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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-5423

Dycom Industries, Inc.

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     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 þ         No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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.    þ

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes þ         No o

     The aggregate market value of the common stock, par value $0.33 1/3 per share, held by non-affiliates of the registrant, computed by reference to the closing price of such stock on January 24, 2004 was $1,360,033,001.

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s Proxy Statement relating to the 2004 Annual Meeting of Shareholders, to be held on November 23, 2004 are incorporated by reference in Parts II and III of this Annual Report on Form 10-K.

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PART I

Overview

      We are a leading provider of specialty contracting services, including engineering, construction, installation, and maintenance services to telecommunications providers throughout the United States. We provide a comprehensive range of telecommunications infrastructure services including the engineering, placement and maintenance of aerial, underground, and buried fiber-optic, coaxial and copper cable systems owned by local and long distance communications carriers and cable television multiple system operators. Additionally, we provide similar services related to the installation of integrated voice, data, and video local and wide area networks within buildings. We also provide underground locating services to various utilities and other construction and maintenance services to electric utilities and others. For the fiscal year ended July 31, 2004, specialty contracting services provided to the telecommunications industry, underground utility locating, and electrical and other utilities contributed approximately 78.0%, 18.1%, and 3.9%, respectively, to our total contract revenues.

      Through our wholly-owned subsidiaries, we have established relationships with many leading telephone companies, cable television multiple system operators and electric utilities. Our major customers include Comcast Cable Corporation (“Comcast”), BellSouth Corporation (“BellSouth”), Sprint Corporation (“Sprint”), Qwest Communications, Inc. (“Qwest”), Adelphia Communications Corporation (“Adelphia”), Verizon Communications Inc. (“Verizon”), Charter Communications, Inc. (“Charter”), DIRECTV, Inc. (“DIRECTV”) and Alltel Corporation (“Alltel”). During fiscal 2004, approximately 87.0% of our total contract revenues came from multi-year master service agreements and other long-term agreements with large telecommunications providers and electric utilities.

Specialty Contracting Services

      Engineering. We provide outside plant engineers and drafters to telecommunication providers and design aerial, underground and buried fiber optic and copper cable systems that extend from the telephone central office to the consumer’s home or business. The engineering services we provide to telecommunication providers include: the design of service area concept boxes, terminals, buried and aerial drops, transmission and central office equipment design and the proper administration of feeder and distribution cable pairs. For competitive access providers, we design building entrance laterals, fiber rings and conduit systems. We obtain rights of way and permits in support of engineering activities, and provide construction management and inspection personnel in conjunction with engineering services or on a stand-alone basis. Also, for cable television multiple system operators, we perform make ready studies, strand mapping, field walk out, computer-aided radio frequency design and drafting, and fiber cable routing and design.

      Construction, Installation, and Maintenance. We place and splice cable, excavate trenches in which to place the cable, place related structures such as poles, anchors, conduits, manholes, cabinets and closures, place drop lines from the main distribution lines to the customer’s home or business, and monitor and remove these facilities. In addition, we install and maintain transmission and central office equipment.

      Premise Wiring. We provide premise wiring services to a variety of large corporations and certain governmental agencies. These services are predominantly limited to the installation, repair and maintenance of telecommunications infrastructure within improved structures. Projects include the placement and removal of various types of cable within buildings and individual offices. These services generally include the development of communication networks within a company or government agency and relate primarily to the establishment and maintenance of computer operations, telephone systems, internet access and communications monitoring systems established for purposes of monitoring environmental controls or security procedures.

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      We provide underground utility locating services to a variety of utility companies. Under various state laws, excavators, prior to excavating, are required to request from utility companies the location of their underground facilities such as telephone, cable television, power and gas lines to help prevent utility network outages and to safeguard the general public from damage to the underground utilities. Utilities are required to respond to these requests from excavators to mark their underground and buried facilities within specified time periods.

      We perform construction and maintenance services for electric utilities and others. This construction is performed primarily as a stand-alone service and includes installing and maintaining electrical transmission and distribution lines, setting utility poles and stringing electrical lines. In addition, we periodically provide these services for the combined projects of telecommunication providers and utility companies, primarily in joint trenching situations, whereby service is being extended to new housing developments. The work performed may involve high voltage splicing. We also repair and replace lines that are damaged or destroyed as a result of weather conditions. Services for gas companies include maintenance and installation of underground natural gas transmission and distribution systems.

