exchange Act
of 1934, and "Directors" in the Company's definitive Proxy Statement for its
2003 Annual Meeting of Stockholders (the "Proxy Statement") to be filed with the
Securities and Exchange Commission no later than January 28, 2003.

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report on Form 10-K, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. The
Company's principal executive officer and principal financial officer concluded,
based on this evaluation, that the Company's disclosure controls and procedures
are effective in alerting them timely to material information relating to the
Company required to be included in the Company's periodic SEC filings.

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

54

PART IV

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

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

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

(b) Exhibits.

3.1 Amended and Restated Certificate of Incorporation as
amended. (Incorporated by reference to 3.1 to the
Registration Statement on Form S-1 (File No. 333-38715) of
the Company)
3.2 Bylaws, as amended (Incorporated by reference to 3.2 to the
Registration Statement on Form S-4 (File No. 333-65160) of
the Company)
4.1 Specimen Common Stock Certificate. (Incorporated by
reference to 4.1 to the Registration Statement on Form S-1
(File No. 333-38715) of the Company)
4.2 Indenture, dated January 28, 1999, by and among Integrated
Electrical Services, Inc. and the subsidiaries named therein
and State Street Bank and Trust Company covering up to
$150,000,000 9 3/8% Senior Subordinated Notes due 2009.
(Incorporated by reference to Exhibit 4.2 to Post-Effective
Amendment No. 3 to the Registration Statement on Form S-4
(File No. 333-50031) of the Company)
4.3 Form of Integrated Electrical Services, Inc. 9 3/8% Senior
Subordinated Note due 2009 (Series A) and (Series B).
(Included in Exhibit A to Exhibit 4.2 to Post-Effective
Amendment No. 3 to the Registration Statement on Form S-4
(File No. 333-50031) of the Company)
4.4 Indenture, dated May 29, 2001, by and among Integrated
Electrical Services, Inc. and the subsidiaries named therein
and State Street Bank and Trust Company covering up to
$125,000,000 9 3/8% Senior Subordinated Notes due 2009.
(Incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-4 (File No. 333-65160) of the Company)
4.5 Form of Integrated Electrical Services, Inc. 9 3/8% Senior
Subordinated Note due 2009 (Series C) and (Series D).
(Included in Exhibit A to Exhibit 4.3 to Registration
Statement on Form S-4 (File No. 333-65160) of the Company)
10.1 Form of Employment Agreement between the Company and H.
Roddy Allen dated May 22, 1998 as amended March 11, 2002.
(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.
10.3 Integrated Electrical Services, Inc. 1997 Stock Plan, as
amended. (Incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 2001)
10.4 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.
(Incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended September 30,
2001)

55

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 JP Morgan Chase Bank, as
administrative agent. (Incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the
year ended September 30, 2001)
10.8 Integrated Electrical Services, Inc. 1999 Incentive
Compensation Plano. (Incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the
year ended September 30, 2000)
10.9 Amendment No. 3 dated February 4, 2002, to the Credit
Facility dated May 22, 2001, among the Company, as borrower,
the Financial Institutions named therein, as banks, Credit
Lyonnais and the Bank of Nova Scotia as syndication agents,
Toronto Dominion (Texas), Inc. as documentation agent and
the JP Morgan Chase Bank, as administrative agent.
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended December
31, 2001)
10.10 Amendment No. 4 dated July 12, 2002, to the Credit Agreement
dated May 22, 2001, among the Company, as borrower, the
Financial Institutions named therein, as banks, Credit
Lyonnais and the Bank of Nova Scotia as syndication agents,
Toronto Dominion (Texas), Inc. as documentation agent and
the JP Morgan Chase Bank, as administrative agent.
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2002)
*12 Ratio of Earnings to Fixed Charges.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Ernst & Young LLP
*24 Powers of Attorney
*99.1 Certification of Herbert R. Allen, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section
906 of The Sarbanes-Oxley Act of 2002.
*99.2 Certification of William W. Reynolds, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted to
Section 906 of The Sarbanes-Oxley Act of 2002.

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

* Filed herewith.

(c) Reports on Form 8-K.

On July 31, 2002 the Company filed a Current Report on Form 8-K that
includes oaths of the Chief Executive Officer and the Chief Financial Officer.

On August 21, 2002 the Company filed a Current Report on Form 8-K in
connection with its press release dated August 20, 2002.

56

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on November 25, 2002.

INTEGRATED ELECTRICAL SERVICES, INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on November 25, 2002.

57

CERTIFICATION

I, Herbert R. Allen, certify that:

1. I have reviewed this annual report on Form 10-K of Integrated
Electrical Services, Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: November 25, 2002

/s/ HERBERT R. ALLEN
--------------------------------------
Herbert R. Allen
Chief Executive Officer

58

CERTIFICATION

I, William W. Reynolds, certify that:

1. I have reviewed this annual report on Form 10-K of Integrated
Electrical Services, Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: November 25, 2002

/s/ WILLIAM W. REYNOLDS
--------------------------------------
William W. Reynolds
Chief Financial Officer

59

EXHIBIT INDEX

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

* Filed herewith.