      For the 2004, 2003 and 2002 fiscal years, the percentages of our total contract revenues derived from specialty contracting services related to the telecommunications industry, underground utility locating, and electrical utilities and other construction and maintenance were as set forth below:

Customer Relationships

      Our current customers include telephone companies such as BellSouth, Sprint, Qwest, Verizon and Alltel Corporation. We also currently provide telecommunications engineering, construction and maintenance services to a number of cable television multiple system operators and a direct satellite operator including Comcast, Adelphia, Charter, DIRECTV, Cablevision, Insight Communications, MediaCom, and Time Warner. Premise wiring services are provided to various corporations and state and local governments.

      Our customer base is highly concentrated with our top five customers in fiscal years 2004, 2003, and 2002 accounting for approximately 64%, 64%, and 59%, respectively, of our total revenues. During fiscal 2004, approximately 28.5% of our total revenues were derived from Comcast, 14.0% from BellSouth, and 10.1% from Sprint. Comcast and AT&T Broadband revenues have been combined for periods prior to Comcast’s November 2002 acquisition of AT&T Broadband. We believe that a substantial portion of our total revenues and operating income will continue to be derived from a concentrated group of customers.

      A significant amount of our business is performed under master service agreements. These agreements are generally exclusive requirement contracts, with certain exceptions, including the customer’s option to perform the services with its own employees. The agreements are typically three to five years in duration, although the terms, in some cases, permit the customer to terminate the agreement upon 90 days prior written notice. Each agreement contemplates hundreds of individual construction and maintenance projects valued generally at less than $10,000 each. Other jobs are bid by us on a nonrecurring basis. Although historically

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Backlog

      Our backlog is comprised of the uncompleted portion of services to be performed under job-specific contracts and the estimated value of future services that we expect to provide under long-term requirements contracts. Our backlog at July 31, 2004 and July 26, 2003 was $1.2 billion and $890.9 million, respectively. We expect to complete approximately 55% of the July 31, 2004 backlog during fiscal year 2005. In many instances our customers are not contractually committed to specific volumes of services under a contract. However, the customer is obligated to obtain these services from us if they are not performed by the customer’s employees and we are committed to perform these services if requested by the customer. Many of these contracts are multi-year agreements, and we include in our backlog the amount of services projected to be performed over the term of the contract based on our historical relationships with customers and our experience in procurements of this nature. There can be no assurance, however, as to the customer’s requirements during a particular period or that such estimates at any point in time are accurate.

Safety and Risk Management

      We are committed to ensuring that our employees perform their work in the safest possible manner. We regularly communicate with our employees to promote safety and to instill safe work habits. Our subsidiary safety directors review all accidents and claims for our operations, examine trends and implement changes in procedures to address safety issues. Claims arising in our business are generally workers’ compensation, various general liability and damage claims, and vehicle liabilities including personal injury and property damage. For losses occurring during fiscal year 2004, excluding our subsidiary UtiliQuest Holdings, Corp.(“UtiliQuest”), we have retained the risk on a per occurrence basis for worker’s compensation, in states where we are allowed to retain risk, and for automobile liability to $500,000 and for general liability to $250,000. For fiscal year 2004, we had aggregate stop loss coverage for the above exposures at the stated retention of approximately $15.8 million. In addition, we have umbrella liability coverage to a policy limit of $75 million. Within the umbrella coverage, we have retained the risk of loss for automobile and general liability between $2.0 and $5.0 million, on a per occurrence basis, with an aggregate stop loss for this layer of $10.0 million for fiscal year 2004.

      For UtiliQuest, we have retained the risk of loss on a per occurrence basis for general liability and damage claims, workers’ compensation and automobile liability to $250,000 for losses occurring between April 4, 2002 and April 3, 2004. In addition, for UtiliQuest, we have umbrella liability coverage to a policy limit of $50 million for the policy period April 4, 2002 to April 3, 2003 and $35 million for the policy period April 4, 2003 to April 3, 2004. From April 4, 2004 thru July 31, 2004, we retained the risk on a per occurrence basis for losses at UtiliQuest at the levels described in the preceding paragraph.

      For losses occurring in fiscal year 2005, we have retained the risk on a per occurrence basis for workers compensation, in states where we are allowed to retain risk, and for automobile liability to $1,000,000 and for general liability excluding UtiliQuest to $250,000. For UtiliQuest’s general liability and locate damage claims, we have retained the risk to $2,000,000. The locate damages represent claims resulting from damages to the underground utility where we provided utility locating services. The Company’s customer or their representative reports damages, which are investigated and assessed by the Company. The potential claim is estimated and developed by the Company based on facts, circumstances and historical evidence. For fiscal year 2005, we have an aggregate stop loss coverage for these exposures at a stated retention of approximately $30.8 million. In addition, we have umbrella liability coverage to a policy limit of $75.0 million. Within the umbrella coverage, we have retained the risk of loss for automobile liability and general liability between $2.0 and $5.0 million, on a per occurrence basis, with an aggregate stop loss for this layer of $10.0 million.

      We carefully monitor claims and actively participate in claims estimates and adjustments. The estimated costs of self-insured claims, which include estimates for incurred but not reported claims, are accrued as

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Competition

      The specialty contracting services industry in which we operate is highly competitive. We compete with other independent contractors in the markets in which we operate, including several that are large domestic companies that may have financial, technical, and marketing resources that exceed our own. In addition, there are relatively few barriers to entry into the markets in which we operate and, as a result, any organization that has adequate financial resources and access to technical expertise may become a competitor.

      A significant portion of our revenue is currently derived from master service agreements and price is often an important factor in the award of such agreements. Accordingly, we could be underbid by our competitors in an effort to procure such business. There can be no assurance that our competitors will not develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, or that we will be able to maintain or enhance our competitive position. We may also face competition from the in-house service organizations of our existing or prospective customers, particularly telecommunications providers that employ personnel who perform some of the same types of services as those provided by us. Although a significant portion of these services is currently outsourced, there can be no assurance that our existing or prospective customers will continue to outsource specialty contracting services in the future.

      We believe that the principal competitive factors for telecommunications engineering, construction and maintenance services, electrical contracting services, and utility locating services include technical expertise, price, quality of service, availability of skilled technical personnel, worker and general public safety, geographic presence, breadth of service offerings, adherence to industry standards, and financial stability. We believe that we compete favorably with our competitors on the basis of these factors.

Employees

      As of July 31, 2004, we employed 7,769 persons. The number of our employees varies according to the level of our work in progress. We maintain a nucleus of technical and managerial personnel from which to draw to supervise all projects. Additional employees are added as needed to complete specific projects.

Materials

      Generally, our customers supply most or all of the materials required for a particular contract and we provide the personnel, tools, and equipment to perform the installation services. However, with respect to a portion of our contracts, we may supply part or all of the materials required. In these instances, we are not dependent upon any one source for the materials that we customarily utilize to complete the job. We are not presently experiencing, nor do we anticipate experiencing, any difficulties in procuring an adequate supply of materials.

Available Information

      We maintain a website at www.dycomind.com where investors and other interested parties may access, free of charge, a copy of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as is reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

      Alternatively, you may access these reports at the Securities and Exchange Commission’s website at www.sec.gov.

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      We lease our executive offices located in Palm Beach Gardens, Florida. Our subsidiaries operate from owned or leased administrative offices, district field offices, equipment yards, shop facilities, and temporary storage locations. We own facilities in Phoenix, Arizona; Durham, North Carolina; Knoxville, Tennessee; Dickson, Tennessee; Sturgis, Kentucky; Pinellas Park, Florida; Broussard, Louisiana; West Chester, Pennsylvania; Epsom, New Hampshire; Costa Mesa, California; Albuquerque, New Mexico; Woodinville, Washington; Wood River, Illinois; Charlotte, North Carolina; Rocky Mount, North Carolina; Statesville, North Carolina; Chamblee, Georgia; Gainesville, Georgia; Marietta, Georgia; and Greensboro, North Carolina. We also lease, subject to long-term noncancelable leases, facilities in Lithonia, Georgia; Issaquah, Washington; Greensboro, North Carolina; Rocky Mount, North Carolina; Nicholasville, Kentucky; Coburg, Oregon; Pleasant Grove, Utah; Greenwood, South Carolina; Vansant, Virginia; Lawrenceville, Georgia; Springfield, Vermont; Englewood, Colorado; Sturgis, Kentucky; Colorado Springs, Colorado; West Chester, Pennsylvania; Hollidaysburg, Pennsylvania; Atlanta, Georgia; Dalton, Georgia; Canton, Georgia; Flagstaff, Arizona; Prescott, Arizona; Olathe, Kansas; Phoenix, Arizona; Littleton, Colorado; Fort Myers, Florida; and Orlando, Florida. We also lease and own other smaller properties as necessary to enable us to effectively perform our obligations under master service agreements and other specific contracts. We believe that our facilities are adequate for our current operations.

      The federal employment tax returns for two of our subsidiaries have been audited by the Internal Revenue Service (“IRS”). As a result of the audit, we received an original proposed assessment from the IRS in March 2004. At issue, according to the examination reports, are the taxpayers’ characterization of certain employee reimbursements for the years 2000 and 2001. We reached an agreed assessment with the IRS regarding one of the two subsidiaries. The amount of the agreed assessment, which was paid in the first quarter of fiscal 2005, will be recorded against the reserve for this matter we established during fiscal 2004. Subsequent to this agreement, $7.4 million of the proposed assessment is still at issue. We continue to disagree with the amount of the proposed assessment with respect to the other subsidiary and are pursuing an administrative appeal for this matter which we intend to vigorously defend. We believe we have a number of legal defenses available that may substantially reduce the proposed assessment and have therefore not recorded any significant liability with respect to the remaining assessment.

      In addition to the above, in the normal course of business, certain of our subsidiaries have pending claims and legal proceedings. We have retained certain self-insurance risks with respect to losses for third-party liability, workers’ compensation, property damage, group health insurance provided to employees and other types of insurance. In such cases, the effect on our financial statements is generally limited to the amount of our insurance deductible or self-insurance retention. It is the opinion of our management, based on information available at this time, that none of these current claims or proceedings will have a material adverse effect on our consolidated financial statements.

      In the normal course of business, we enter into employment agreements with certain members of our executive management. It is the opinion of our management, based on information available at this time, that these agreements will not have a material adverse effect on our consolidated financial statements.

      During the fourth quarter of the year covered by this report, no matters were submitted to a vote of our security holders whether through the solicitation of proxies or otherwise.

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PART II

      Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “DY”. The following table shows the range of the high and low closing sales prices for each quarter within the last two fiscal years as reported on the NYSE.

      As of October 5, 2004, there were approximately 583 holders of record of our $0.33 1/3 par value per share common stock. The common stock closed at a high of $28.77 and a low of $24.28 during the period July 31, 2004 through October 5, 2004.

      Since 1982 we have paid no cash dividends. Our Board of Directors continues to evaluate the dividend policy based on our financial condition including profitability, cash flow, capital requirements, and the outlook of the business. The Company currently intends to retain any earnings for use in its business and for investment in acquisitions and consequently does not anticipate paying any cash dividends on its common stock in the foreseeable future.

      Information concerning our equity compensation plans is hereby incorporated by reference to our definitive proxy statement to be filed with the Commission pursuant to Regulation 14A and is set forth in Note 14, Stock Option Plans, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

      The following table sets forth certain selected financial data of us for the years ended July 31, 2004, July 26, 2003, July 27, 2002, July 28, 2001 and July 29, 2000. We acquired Niels Fugal Sons Company in March 2000. This acquisition was accounted for as a pooling of interests and, accordingly, the consolidated financial statements include the accounts of Niels Fugal Sons Company for all periods presented. All other acquisitions, referred to in the footnotes to this table, were accounted for under the purchase method of accounting and amounts include the results and balances of the acquired company from its acquisition date. The table has been adjusted to reflect the 3-for-2 stock split effected in the form of a stock dividend paid on

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(1)	Amounts include the results and balances of UtiliQuest Holdings, Corp. (“UtiliQuest”) (acquired December 2003) and the results and balances of First South Utility Construction, Inc. (“First South”) (acquired November 2003) from their acquisition dates until July 31, 2004.
(2)	Amounts include the results and balances of Arguss Communications, Inc. (“Arguss”) (acquired February 2002) from its acquisition date until July 27, 2002.
(3)	Amounts include the results and balances of Cable Connectors, Inc. (acquired October 2000), Schaumberg Enterprises, Inc. (acquired December 2000), Point to Point Communications, Inc. (acquired December 2000), Stevens Communications, Inc. (acquired January 2001), and Nichols Holding, Inc. (acquired April 2001) from their respective acquisition dates until July 28, 2001.
(4)	Amounts include the results and balances of Lamberts’ Cable Splicing Company (acquired August 1999), C-2 Utility Contractors, Inc. (acquired January 2000), Artoff Construction Co., Inc. (acquired January 2000), K.H. Smith Communications, Inc. (acquired February 2000), and Selzee Solutions, Inc. (acquired July 2000) from their respective acquisition dates until July 29, 2000.

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Overview

      We are a leading provider of specialty contracting services. These services are provided throughout the United States and include engineering, construction, installation and maintenance services to telecommunications providers, underground locating services to various utilities, and electrical and other construction and maintenance services to electric utilities and others. Due to the nature of the services we provide, our revenues may fluctuate as a result of changes in the capital expenditure and maintenance budgets of our customers, as well as the general level of construction activity. Factors impacting the capital expenditure and maintenance budgets of our customers include consumer demands on telecom providers, actions of the Federal Communications Commission and general economic conditions. For the fiscal year ended July 31, 2004, specialty contracting services related to the telecommunications industry, underground utility locating and electrical and other utilities contributed approximately 78.0%, 18.1% and 3.9%, respectively, to our total contract revenues.

      In December 2003, we acquired UtiliQuest for approximately $116.1 million. In fiscal 2004, we borrowed $85.0 million under our Credit Agreement in connection with the acquisition of UtiliQuest. We repaid this debt during the third quarter of fiscal 2004. UtiliQuest is a provider of utility locating services. In November 2003, we acquired substantially all of the assets of First South and assumed certain liabilities associated with these assets for an aggregate purchase price of approximately $55.7 million, including the issuance of approximately 175,840 shares of our common stock. In conjunction with the acquisition, we also paid approximately $9.0 million for excess working capital consisting primarily of accounts receivable and unbilled revenue. We paid the purchase price of First South from cash on hand. First South provides specialty contracting services to telecommunications customers.

      In February 2002, we acquired all of the outstanding stock of Arguss for approximately 4.9 million shares of our common stock for an aggregate purchase price of approximately $85.4 million before various transaction costs. All of these acquisitions were accounted for using the purchase method of accounting and the Company’s results include the results of these entities from their respective acquisition dates.

      As part of our growth strategy, we may acquire companies that expand, complement, or diversify our business. We regularly review various strategic opportunities and periodically engage in discussions regarding such possible acquisitions. Our ability to sustain growth and maintain our competitive position may be affected by our ability to achieve our acquisition strategy and successfully integrate any businesses acquired.

      We provide a significant portion of our services pursuant to multi-year master service agreements. Master service agreements generally have the following characteristics: contract periods of one or more years, exclusivity and customer specified service requirements. In addition, master service agreements typically provide that we will furnish a specified unit of service for a specified unit price (i.e. fiber optic cable will be installed underground for a specified rate of dollars per foot). In some cases, a customer may terminate these agreements for convenience with at least 90 days prior written notice. Although historically master service agreements have been awarded through a competitive bidding process, recent trends have been toward securing or extending such contracts on negotiated terms. We are currently a party to approximately 230 master service agreements, including approximately 157 of these contracts from our UtiliQuest acquisition.

      The remainder of our services are provided pursuant to contracts for particular jobs. Long-term contracts relate to specific projects with terms in excess of one year from the contract date. Short-term contracts are generally from three to four months in duration, depending upon the size of the project. A portion of our contracts include retainage provisions under which 5% to 10% of the contract invoicing is withheld subject to project completion and acceptance by the customer.

      Contract revenues from multi-year master service agreements represented 49.9% and 44.3% of total contract revenues in fiscal 2004 and 2003, respectively, and contract revenues from long-term contracts, including multi-year master service agreements, represented 87.0% and 81.4% of total contract revenues, respectively. The increase is primarily due to agreements in place at UtiliQuest which was acquired in December 2003.

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      We derive a significant amount of our revenue from telecommunications companies. During fiscal 2002 and into fiscal 2003, certain segments of the telecommunications industry suffered a severe downturn that has resulted in certain of our customers experiencing financial difficulties. Several of our customers filed for bankruptcy protection, including Adelphia and WorldCom, Inc. (“WorldCom”). At July 26, 2003, we had pre-petition outstanding receivables from Adelphia of approximately $21.6 million after a write-down of $19.1 million. In fiscal 2004, we sold the Adelphia accounts receivables and recorded an $11.4 million gain on the sale. During fiscal 2003, management determined that the likelihood of payment from WorldCom was low and we fully wrote off the receivable amount of $2.1 million. In fiscal 2004, we had a recovery of approximately $0.9 million on the WorldCom receivables.

      The downturn in the telecommunications industry in fiscal 2002 and 2003 adversely affected capital expenditures for infrastructure projects even among customers that were not experiencing financial difficulties. Generally, capital expenditures by telecommunications customers increased in fiscal 2004, including one of our significant customers that was engaged in a major upgrade project. Although the Company does not believe that any of its significant customers are experiencing significant financial difficulty as of July 31, 2004, additional bankruptcies of companies in the telecommunications sector could adversely impact our liquidity, results of operations and financial condition.

      A significant portion of our revenue comes from several large customers. The following table reflects the percentage of total contract revenue from customers contributing at least 2.5% of our total contract revenue for either fiscal 2004 or 2003:

      Cost of earned revenues includes all direct costs of providing services under our contracts, including all costs of construction personnel, subcontractor costs, all costs associated with operation of equipment (excluding depreciation), and insurance. Generally the customer provides the materials that are to be used for their job. To the extent the customer does not supply their own materials, these costs are also included as cost of earned revenues. Because we retain the risk for automobile, general liability including damage claims, worker’s compensation, and employee group health claims subject to certain limits, a change in experience or actuarial assumptions could materially affect results of operations in a particular period.

      General and administrative costs include all our costs at the parent company level, as well as subsidiary management personnel and administrative overhead. Our management personnel, including subsidiary management, perform substantially all sales and marketing functions as part of their management responsibilities and, accordingly, we have not incurred material selling expenses.

Outlook

      The statements in this section are based on our current expectations. These statements are forward looking, and actual results may differ materially. Please refer to “Special Note Concerning Forward-Looking Statements” included elsewhere in this Form 10-K for more information on what may cause our actual results to differ.

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      We use a fiscal year ending on the Saturday closest to July 31. Fiscal 2004 consisted of 53 weeks while fiscal 2003 and 2002 consisted of 52 weeks. Fiscal 2005 will consist of 52 weeks.

      We are subject to market cycles for the specialty contracting services we provide that can affect our results of operations. We continue to focus on the elements of our business that we can control, including projects selected for bid, close monitoring of costs, safety performance, active claims management and prudent maintenance of and targeted capital expenditures for our fleet of capital equipment. Although other factors may impact us, including some we do not foresee, we believe the market trends and opportunities during 2005 and beyond, as described below, will have a more significant impact on our business. The impact of these and other trends are also discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

      During fiscal 2005, we believe a growing overall economy and increased telephone company expenditures will provide us with increased market opportunities. However, we believe there will be a decline in spending by Comcast, which contributed 28.5% of our revenue during fiscal 2004, as it substantially completes an upgrade of its broadband network.

      During fiscal 2004, we began to perform work related to Fiber to the Premises (“FTTP”) initiatives of a telephone company. This activity is the next phase for the telecom providers expanding fiber optic deployment further into their networks and we believe it will result in increased capital spending by our customers. We have been an active supplier of services to telephone companies and we believe the strength of our relationships with our customers will provide increased fiber related opportunities in the market.

      In part due to our expectations of the FTTP initiatives, we expect our capital expenditures, net of disposals, to range from $35 million to $40 million for fiscal 2005, which could vary depending on the expected timing of contract performance, overall economic growth, customer demand for our services and the replacement cycle we select for our equipment. We intend to fund these expenditures from operating cash flows, availability under our Credit Agreement and existing cash on hand.

      On September 21, 2004, we acquired certain assets and assumed certain liabilities of RJE Telecom, Inc. (“RJE”) for approximately $8.6 million in cash, subject to a working capital adjustment. RJE provides specialty contracting services primarily to telephone companies. The acquisition will be accounted for under the purchase method of accounting. We expect that the purchase price will be allocated primarily to the tangible working capital assets and approximately $1.0 million to intangible assets.

Critical Accounting Policies and Estimates

      The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, bad debts, self-insured claims liability, income taxes, intangible assets, contingencies and litigation. We base our estimates on current information, historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. We cannot assure you that actual results will not differ from those estimates.

      We have identified the accounting policies below as critical to the accounting for our business operations and the understanding of our results of operations because they involve more significant judgments and estimates used in the preparation of our consolidated financial statements. The impact of these policies on our operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. We have discussed the development, selection and application of our critical accounting policies with the Audit

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      Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also critical to understanding our consolidated financial statements. The notes to our consolidated financial statements contain additional information related to our accounting policies and should be read in conjunction with this discussion.

      Revenue Recognition. We recognize revenue using the units of delivery or cost-to-cost measures of the percentage of completion method of accounting. Revenues from services provided to customers are reported as earned and are recognized when services are performed. The majority of our contracts are unit based. Revenue on these contracts is recognized as the unit is completed. Revenue on non-unit based contracts is recognized based primarily on the ratio of contract costs incurred to date to total estimated contract costs. Application of the percentage of completion method of accounting requires the use of estimates of costs to be incurred for the performance of the contract. 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 all costs associated with operation of equipment (excluding depreciation). The cost estimation process is based upon the professional knowledge and experience of the company’s engineers, project managers, and financial professionals. Factors that are considered in estimating the work to be completed and ultimate contract recovery include the availability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance and the recoverability of any claims. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income and their effects are recognized in the period in which the revisions are determined. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is accrued.

      “Costs and estimated earnings in excess of billings”, classified as a current asset, primarily relates to revenues for completed but unbilled units under unit based contracts, as well as unbilled revenues recognized under the percentage-of-completion method for non-unit based contracts. For those contracts in which billings exceed contract revenues recognized to date, such excesses are classified as a current liability in the caption “billings in excess of costs and estimated earnings.”

      Estimation of the Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We record an increase in the allowance for doubtful accounts when it is probable that the receivable has been impaired at the date of the financial statements and the loss can be reasonably estimated. Any increase in the allowance account has a corresponding negative effect on our results of operations. Management analyzes the collectibility of accounts receivable balances each period. This review considers the aging of account balances, historical bad debt experience, changes in customer creditworthiness, current economic trends, customer payment activity and any other relevant factors. Should any of these factors change, the estimate made by management may also change, which could affect the level of our future provision for doubtful accounts.

      As of July 31, 2004, we had accounts receivables of approximately $5.8 million, net of a reserve for estimated uncollectible amounts, from a customer that is currently in Chapter 11 bankruptcy proceedings. We have perfected liens with respect to a substantial majority of the outstanding balance and we have engaged legal counsel to handle our claim against the customer in the bankruptcy proceedings. We do not believe that any of our significant customers are experiencing significant financial difficulty as of July 31, 2004.

      Self-Insured Claims Liability. We retain the risk of loss, up to certain limits, for automobile, general liability and damage claims, and workers’ compensation claims. A liability for unpaid claims and the associated claim expenses, including incurred but not reported losses, is actuarially determined and reflected in the consolidated financial statements as an accrued liability. Loss reserves are undiscounted. Factors affecting the determination of amounts to be accrued for self-insured claims include, but are not limited to, the expected cost for existing and anticipated claims, frequency, or payment patterns resulting from new types of claims, the hazard level of our operations, the overall level of medical cost inflation, changes in the medical

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      In addition, we retain the risk, up to certain limits, under a self-insured employee health plan. We review quarterly, the paid claims history of our employees and analyze our accrued liability for claims, including claims incurred but not yet paid. Factors affecting the determination of amounts to be accrued under the employee health plan include, but are not limited to, frequency of use, changes in medical costs, changes in the medical conditions of claimants, levels of employee contributions, unfavorable jury decisions, legislative changes and court interpretations.

      For losses occurring during fiscal year 2004, excluding UtiliQuest, we have retained the risk on a per occurrence basis for worker’s compensation, in states where we are allowed to retain risk, and automobile liability to $500,000 and for general liability to $250,000. For fiscal year 2004, we had aggregate stop loss coverage for the above exposures at the stated retention of approximately $15.8 million. In addition, we have umbrella liability coverage to a policy limit for each year of $75 million. Within the umbrella coverage, we have retained the risk of loss for automobile and general liability and damage claims between $2.0 and $5.0 million, on a per occurrence basis, with an aggregate stop loss for this layer of $10.0 million for fiscal year 2004.

      For UtiliQuest, we have retained the risk of loss on a per occurrence basis for general liability and damage claims, workers’ compensation and automobile liability to $250,000 for losses occurring between April 4, 2002 and April 3, 2004. In addition, for UtiliQuest, we have umbrella liability coverage to a policy limit of $50 million for the policy period April 4, 2002 to April 3, 2003 and $35 million for the policy period April 4, 2003 to April 3, 2004. From April 4, 2004 to July 31, 2004, we retained the risk on a per occurrence basis for losses at UtiliQuest at the levels described in the preceding paragraph. In addition, the locate damages included in general liability represent claims resulting from damages to the underground utility where we provided utility locating services. The Company’s customer or their representative reports damages, which are investigated and assessed by the Company. The potential claim is estimated and developed by the Company based on facts, circumstances and historical evidence.

      For losses occurring in fiscal year 2005, we have retained the risk on a per occurrence basis for workers compensation, in states where we are allowed to retain risk, and for automobile liability to $1,000,000 and for general liability excluding UtiliQuest to $250,000. For UtiliQuest’s general liability and damage claims, we have retained the risk to $2,000,000. For fiscal year 2005, we have an aggregate stop loss coverage for these exposures at a stated retention of approximately $30.8 million. In addition, we have umbrella liability coverage to a policy limit of $75.0 million. Within the umbrella coverage, we have retained the risk of loss for automobile liability and general liability and damage claims between $2.0 and $5.0 million, on a per occurrence basis, with an aggregate stop loss for this layer of $10.0 million.

      For losses related to our employee health plan occurring during fiscal years 2004 and 2005, we have retained the risk, on an annual basis, of $200,000 per participant. For fiscal year 2004 and 2005, excluding UtiliQuest, we have aggregate stop loss coverage for this exposure at the stated retention of approximately $25.3 and $23.2 million, respectively. For losses related to the UtiliQuest health plan, there is no aggregate stop loss coverage.

      The method of calculating the estimated accrued liability for self-insured claims is subject to inherent uncertainty. If actual results significantly differ from our estimates used to calculate the liability, our financial condition and results of operations could be materially impacted.

      Valuation of Goodwill and Intangible Assets. As of July 31, 2004, we had $224.1 million of goodwill, $4.7 million of indefinite lived intangible assets and $30.5 of finite lived intangible assets. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, we conduct, on at least an annual basis, a review of our reporting units to determine whether their carrying value exceeds their fair market value. Should this be the case, the value of our goodwill may be impaired and written down. Indefinite lived intangible assets are also tested for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that the asset might be impaired. If the fair value of the intangible asset is less than the

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      We use judgment in assessing goodwill and intangible assets for impairment. When necessary, we engage third party specialists to assist us with our valuations. The valuations employ a combination of present value techniques to measure fair value, corroborated by comparisons to estimated market multiples. These valuations are based on a discount rate determined by our management to be consistent with industry discount rates and the risks inherent in our current business model. Impairment losses, if any, are reflected in operating income or loss in the consolidated statements of operations.

      Accounting for Income Taxes. We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Developing our provision for income taxes requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. We have not recorded any valuation allowances as of July 31, 2004 because management believes that future taxable income will, more likely than not, be sufficient to realize the benefits of those assets as the temporary differences in basis reverse over time. Our judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has provided adequately for its income tax liabilities in its consolidated financial statements, adverse determinations by taxing authorities could have a material adverse effect on our consolidated financial condition and results of operations.

      Contingencies and Litigation. In the ordinary course of our business we are involved in certain legal proceedings. We estimate the range of liability related to pending litigation where the amount and range of loss can be estimated. Where there is a range of loss, we record the minimum estimated liability related to those claims in accordance with SFAS No. 5 “Accounting for Contingencies”. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. Revisions of our estimates of the potential liability could materially impact our results of operations. If the final outcome of such litigation and contingencies differs adversely from that currently expected, it would result in a charge to earnings when determined.

      The federal employment tax returns for two of our subsidiaries have been audited by the Internal Revenue Service (“IRS”). As a result of the audit, we received an original proposed assessment from the IRS in March 2004. At issue, according to the examination reports, are the taxpayers’ characterization of certain employee reimbursements for the years 2000 and 2001. We reached an agreed assessment with the IRS regarding one of the two subsidiaries. The amount of the agreed assessment, which was paid in the first quarter of fiscal 2005, will be recorded against the reserve for this matter we established during fiscal 2004. Subsequent to this agreement, $7.4 million of the proposed assessment is still at issue. We continue to disagree with the amount of the proposed assessment with respect to the other subsidiary and are pursuing an administrative appeal for this matter which we intend to vigorously defend. We believe we have a number of legal defenses available that may substantially reduce the proposed assessment and have therefore not recorded any significant liability with respect to the remaining assessment.

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Results of Operations

      The following table sets forth, as a percentage of contract revenues earned, certain items in our consolidated statements of operations for the periods indicated: