UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended November 30, 2008

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 001-15461

MATRIX SERVICE COMPANY

(Exact name of registrant as specified in its charter)

DELAWARE	73-1352174
(State of incorporation)	(I.R.S. Employer Identification No.)

5100 East Skelly Drive, Suite 700, Tulsa, Oklahoma 74135

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (918) 838-8822

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

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

As of January 7, 2009 there were 27,888,217 shares of the Company’s common stock, $0.01 par value per share, issued and 26,131,982 shares outstanding.

TABLE OF CONTENTS

		PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements (Unaudited)
	Consolidated Statements of Income for the Three and Six Months Ended November 30, 2008 and 2007	1
	Consolidated Balance Sheets as of November 30, 2008 and May 31, 2008	2
	Consolidated Statements of Cash Flows for the Six Months Ended November 30, 2008 and 2007	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended November 30, 2008 and 2007	6
	Notes to Consolidated Financial Statements	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 4.	Controls and Procedures	28
PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	29
ITEM 1A.	Risk Factors	29
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
ITEM 3.	Defaults Upon Senior Securities	30
ITEM 4.	Submission of Matters to a Vote of Security Holders	31
ITEM 5.	Other Information	31
ITEM 6.	Exhibits	32
Signature		32

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

Matrix Service Company

Consolidated Statements of Income

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	November 30, 2008			November 30, 2007			November 30, 2008			November 30, 2007
	(unaudited)						(unaudited)
Revenues	$	176,937		$	194,734		$	363,587		$	356,061
Cost of revenues		150,568			183,488			310,547			325,911
Gross profit		26,369			11,246			53,040			30,150
Selling, general and administrative expenses		11,776			11,841			23,838			19,887
Operating income (loss)		14,593			(595	)		29,202			10,263
Other income (expense):
Interest expense		(123	)		(273	)		(237	)		(577	)
Interest income		104			15			213			31
Other		175			47			911			37
Income (loss) before income taxes		14,749			(806	)		30,089			9,754
Provision (benefit) for federal, state and foreign income taxes		4,621			(1,016	)		10,457			3,208
Net income	$	10,128		$	210		$	19,632		$	6,546
Basic earnings per common share	$	0.39		$	0.01		$	0.75		$	0.25
Diluted earnings per common share	$	0.38		$	0.01		$	0.74		$	0.24
Weighted average common shares outstanding:
Basic		26,102			26,625			26,087			26,609
Diluted		26,400			27,131			26,456			27,109

See accompanying notes.

-1-

Matrix Service Company

Consolidated Balance Sheets

(In thousands)

	November 30, 2008			May 31, 2008
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	13,538		$	21,989
Accounts receivable, less allowances (November 30, 2008 - $300 and May 31, 2008 - $269)		98,809			105,858
Income tax receivable		1,343			—
Costs and estimated earnings in excess of billings on uncompleted contracts		52,356			49,940
Inventories		5,893			4,255
Deferred income taxes		4,954			4,399
Prepaid expenses		4,717			3,357
Other current assets		—			809
Total current assets		181,610			190,607
Property, plant and equipment at cost:
Land and buildings		26,683			24,268
Construction equipment		50,866			47,370
Transportation equipment		17,491			16,927
Furniture and fixtures		13,675			11,781
Construction in progress		2,975			6,712
		111,690			107,058
Accumulated depreciation		(52,498	)		(49,811	)
Property, plant and equipment, net		59,192			57,247
Goodwill		22,166			23,329
Other assets		1,555			3,410
Total assets	$	264,523		$	274,593

See accompanying notes.

-2-

Matrix Service Company

Consolidated Balance Sheets

(In thousands, except share data)

	November 30, 2008			May 31, 2008
	(unaudited)
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	45,496		$	53,560
Billings on uncompleted contracts in excess of costs and estimated earnings		35,140			48,709
Accrued insurance		7,866			8,451
Accrued wages and benefits		10,477			14,976
Income tax payable		—			2,028
Current capital lease obligation		1,195			1,042
Other accrued expenses		1,297			1,015
Total current liabilities		101,471			129,781
Long-term capital lease obligation		777			1,000
Deferred income taxes		4,150			5,112
Stockholders’ equity:
Common stock - $.01 par value; 60,000,000 shares authorized 27,888,217 shares issued as of November 30, 2008 and May 31, 2008		279			279
Additional paid-in capital		110,465			108,402
Retained earnings		64,436			44,809
Accumulated other comprehensive income (loss)		(845	)		1,584
		174,335			155,074
Less: Treasury stock, at cost - 1,756,235 and 1,825,600 shares as of November 30, 2008 and May 31, 2008		(16,210	)		(16,374	)
Total stockholders’ equity		158,125			138,700
Total liabilities and stockholders’ equity	$	264,523		$	274,593

See accompanying notes.

-3-

Matrix Service Company

Consolidated Statements of Cash Flows

(In thousands)

	Six Months Ended
	November 30, 2008			November 30, 2007
	(unaudited)
Operating activities:
Net income	$	19,632		$	6,546
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		4,861			3,813
Deferred income tax		(1,179	)		(1,475	)
Gain on sale of property, plant and equipment		(51	)		(9	)
Allowance for uncollectible accounts		31			1,084
Stock-based compensation expense		2,173			1,384
Other		48			173
Changes in operating assets and liabilities increasing (decreasing) cash:
Receivables		7,018			(29,876	)
Costs and estimated earnings in excess of billings on uncompleted contracts		(2,416	)		2,476
Inventories		(1,638	)		25
Prepaid expenses and other assets		447			(208	)
Accounts payable		(8,218	)		9,801
Billings on uncompleted contracts in excess of costs and estimated earnings		(13,569	)		17,751
Accrued expenses		(4,802	)		(5,248	)
Income tax receivable/payable		(3,215	)		(4,060	)
Net cash provided (used) by operating activities		(878	)		2,177
Investing activities:
Acquisition of property, plant and equipment		(6,590	)		(8,327	)
Proceeds from asset sales		955			192
Net cash used by investing activities	$	(5,635	)	$	(8,135	)

-4-

Matrix Service Company

Consolidated Statements of Cash Flows

(In thousands)

	Six Months Ended
	November 30, 2008			November 30, 2007
	(unaudited)
Financing activities:
Advances under bank credit facility	$	—		$	107,820
Repayments of bank credit facility		—			(104,570	)
Capital lease payments		(588	)		(416	)
Issuances of common stock		131			239
Tax benefit from exercised stock options		96			428
Purchase of treasury shares		(32	)		(700	)
Net cash provided (used) by financing activities		(393	)		2,801
Effect of exchange rate changes on cash		(1,545	)		239
Net decrease in cash and cash equivalents		(8,451	)		(2,918	)
Cash and cash equivalents, beginning of period		21,989			9,147
Cash and cash equivalents, end of period	$	13,538		$	6,229
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	14,800		$	8,304
Interest	$	208		$	311
Non-cash investing and financing activities:
Equipment acquired through capital leases	$	518		$	202
Purchases of property, plant and equipment on account	$	638		$	1,611

See accompanying notes.

-5-

Matrix Service Company

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share data)

(unaudited)

	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Translation Adjustments			Total
Balances, May 31, 2008	$	279	$	108,402		$	44,809		$	(16,374	)	$	1,584		$	138,700
Net Income		—		—			19,632			—			—			19,632
Other comprehensive loss		—		—			—			—			(2,429	)		(2,429	)
Comprehensive income																17,203
Exercise of stock options (31,650 shares)		—		51			(5	)		85			—			131
Tax effect of exercised stock options and vesting of deferred shares		—		(50	)		—			—			—			(50	)
Stock based compensation expense		—		2,173			—			—			—			2,173
Issuance of deferred shares (40,615 shares)		—		(111	)		—			111			—			—
Purchase of treasury shares (2,900 shares)		—		—			—			(32	)		—			(32	)
Balances, November 30, 2008	$	279	$	110,465		$	64,436		$	(16,210	)	$	(845	)	$	158,125
Balances, May 31, 2007	$	279	$	104,408		$	23,422		$	(3,500	)	$	967		$	125,576
Net income		—		—			6,546			—			—			6,546
Other comprehensive income		—		—			—			—			472			472
Comprehensive income																7,018
Exercise of stock options (42,550 shares)		—		112			(15	)		142			—			239
Tax effect of exercised stock options and vesting of deferred shares		—		428			—			—			—			428
Stock based compensation expense		—		1,384			—			—			—			1,384
Issuance of deferred shares (59,590 shares)		—		(175	)		—			175			—			—
Purchase of treasury shares (23,192 shares)		—		—			—			(700	)		—			(700	)
Balances, November 30, 2007	$	279	$	106,157		$	29,953		$	(3,883	)	$	1,439		$	133,945

See accompanying notes.

-6-

Matrix Service Company

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The consolidated financial statements include the accounts of Matrix Service Company (“Matrix Service”, “we”, “our”, “us” or the “Company”) and its subsidiaries, all of which are wholly owned. Intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all adjustments, consisting of normal recurring adjustments and other adjustments described herein that are, in the opinion of management, necessary for a fair statement of the results for the interim periods.

The accompanying financial statements should be read in conjunction with the audited financial statements for the year ended May 31, 2008, included in the Company’s Annual Report on Form 10-K for the year then ended. The Company’s business is cyclical due to the scope and timing of projects released by its customer base. In addition, Matrix Service generates a significant portion of its revenues under a comparatively few major contracts which often do not commence or terminate in the same period from one year to the next. Accordingly, results for any interim period may not necessarily be indicative of future operating results.

Note 2 – Purchase of Engineering and Construction Assets and Technology

On December 20, 2008, the Company acquired engineering and construction resources and technology used to design, engineer and construct single and full containment LNG storage tanks, LIN/LOX storage tanks, LPG storage tanks and thermal vacuum chambers from CB&I, Inc., a subsidiary of Chicago Bridge & Iron Company N.V. (“CB&I”). The purchase included approximately 70 engineering and construction personnel, along with tools, equipment and up to $20.0 million of backlog, which is expected to be completed over the next two years. Also included in the purchase was a perpetual license to use CB&I’s technology necessary to design, engineer and construct LNG storage tanks, LIN/LOX storage tanks, LPG storage tanks and thermal vacuum chambers. The purchase price was not material to the Company’s total assets, property, plant and equipment, or operations.

Note 3 – Recently Issued Accounting Standards

SFAS No. 157 – Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statement established a framework for fair value measurements in the financial statements by providing a definition of fair value, guidance on the methods used to estimate fair value and expanded disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. On June 1, 2008, the Company adopted the provisions of SFAS No. 157 related to financial and non-financial assets and liabilities measured at fair value on a recurring basis. The adoption of this accounting pronouncement did not result in a material impact to the consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157” which defers the effective date of SFAS No. 157 for one year for certain non-financial assets and liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We do not expect the provisions of SFAS No. 157 related to these items to have a material effect on the consolidated financial statements.

-7-

Matrix Service Company

Notes to Consolidated Financial Statements

SFAS No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. On June 1, 2008, the Company adopted SFAS No. 159. The Company elected not to apply the fair value option permitted under SFAS No. 159 to any financial assets or liabilities.

SFAS No. 141(R) – Business Combinations

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) applies to all business combinations and establishes guidance for recognizing and measuring identifiable assets acquired, liabilities assumed, noncontrolling interests in the acquiree and goodwill. Most of these items are recognized at their full fair value on the acquisition date, including acquisitions where the acquirer obtains control but less than 100 percent ownership in the acquiree. SFAS No. 141(R) also requires transaction costs to be recognized as expense as incurred and establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141(R) is effective for the Company for any business combination that occurs after May 31, 2009.

Note 4 – Asset Held for Sale

In September 2008 the Company completed the sale of its excess land in Orange, California. The sale proceeds approximated the carrying value of $0.8 million; therefore, no gain or loss was recognized.

Note 5 – Uncompleted Contracts

Contract terms of the Company’s construction contracts generally provide for progress billings based on project milestones. The excess of costs incurred and estimated earnings over amounts billed on uncompleted contracts is reported as a current asset. The excess of amounts billed over costs incurred and estimated earnings on uncompleted contracts is reported as a current liability. Gross and net amounts on uncompleted contracts are as follows:

	November 30, 2008		May 31, 2008
	(In thousands)
Costs incurred and estimated earnings recognized on uncompleted contracts	$	1,031,603	$	982,369
Billings on uncompleted contracts		1,014,387		981,138
	$	17,216	$	1,231
Shown on balance sheet as:
Costs and estimated earnings in excess of billings on uncompleted contracts	$	52,356	$	49,940
Billings on uncompleted contracts in excess of costs and estimated earnings		35,140		48,709
	$	17,216	$	1,231

-8-

Matrix Service Company

Notes to Consolidated Financial Statements

Progress billings in accounts receivable at November 30, 2008 and May 31, 2008 included retentions to be collected within one year of $12.8 million and $16.3 million, respectively. Contract retentions collectible beyond one year are included in Other Assets on the Consolidated Balance Sheets and totaled $0.6 million at November 30, 2008 and $1.7 million at May 31, 2008.

Note 6 – Debt

The Company has a five-year, $75.0 million senior revolving credit facility (“Credit Facility”) that expires on November 30, 2012. The Credit Facility is guaranteed by substantially all of the Company’s subsidiaries and is secured by a lien on substantially all of the Company’s assets.

Availability under the Credit Facility is as follows:

	November 30, 2008		May 31, 2008
	(In thousands)
Credit Facility	$	75,000	$	75,000
Letters of credit		4,648		4,648
Availability under the Credit Facility	$	70,352	$	70,352

The Credit Facility may be used for working capital, issuance of letters of credit or other lawful corporate purposes. The Credit Agreement contains customary affirmative and negative covenants that place certain restrictions on the Company, including limits on new debt, operating and capital lease obligations, asset sales and certain distributions, including dividends. Significant financial covenants include the following:

• Senior Leverage Ratio not to exceed 2.50 to 1.00;

• Asset Coverage Ratio to be greater than 1.45 to 1.00;

• Fixed Charge Coverage Ratio to be greater than 1.25 to 1.00; and

• Tangible Net Worth must be greater than the sum of $55.6 million plus 75% of positive net income after August 31, 2006 and net proceeds from the sale of any equity securities.

The Company is currently in compliance with all affirmative, negative, and financial covenants.

At the Company’s option, amounts borrowed under the Credit Facility bear interest at LIBOR or an Alternate Base Rate, plus in each case, an additional margin based on the Senior Leverage Ratio. The Alternate Base Rate is the greater of the Prime Rate or the Fed Funds Effective Rate plus 0.5%. The additional margin ranges on the Alternate Base Rate loans are between 0.00% and 0.25% and from between 1.00% and 1.75% on LIBOR-based loans. The Company also pays an Unused Revolving Credit Facility Fee of between 0.175% and 0.375% based on the Senior Leverage Ratio. Since the closing date, the Company has been at the lowest additional margin tier for both LIBOR and Alternate Base Rate loans and the lowest fee tier for the Unused Revolving Credit Facility Fee.

-9-

Matrix Service Company

Notes to Consolidated Financial Statements

Note 7 – Income Taxes

Deferred income taxes are computed using the liability method whereby deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and tax basis of assets and liabilities using presently enacted tax rates. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes.

Note 8 – Commitments and Contingencies

Insurance Reserves

The Company maintains insurance coverage for various aspects of its operations. However, exposure to potential losses is retained through the use of deductibles and coverage limits.

Typically our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide for warranties for materials and workmanship. The Company may also be required to name the customer as an additional insured under certain insurance policies up to the limits of insurance available, or we may have to purchase special insurance policies or surety bonds for specific customers or provide letters of credit issued under our Credit Facility in lieu of bonds to satisfy performance and financial guarantees on some projects. Matrix Service currently maintains a performance and payment bonding line of $140.0 million. The Company generally requires its subcontractors to indemnify the Company and the Company’s customer and name the Company as an additional insured for activities arising out of the subcontractors’ presence at the customer’s location. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of the Company, to secure the subcontractors’ work or as required by the subcontract.

There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers.

Unapproved Change Orders and Claims

As of November 30, 2008 and May 31, 2008, accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts included revenues, to the extent of costs incurred, for unapproved change orders of $0.9 million and $0.8 million, respectively. At November 30, 2008 costs and estimated earnings in excess of billings on uncompleted contracts included revenues for other claims of $0.1 million. There were no claims included in costs and estimated earnings in excess of billings on uncompleted contracts at May 31, 2008. Generally, collection of amounts related to unapproved change orders and claims is expected within twelve months. However, customers generally will not pay these amounts until final resolution of related claims, and accordingly, collection of these amounts may extend beyond one year.

-10-

Matrix Service Company

Notes to Consolidated Financial Statements

Capital Commitments

At November 30, 2008, expected remaining spending on capital projects that have been approved but are not yet completed total $2.6 million.

Other

The Company and its subsidiaries are named as defendants in various other legal actions and are vigorously defending each of them. It is the opinion of management that none of the known legal actions will have a material adverse impact on the Company’s financial position, results of operations or liquidity.

Note 9 – Other Comprehensive Income

Other comprehensive income and accumulated other comprehensive income consisted of foreign currency translation adjustments.

	Three Months Ended					Six Months Ended
	November 30, 2008			November 30, 2007		November 30, 2008			November 30, 2007
	(In thousands)					(In thousands)
Net income	$	10,128		$	210	$	19,632		$	6,546
Other comprehensive income (loss)		(1,792	)		364		(2,429	)		472
Comprehensive income	$	8,336		$	574	$	17,203		$	7,018

-11-

Matrix Service Company

Notes to Consolidated Financial Statements

Note 10 – Earnings per Common Share

Basic earnings per share (“EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted EPS includes the dilutive effect of employee and director stock options as well as the dilutive effect of nonvested deferred shares.

The computation of basic and diluted EPS is as follows:

	Three Months Ended				Six Months Ended
	November 30, 2008		November 30, 2007		November 30, 2008		November 30, 2007
	(In thousands, except per share data)
Basic EPS:
Net income	$	10,128	$	210	$	19,632	$	6,546
Weighted average shares outstanding		26,102		26,625		26,087		26,609
Basic EPS	$	0.39	$	0.01	$	0.75	$	0.25
Weighted average shares outstanding - basic		26,102		26,625		26,087		26,609
Dilutive stock options		166		398		228		395
Dilutive nonvested deferred shares		132		108		141		105
Dilutive weighted average shares		26,400		27,131		26,456		27,109
Diluted EPS	$	0.38	$	0.01	$	0.74	$	0.24

The following securities are considered antidilutive and have been excluded from the calculation of diluted earnings per share:

	Three Months Ended		Six Months Ended
	November 30, 2008	November 30, 2007	November 30, 2008	November 30, 2007
	(In thousands)
Stock options	—	—	—	—
Nonvested deferred shares	136	—	109	—

-12-

Matrix Service Company

Notes to Consolidated Financial Statements

Note 11 – Segment Information

The Company has two reportable segments, the Construction Services segment and the Repair and Maintenance Services segment.

The primary services of our Construction Services segment are aboveground storage tanks for the bulk storage/terminal industry, capital construction for the downstream petroleum industry, specialty construction, and electrical/instrumentation services for various industries. These services, including civil/structural, mechanical, piping, electrical and instrumentation, millwrighting, and fabrication, are provided for projects of varying complexities, schedule durations, and budgets. Our project experience includes renovations, retrofits, modifications and expansions to existing facilities as well as construction of new facilities.

The primary services of our Repair and Maintenance Services segment are aboveground storage tank repair and maintenance services, planned major and routine maintenance for the downstream petroleum industry, specialty repair and maintenance services and electrical and instrumentation repair and maintenance.

Other consists of operating activity related to previously disposed-of businesses and certain corporate assets.

The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K. Intersegment sales and transfers are recorded at cost; therefore, no intercompany profit or loss is recognized.

-13-

Matrix Service Company

Notes to Consolidated Financial Statements

Results of Operations

(In thousands)

	Construction Services			Repair & Maintenance Services		Other		Total
Three Months Ended November 30, 2008
Gross revenues	$	108,084		$	77,499	$	—	$	185,583
Less: Inter-segment revenues		7,955			691		—		8,646
Consolidated revenues		100,129			76,808		—		176,937
Gross profit		12,761			13,608		—		26,369
Operating income		5,618			8,975		—		14,593
Income before income tax expense		5,680			9,069		—		14,749
Net income		4,434			5,694		—		10,128
Segment assets		135,887			96,865		31,771		264,523
Capital expenditures		932			814		1,739		3,485
Depreciation and amortization expense		1,359			1,121		—		2,480
Three Months Ended November 30, 2007
Gross revenues	$	119,443		$	79,420	$	—	$	198,863
Less: Inter-segment revenues		3,170			959		—		4,129
Consolidated revenues		116,273			78,461		—		194,734
Gross profit (loss)		(1,839	)		13,085		—		11,246
Operating income (loss)		(9,269	)		8,508		166		(595	)
Income (loss) before income tax expense		(9,432	)		8,460		166		(806	)
Net income (loss)		(5,240	)		5,350		100		210
Segment assets		163,597			93,030		21,634		278,261
Capital expenditures		2,400			1,870		1,169		5,439
Depreciation and amortization expense		1,178			861		—		2,039
Six Months Ended November 30, 2008
Gross revenues	$	230,445		$	149,666	$	—	$	380,111
Less: Inter-segment revenues		15,558			966		—		16,524
Consolidated revenues		214,887			148,700		—		363,587
Gross profit		27,806			25,234		—		53,040
Operating income		13,110			16,092		—		29,202
Income before income tax expense		13,383			16,706		—		30,089
Net income		8,813			10,819		—		19,632
Segment assets		135,887			96,865		31,771		264,523
Capital expenditures		1,973			1,744		2,873		6,590
Depreciation and amortization expense		2,771			2,090		—		4,861
Six Months Ended November 30, 2007
Gross revenues	$	222,460		$	143,405	$	—	$	365,865
Less: Inter-segment revenues		7,408			2,396		—		9,804
Consolidated revenues		215,052			141,009		—		356,061
Gross profit		6,834			23,316		—		30,150
Operating income (loss)		(5,345	)		15,527		81		10,263
Income (loss) before income tax expense		(5,719	)		15,392		81		9,754
Net income (loss)		(3,013	)		9,510		49		6,546
Segment assets		163,597			93,030		21,634		278,261
Capital expenditures		3,906			2,542		1,879		8,327
Depreciation and amortization expense		2,231			1,582		—		3,813

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Matrix Service Company

Notes to Consolidated Financial Statements

Segment Revenue from External Customers by Industry Type

	Construction Services		Repair & Maintenance Services		Total
	(In thousands)
Three Months Ended November 30, 2008
Aboveground Storage Tanks	$	45,024	$	51,309	$	96,333
Downstream Petroleum		42,126		21,204		63,330
Electrical and Instrumentation		8,714		4,295		13,009
Specialty		4,265		—		4,265
Total	$	100,129	$	76,808	$	176,937
Three Months Ended November 30, 2007
Aboveground Storage Tanks	$	58,326	$	44,504	$	102,830
Downstream Petroleum		39,499		29,810		69,309
Electrical and Instrumentation		5,239		4,147		9,386
Specialty		13,209		—		13,209
Total	$	116,273	$	78,461	$	194,734
Six Months Ended November 30, 2008
Aboveground Storage Tanks	$	100,893	$	99,206	$	200,099
Downstream Petroleum		86,514		42,449		128,963
Electrical and Instrumentation		14,347		7,045		21,392
Specialty		13,133		—		13,133
Total	$	214,887	$	148,700	$	363,587
Six Months Ended November 30, 2007
Aboveground Storage Tanks	$	97,801	$	86,033	$	183,834
Downstream Petroleum		73,050		47,347		120,397
Electrical and Instrumentation		7,410		7,629		15,039
Specialty		36,791		—		36,791
Total	$	215,052	$	141,009	$	356,061

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Estimates

The following is a discussion of the most critical accounting policies, judgments and uncertainties that are inherent in our application of generally accepted accounting principles (“GAAP”) in the United States of America.

Revenue Recognition

Matrix Service records profits on fixed-price contracts on a percentage-of-completion basis, primarily based on costs incurred to date compared to the total estimated contract cost. Matrix Service records revenue on reimbursable and time and material contracts on a proportional performance basis as costs are incurred. Contracts in process are valued at cost plus accrued profits less billings on uncompleted contracts. Contracts are generally considered substantially complete when field construction is completed. The elapsed time from award of a contract to completion of performance may be in excess of one year. Matrix Service includes pass-through revenue and costs on cost-plus contracts, which are customer-reimbursable materials, equipment and subcontractor costs, when Matrix Service determines that it is responsible for the procurement and management of such cost components on behalf of the customer.

Matrix Service has numerous contracts that are in various stages of completion which require estimates to determine the appropriate cost and revenue recognition. Matrix Service has a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs, and accordingly, does not believe significant fluctuations are likely to materialize. However, current estimates may be revised as additional information becomes available. If estimates of costs to complete fixed-price contracts indicate a loss, a provision is made through a contract write-down for the total loss anticipated. A number of our contracts contain various cost and performance incentives and penalties that impact the earnings we realize from our contracts. Adjustments related to these incentives and penalties are recorded in the period on a percentage of completion basis when estimable and probable.

Indirect costs (such as salaries and benefits, supplies and tools, equipment costs and insurance costs) are charged to projects based upon direct labor hours and overhead allocation rates per direct labor hour. Warranty costs are normally incurred prior to project completion and are charged to project costs as they are incurred. Warranty costs incurred subsequent to project completion were not material for the periods presented. Overhead allocation rates are established annually during the budgeting process and evaluated for accuracy throughout the year based upon actual direct labor hours and actual costs incurred.

Claims Recognition

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of anticipated additional costs incurred by us. Recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. We must determine if:

• there is a legal basis for the claim;

• the additional costs were caused by circumstances that were unforeseen by the Company and are not the result of deficiencies in our performance;

• the costs are identifiable or determinable and are reasonable in view of the work performed; and

• the evidence supporting the claim is objective and verifiable.

If all of these requirements are met, revenue from a claim is recorded only to the extent that we have incurred costs relating to the claim.

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As of November 30, 2008 and May 31, 2008, accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts included revenues, to the extent of costs incurred, for unapproved change orders of $0.9 million and $0.8 million, respectively. At November 30, 2008 costs and estimated earnings in excess of billings on uncompleted contracts included revenues for other claims of $0.1 million. There were no claims included in costs and estimated earnings in excess of billings on uncompleted contracts at May 31, 2008. Historically, our collections for unapproved change orders and other claims have approximated the amount of revenue recognized.

The following table provides a rollforward of revenue recognized on claims and unapproved change orders:

	Claims for Unapproved Change Orders			Other Claims		Total
	(In thousands)
Balance at May 31, 2008	$	804		$	—	$	804
Additions		498			141		639
Collections		(419	)		—		(419	)
Gain/(loss)		—			—		—
Balance at November 30, 2008	$	883		$	141	$	1,024
Balance at May 31, 2007	$	5,129		$	1,493	$	6,622
Additions		1,176			897		2,073
Collections		(1,636	)		—		(1,636	)
Loss		(34	)		—		(34	)
Balance at November 30, 2007	$	4,635		$	2,390	$	7,025

Loss Contingencies

Various legal actions, claims, and other contingencies arise in the normal course of our business. Contingencies are recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with SFAS No. 5 “Accounting for Contingencies.” Specific reserves are provided for loss contingencies to the extent we conclude their occurrence is both probable and estimable. We use a case by case evaluation of the underlying data and update our evaluation as further information becomes known. We believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. However, the results of litigation are inherently unpredictable and the possibility exists that the ultimate resolution of one or more of these matters could result in a material adverse effect on our financial position, results of operations or liquidity.

Legal costs are expensed as incurred.

Insurance Reserves

We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles and coverage limits. As of November 30, 2008 and May 31, 2008, insurance reserves totaling $7.9 million and $8.5 million, respectively, are included on our balance sheet. These amounts represent our best estimate of our ultimate obligations for asserted claims, insurance premium obligations, and claims incurred but not yet reported at the balance sheet dates. We establish specific reserves for known claims using a case by case evaluation of the underlying claim data and update our evaluations as further information becomes known. We establish reserves for incurred but not reported claims based on historical claim development and other factors. Judgments and assumptions are inherent in our reserve accruals; as a result, changes in assumptions or claims experience could result in changes to these estimates in the future. Additionally, the actual results of claim settlements could differ from the amounts estimated.

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Goodwill

Goodwill and intangible assets with indefinite useful lives are not amortized and are tested at least annually for impairment. We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant an additional analysis. Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired. Goodwill is evaluated for impairment by first comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. Reporting units for purposes of goodwill impairment calculations are our reportable segments.

Management utilizes a discounted cash flow analysis to determine the estimated fair value of our reporting units. Significant judgments and assumptions including the discount rate, anticipated revenue growth and gross margins, estimated operating and interest expense, and capital expenditures are inherent in these fair value estimates which are based on our internal operating budgets. As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of an impairment charge in the financial statements.

As a result of these uncertainties, we utilize multiple scenarios and assign probabilities to each of the scenarios in the discounted cash flow analysis. The results of the discounted cash flow analysis are then compared to the carrying value of the reporting unit. If the carrying value of a reporting unit exceeds its fair value, a computation of the implied fair value of goodwill is compared with its related carrying value. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in the amount of the excess. If an impairment charge is incurred, it would negatively impact our results of operations and financial position.

Certain events may occur that might adversely affect the reported value of goodwill. Such events could include, but are not limited to, strategic decisions made in response to economic or competitive conditions, a significant change in the project plans of our customers, the economic condition of the customers and industries we serve, and a material negative change in the relationships with one or more of our significant customers. If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied value of one or more of our reporting units also may change.

At May 31, 2008 the estimated fair value of the Construction Services segment exceeded its carrying value by 220% and the estimated fair value of the Repair and Maintenance Services segment exceeded its carrying value by 74%. The unfavorable economic environment that currently exists has caused some of our customers to delay certain capital projects; therefore, we now expect fiscal 2009 revenues to be below levels assumed in our 2009 operating budget. To mitigate the impact to cash flow caused by the decreased revenue projections we are taking steps, including, but not limited to, reductions in capital spending and operating overhead. We view the anticipated revenue decline as temporary and believe that the long-term revenue and cash flow projections used to estimate the excess of estimated fair value over carrying value at May 31, 2008 are still achievable.

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Results of Operations

Overview

The Company has two reportable segments, Construction Services and Repair and Maintenance Services. The majority of the work for both segments is performed in the United States with less than 4% of revenues generated in Canada during the first six months of fiscal 2009. However, the Company does continue to seek opportunities for growth in both the domestic and international markets.

The primary services of our Construction Services segment are aboveground storage tanks for the bulk storage/terminal industry, capital construction for the downstream petroleum industry, specialty construction, and electrical/instrumentation services for various industries. These services, including civil/structural, mechanical, piping, electrical and instrumentation, millwrighting, and fabrication, are provided for projects of varying complexities, schedule durations, and budgets. Our project experience includes renovations, retrofits, modifications and expansions to existing facilities as well as construction of new facilities.

The primary services of our Repair and Maintenance Services segment are aboveground storage tank repair and maintenance services, planned major and routine maintenance for the downstream petroleum industry, specialty repair and maintenance services and electrical and instrumentation repair and maintenance.

Significant fluctuations in revenues, gross profits and operating results are discussed below on a consolidated basis and for each segment. Revenues fluctuate due to many factors, including the changing product mix and project schedules, which are dependent on the level and timing of customer releases of new business.

Three Months Ended November 30, 2008 Compared to the Three Months Ended November 30, 2007

Consolidated

Consolidated revenues were $176.9 million in fiscal 2009, a decrease of $17.8 million, or 9.1%, from consolidated revenues of $194.7 million for fiscal 2008. The decline in consolidated revenues was the result of decreases in the Construction Services segment of $16.1 million and in the Repair and Maintenance Services segment of $1.7 million.

Consolidated gross profit increased from $11.2 million in fiscal 2008 to $26.4 million in fiscal 2009. The improvement of $15.2 million, or 135.7% was due to an increase in gross margins, which improved from 5.8% in fiscal 2008 to 14.9% in fiscal 2009. The gross margin improvement was due to higher margins in the Construction Services segment, where the gross margin increased to 12.7% in the current fiscal year versus (1.6)% in the prior fiscal year and higher gross margins in the Repair and Maintenance Services segment which increased to 17.7% in the current year compared to 16.7% in fiscal 2008.

Consolidated SG&A expenses were $11.8 million during both fiscal periods. SG&A expense as a percentage of revenue increased to 6.7% in fiscal 2009 compared to 6.1% in the prior fiscal year due to the $17.8 million decline in revenues.

Net interest expense in fiscal 2009 was negligible as the non-cash amortization of deal fees relating to the senior revolving credit facility and cash interest on our capital leases was almost entirely offset by interest income generated from the investment of excess cash. The prior year net interest expense of $0.3 million was primarily related to the amortization of deal fees on the senior revolving credit facility and interest on short-term borrowings under the facility.

Other income in fiscal 2009 was $0.2 million and related primarily to higher discounts taken due to early payments to our vendors and settlement proceeds.

Income before income tax expense increased to $14.7 million in fiscal 2009 from $(0.8) million in fiscal 2008. This $15.5 million increase occurred due to higher gross profits.

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The effective tax rate for fiscal 2009 was 31.3% as certain operating loss carryforwards previously reserved were utilized or deemed to be fully utilizable resulting in a benefit of $1.0 million. The prior fiscal year included a $0.7 million tax benefit resulting from the assessment of the realizability of state investment tax credits.

Net income for fiscal 2009 increased to $10.1 million, or $0.38 per fully diluted share, versus net income in fiscal 2008 of $0.2 million, or $0.01 per fully diluted share.

Construction Services

Revenues for the Construction Services segment were $100.1 million, compared with $116.2 million in the same period a year earlier. The decrease of $16.1 million, or 13.9%, was due to lower Aboveground Storage Tank revenues, which decreased 22.8% to $45.0 million in fiscal 2009, compared to $58.3 million a year earlier, lower Specialty revenues, which decreased $8.9 million to $4.3 million in fiscal 2009, compared to $13.2 million a year earlier, partially offset by higher Downstream Petroleum revenues, which increased 6.6% to $42.1 million in fiscal 2009 compared to $39.5 million a year earlier and higher Electrical and Instrumentation revenues, which improved $3.5 million.

At November 30, 2008, the Construction Services segment had a backlog of $282.9 million, as compared to a backlog of $300.3 million at August 31, 2008. The decrease of $17.4 million from August 31, 2008 was due to declines in Downstream Petroleum and Electrical and Instrumentation of $18.2 million and $12.4 million, partially offset by increases in Aboveground Storage Tank of $8.1 million and Specialty of $5.1 million.

Gross profit increased from $(1.8) million in fiscal 2008 to $12.8 million in fiscal 2009 due to improved gross margins, which increased from (1.6)% in fiscal 2008 to 12.7% in fiscal 2009. The prior year’s gross margins of (1.6)% included a $16.0 million pretax charge for cost overruns related to a Gulf Coast LNG project.

Operating income and income before income tax expense were $5.6 million and $5.7 million in fiscal 2009 compared to $(9.3) million and $(9.4) million in fiscal 2008.

Repair and Maintenance Services

Revenues for the Repair and Maintenance Services segment were $76.8 million in fiscal 2009 compared to $78.5 million in fiscal 2008. The change was due to lower Downstream Petroleum revenues, which decreased $8.6 million to $21.2 million in fiscal 2009, compared to $29.8 million a year earlier. Largely offsetting this decline was an increase of $6.8 million in Aboveground Storage Tank revenues, which increased 15.3% to $51.3 million in fiscal 2009, compared to $44.5 million in the prior fiscal year. Electrical and Instrumentation revenues were $4.3 million in fiscal 2009, compared to $4.2 million a year earlier.

Backlog at November 30, 2008 and August 31, 2008 for the Repair and Maintenance Services segment was $171.2 million and $158.5 million, respectively. The increase of $12.7 million from August 31, 2008 was due to increases in Downstream Petroleum of $13.9 million and Electrical and Instrumentation of $2.5 million partially offset by a decrease of $3.7 million in Aboveground Storage Tank.

Gross profit increased from $13.1 million in fiscal 2008 to $13.6 million in fiscal 2009 due to an increase in gross margins, which were 17.7% in fiscal 2009 compared to 16.7% in fiscal 2008.

Operating income and income before income tax expense increased to $9.0 million and $9.1 million, respectively, in fiscal 2009 compared to $8.5 million and $8.5 million in fiscal 2008.

Six Months Ended November 30, 2008 Compared to Six Months Ended November 30, 2007

Consolidated

Consolidated revenues were $363.6 million in fiscal 2009, an increase of $7.5 million, or 2.1%, from consolidated revenues of $356.1 million for fiscal 2008. The improvement in consolidated revenues was the result of an increase in the Repair and Maintenance Services segment of $7.7 million partially offset by a decline of $0.2 million in the Construction Services segment.

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Consolidated gross profit increased from $30.2 million in fiscal 2008 to $53.0 million in fiscal 2009. The improvement of $22.8 million, or 75.5% was primarily due to an increase in gross margins, which improved from 8.5% in fiscal 2008 to 14.6% in fiscal 2009. The gross margin improvement was due to higher margins in the Construction Services segment, where the gross margin increased to 12.9% in the current fiscal year versus 3.2% in the prior fiscal year. Repair and Maintenance Services segment gross margins also increased to 17.0% in the current year compared to 16.5% in fiscal 2008.

Consolidated SG&A expenses increased $3.9 million, or 19.6%, in fiscal 2009 to $23.8 million from $19.9 million for fiscal 2008. The increase was primarily due to costs relating to our expansion into Western Canada and the Gulf Coast Region and higher employee related and facility costs incurred to build the infrastructure and sales force necessary to support our long-term growth plan. SG&A expense as a percentage of revenue increased to 6.6% in fiscal 2009 compared to 5.6% in the prior fiscal year.

Net interest expense in fiscal 2009 was negligible as the non-cash amortization of deal fees relating to the senior revolving credit facility and cash interest on our capital leases was almost entirely offset by interest income generated from the investment of excess cash. The prior year net interest expense of $0.5 million was primarily related to the amortization of deal fees on the senior revolving credit facility and interest on short-term borrowings under the facility.

Other income in fiscal 2009 was $0.9 million and related primarily to insurance proceeds received. There were no similar items in fiscal 2008.

Income before income tax expense increased to $30.1 million in fiscal 2009 from $9.8 million in fiscal 2008. This $20.3 million increase occurred due to higher gross profits partially offset by higher SG&A expenses.

The effective tax rate for fiscal 2009 was 34.8% compared to 32.9% in fiscal 2008. In fiscal 2009, certain operating loss carryforwards previously reserved were utilized or deemed to be fully utilizable resulting in a benefit of $1.0 million. The prior fiscal year included a $0.7 million tax benefit resulting from the assessment of the realizability of state investment tax credits.

Net income for fiscal 2009 grew to $19.6 million, or $0.74 per fully diluted share, versus net income in fiscal 2008 of $6.5 million, or $0.24 per fully diluted share.

-21-

Construction Services

Revenues for the Construction Services segment were $214.9 million, compared with $215.1 million in the same period a year earlier. The decrease of $0.2 million was due to lower Specialty revenues, which decreased $23.7 million as the construction of the tanks on a Gulf Coast LNG project was completed in the fourth quarter of fiscal 2008. Largely offsetting this decline was higher Downstream Petroleum revenues, which increased $13.5 million to $86.5 million in fiscal 2009 compared to $73.0 million a year earlier, higher Electrical and Instrumentation revenues, which increased $6.9 million to $14.3 million in fiscal 2009, compared to $7.4 million a year earlier, and higher Aboveground Storage Tank revenues, which increased $3.1 million to $100.9 million in fiscal 2009, compared to $97.8 million a year earlier.

At November 30, 2008, the Construction Services segment had a backlog of $282.9 million, as compared to a backlog of $325.3 million as of May 31, 2008. The decrease of $42.4 million was due to declines in Aboveground Storage Tank, Electrical and Instrumentation, and Downstream Petroleum of $22.8 million, $16.7 million and $9.7 million, respectively. Partially offsetting these declines was an increase in Specialty of $6.8 million.

Gross profit increased from $6.8 million in fiscal 2008 to $27.8 million in fiscal 2009 due to improved gross margins, which increased from 3.2% in fiscal 2008 to 12.9% in fiscal 2009. The prior year’s gross margins of 3.2% included $17.5 million in pretax charges for cost overruns related to a Gulf Coast LNG project.

Operating income and income before income tax expense were $13.1 million and $13.4 million in fiscal 2009 compared to $(5.3) million and $(5.7) million in fiscal 2008.

Repair and Maintenance Services

Revenues for the Repair and Maintenance Services segment were $148.7 million in fiscal 2009 compared to $141.0 million in fiscal 2008. The improvement was due to higher Aboveground Storage Tank revenues, which increased 15.3% to $99.2 million in fiscal 2009, compared to $86.0 million in the prior fiscal year. This increase was partially offset by lower Downstream Petroleum revenues, which decreased $4.9 million to $42.4 million in fiscal 2009 from $47.3 million during fiscal 2008 and lower Electrical and Instrumentation revenues, which decreased $0.6 million to $7.0 million in fiscal 2009 from $7.6 million during fiscal 2008.

Backlog at November 30, 2008 and May 31, 2008 for the Repair and Maintenance Services segment was $171.2 million and $142.0 million, respectively. The increase of $29.2 million was due to increases in Downstream Petroleum of $25.8 million, Electrical and Instrumentation of $2.5 million and Aboveground Storage Tank of $0.9 million.

Gross profit increased from $23.3 million in fiscal 2008 to $25.2 million in fiscal 2009 due to an increase in revenues combined with improved gross margins, which were 17.0% in fiscal 2009 versus 16.5% in fiscal 2008.

Operating income and income before income tax expense increased to $16.1 million and $16.7 million, respectively, in fiscal 2009, compared to $15.5 million and $15.4 million in fiscal 2008.

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Backlog

We define backlog as the total dollar amount of revenues that we expect to recognize as a result of performing work that has been awarded to us through a signed contract that we consider firm. The following contract types are considered firm:

• fixed-price arrangements;

• minimum customer commitments on cost plus arrangements; and

• certain time and material contracts in which the estimated contract value is firm or can be estimated with a reasonable amount of certainty in both timing and amounts.

For long-term maintenance contracts, we include only the amounts that we expect to recognize into revenue over the next 12 months. For all other arrangements, we calculate backlog as the estimated contract amount less the revenue recognized as of the reporting date.

The following provides a rollforward of our backlog for the three-months ended November 30, 2008:

	Construction Services			Repair and Maintenance Services			Total
	(In thousands)
Backlog as of August 31, 2008	$	300,290		$	158,471		$	458,761
New backlog awarded		82,707			89,490			172,197
Revenue recognized on contracts in backlog		(100,129	)		(76,808	)		(176,937	)
Backlog as of November 30, 2008	$	282,868		$	171,153		$	454,021

The following provides a rollforward of our backlog for the six-months ended November 30, 2008:

	Construction Services			Repair and Maintenance Services			Total
	(In thousands)
Backlog as of May 31, 2008	$	325,341		$	141,967		$	467,308
New backlog awarded		172,414			177,886			350,300
Revenue recognized on contracts in backlog		(214,887	)		(148,700	)		(363,587	)
Backlog as of November 30, 2008	$	282,868		$	171,153		$	454,021

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Non-GAAP Financial Measure

EBITDA is a supplemental, non-GAAP financial measure. We define EBITDA as earnings before net interest expense, income taxes, depreciation and amortization. We have presented EBITDA because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses. We believe that the line item on our Consolidated Statements of Income entitled “Net Income” is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. EBITDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure is not necessarily a measure of our ability to fund our cash needs. As EBITDA excludes certain financial information compared with net income, the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded. Our non-GAAP performance measure, EBITDA, has certain material limitations as follows:

• It does not include interest income or expense. Because we borrow money from time to time to finance our operations, interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore, any measure that excludes interest expense has material limitations.

• It does not include income taxes. Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations.

• It does not include depreciation expense. Because we use capital assets to generate revenue, depreciation expense is a necessary element of our cost structure. Therefore, any measure that excludes depreciation expense has material limitations.

A reconciliation of EBITDA to net income follows:

	Three Months Ended					Six Months Ended
	November 30, 2008		November 30, 2007			November 30, 2008		November 30, 2007
	(In thousands)					(In thousands)
Net income	$	10,128	$	210		$	19,632	$	6,546
Interest expense, net		19		258			24		546
Provision (benefit) for income taxes		4,621		(1,016	)		10,457		3,208
Depreciation and amortization		2,480		2,039			4,861		3,813
EBITDA	$	17,248	$	1,491		$	34,974	$	14,113

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Financial Condition & Liquidity

Overview

We define liquidity as the ongoing ability to pay our liabilities as they become due, fund business operations and meet all monetary contractual obligations. Our primary source of liquidity in the first six months of fiscal 2009 was cash on hand at the beginning of the fiscal year. Cash on hand at November 30, 2008 totaled $13.5 million and availability under the senior revolving credit facility totaled $70.4 million resulting in total liquidity of $83.9 million.

Factors that routinely impact our short-term liquidity and that may impact our long-term liquidity include, but are not limited to:

• Changes in working capital

• Contract terms that determine the timing of billings to customers and the collection of those billings

• Some cost plus and fixed price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collecting from our customers.

• Time and material contracts are normally billed in arrears. Therefore, we are routinely required to carry these costs until they can be billed and collected.

• Some of our large construction projects require retentions.

• Capital expenditures

• Strategic investments in new operations

• Acquisitions of new businesses

• Purchases of shares under our existing or any future stock buyback program

• Contract disputes or collection issues resulting from the failure of a significant customer

In the future we may elect to raise additional capital by issuing common stock, convertible notes or term debt as necessary to fund our operations or to fund the acquisition of new businesses. In fiscal 2009, we expect cash flows from operations and our existing cash balance to be significant sources of liquidity, which we expect will provide funding for additional investments in capital assets and the acquisition of the engineering and construction assets and technology from CB&I. We will continue to evaluate our working capital requirements and other factors to maintain sufficient liquidity.

Cash Flows from Operating Activities

Operations used $0.9 million in cash in the first six months of fiscal 2009. The cash used in operations was due primarily to profitable operating results offset by an unfavorable change in working capital. The unfavorable change in working capital primarily relates to a decrease in accounts payable of $8.2 million, a decrease in billings in excess of costs and estimated earnings of $13.6 million, and a decrease in accrued expenses of $4.8 million, partially offset by an decrease in accounts receivable of $7.0 million.

Cash Flows from Investing Activities

Investing activities used $5.6 million in cash in the first six months of fiscal 2009. This was due to capital expenditures of $6.6 million partially offset by proceeds from asset sales of $1.0 million. The asset sale proceeds relate primarily to the sale of excess property discussed in Note 4 of the Notes to Consolidated Financial Statements. Capital expenditures included $2.7 million for the purchase of construction equipment, $1.5 million for transportation equipment, $0.7 million for furniture and fixtures, and $1.7 million for land and buildings. We also routinely acquire assets utilizing capital leases. Assets acquired through capital leases totaled $0.5 million in the first six months of fiscal 2009 and are reported as non-cash additions to Property, Plant and Equipment.

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Cash Flows from Financing Activities

Financing activities used $0.4 million in cash in the first six months of fiscal 2009 primarily due to capital lease payments of $0.6 million partially offset by proceeds from stock option activity of $0.2 million.

Senior Revolving Credit Facility

The senior revolving credit facility is primarily used to fund short-term changes in working capital and issuance of letters of credit. The total capacity of the facility at November 30, 2008 was $75.0 million with $4.6 million outstanding for letters of credit that have been issued to support certain workers’ compensation insurance programs and remaining availability of $70.4 million. We believe the facility provides adequate liquidity and financial flexibility to support our expected growth.

The facility contains customary negative covenants including limits on other indebtedness, operating and capital lease obligations, asset sales, dividends and certain other distributions. The facility also contains financial covenants that require us to maintain certain financial ratios including a senior leverage ratio, an asset coverage ratio, a fixed charge coverage ratio and a tangible net worth requirement. Non-compliance with any of these ratios or the tangible net worth requirement or a violation of other covenants could result in an event of default and reduce the availability or eliminate our borrowing capacity under the facility. We are currently in compliance with all covenants and have full availability under the facility.

Dividend Policy

We have never paid cash dividends on our Common Stock and the terms of our credit agreement limit the amount of cash dividends we can pay. We currently intend to retain earnings to finance the growth of our business. Any payment of cash dividends in the future will depend upon our financial condition, capital requirements and earnings as well as other factors the Board of Directors may deem relevant.

Stock Repurchase Program

In October 2000, the Board of Directors authorized a stock buyback program, which permitted the purchase of up to 20% (i.e., 3,447,506 shares) of our common stock outstanding at that time. To date, Matrix Service has purchased 2,846,782 shares under the program and has authorization to purchase an additional 600,724 shares. The Company did not purchase any common shares under the program during the first six months of fiscal 2009. Matrix Service intends to repurchase shares in future periods if accretive to earnings per share. The Company has 1,756,235 treasury shares as of November 30, 2008 and intends to utilize these treasury shares solely for the satisfaction of stock issuances under the Company’s stock plans.

Outlook

Even in this challenging economic environment, we will continue to focus on continuing our long-term strategies to grow and diversify our business while producing quality earnings. We have invested in our infrastructure to ensure we are positioned to execute on this strategy and develop additional business opportunities. As a result, we have been able to maintain backlog and believe there is opportunity for long-term future growth. Our bid flow remains strong and we are currently tracking more than $2 billion of projects.

As evident in the economy, we experienced a slow down toward the end of the year with anticipated capital awards and maintenance pushed into calendar 2009. Furthermore, there has been a lack of guidance from some of our customers on their capital and maintenance plans as they assess the impact of the economic turmoil on their businesses. While we remain committed to growing and diversifying our business, we have taken steps to reduce costs. We are actively managing our liquidity to maintain our strong financial position in this environment and to be able to be opportunistic in the future.

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FORWARD-LOOKING STATEMENTS

This Form 10-Q includes “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. All statements, other than statements of historical facts, included in this Form 10-Q which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts” and similar expressions are also intended to identify forward-looking statements.

These forward-looking statements include, among others, such things as:

• amounts and nature of future revenues and margins from our Construction Services and Repair and Maintenance Services segments;

• expansion and other development trends of the industries we serve;

• our ability to generate sufficient cash from operations or to raise cash in order to meet our short and long-term capital requirements;

• our ability to continue to comply with the covenants in our credit agreement;

• the adequacy of our reserves for contingencies and insurance losses; and

• the likely impact of new or existing regulations or market forces on the demand for our services.

These statements are based on certain assumptions and analyses we made in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including:

• the risk factors discussed in our Form 10-K for the fiscal year ended May 31, 2008 and listed from time to time in our filings with the Securities and Exchange Commission;

• economic, market or business conditions in general and in the oil and gas, power and petrochemical industries in particular;

• changes in laws or regulations; and

• other factors, many of which are beyond our control.

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to or effects on us or our business or operations. We assume no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk faced by us from those reported in our Annual Report on Form 10-K for the fiscal year ended May 31, 2008, filed with the Securities and Exchange Commission. For more information on market risk, see Part II, Item 7A in our fiscal 2008 Annual Report on Form 10-K.

ITEM 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2008. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting during the quarter ended November 30, 2008.

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PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

For information regarding legal proceedings, see Note 8 in Item 1 of Part 1 of this Quarterly Report on Form 10-Q, which information is incorporated by reference into this Part II, Item 1.

ITEM 1A. Risk Factors

Except as set forth below, there were no material changes in our Risk Factors from those reported in Item IA. of Part I of our Annual Report on Form 10-K for the fiscal year ended May 31, 2008.

Our Construction Services segment’s performance is highly dependent upon the level of capital expenditures by oil, gas and power companies on infrastructure.

Our Construction Services segment’s revenue and cash flow are dependent upon engineering and construction projects. The availability of these types of projects is dependent upon the economic condition of the oil, gas, and power industries, specifically, the level of capital expenditures of oil, gas and power companies on infrastructure. The current credit crisis and related turmoil in the global financial system, including the capital markets, as well as a general economic downturn or recession in North America may have an adverse impact on the level of capital expenditures of oil, gas and power companies and/or their ability to finance these expenditures. Our failure to obtain projects, the delay in award of projects, the cancellation of projects or delays in completion of contracts are factors the could result in under-utilization of our resources, which would have an adverse impact on our revenue and cash flow. There are numerous factors beyond our control that influence the level of capital expenditures of oil, gas and power companies, including:

• current or projected oil, gas and power prices as well as refining margins;

• the demand for electricity;

• the abilities of oil, gas and power companies to generate, access and deploy capital;

• exploration, production and transportation costs;

• regulatory restraints on the rates that power companies may charge their customers; and

• local and international political and economic conditions.

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

In October 2000, the Board of Directors authorized a stock buyback program, which permitted the purchase of up to 20% (i.e., 3,447,506 shares) of the common stock outstanding at that time. The Company did not purchase any common shares during the three months ended November 30, 2008 under this program but may repurchase additional shares in future periods. To date, Matrix Service has purchased 2,846,782 shares under the program and has authorization to purchase an additional 600,724 shares. The Company purchased 2,900 shares in the three months ended November 30, 2008 at an average price of $10.92 related to the statutory tax withholding on the net share settlement provisions on the issuance of deferred shares. The Company has 1,756,235 treasury shares as of November 30, 2008 and intends to utilize these shares solely for the satisfaction of stock issuances under the Company’s stock plans.

	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Shares That May Yet Be Purchased Under the Plans or Programs
September 1 to 30, 2008	—	$	—	2,846,782	600,724
October 1 to 31, 2008	2,436	$	11.65	2,846,782	600,724
November 1 to 30, 2008	464	$	7.13	2,846,782	600,724
Total	2,900	$	10.92

Dividend Policy

We have never paid cash dividends on our Common Stock, and the terms of our credit agreement limit the amount of cash dividends we can pay. We currently intend to retain earnings to finance the growth of our business. Any payment of cash dividends in the future will depend upon our financial condition, capital requirements and earnings as well as other factors the Board of Directors may deem relevant.

ITEM 3. Defaults Upon Senior Securities

Not applicable

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ITEM 4. Submission of Matters to a Vote of Security Holders

The Company’s annual meeting of stockholders was held in Tulsa, Oklahoma at 10:30 a.m. local time on Monday, October 21, 2008. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the nominees for election as directors as listed in the proxy statement, and all nominees were elected.

Out of a total of 26,082,067 shares of the Company’s common stock outstanding and entitled to vote, 24,411,948 shares were present at the meeting in person or by proxy, representing approximately 93.6 percent. Matters voted upon at the meeting were as follows:

• Six directors to serve on the Company’s Board of Directors. Messrs. Michael J. Bradley, Michael J. Hall, I. Edgar (Ed) Hendrix, Paul K. Lackey, Tom E. Maxwell and David J. Tippeconnic were elected to serve until the 2009 Annual Meeting. The vote tabulation with respect to each nominee was as follows:

Nominee	For	Authority Withheld
Michael J. Bradley	24,167,778	244,170
Michael J. Hall	24,086,531	325,417
I. Edgar (Ed) Hendrix	24,222,679	189,269
Paul K. Lackey	24,220,311	191,637
Tom E. Maxwell	21,980,725	2,431,223
David J. Tippeconnic	24,176,245	235,703

• Ratified the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for fiscal 2009.

For	Against	Abstain	Broker Non-Votes
24,250,453	145,700	15,795	—

ITEM 5. Other Information

Not applicable

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ITEM 6. Exhibits:

Exhibit 10.1:	Amended and Restated Deferred Compensation Plan for Members of the Board of Directors.
Exhibit 10.2:	Form of Amendment to Severance Agreement (Senior Executives).
Exhibit 10.3:	Form of Amendment to Severance Agreement (Key Employees).
Exhibit 31.1:	Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – CEO.
Exhibit 31.2:	Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – CFO.
Exhibit 32.1:	Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) – CEO.
Exhibit 32.2:	Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) – CFO.

Signature

Pursuant to the requirements 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.

	MATRIX SERVICE COMPANY
Date: January 8, 2009	By:	/s/ Thomas E. Long
		Thomas E. Long, Vice President Finance and Chief Financial Officer signing on behalf of the registrant and as the registrant’s principal financial officer

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EXHIBIT INDEX

Exhibit 10.1:	Amended and Restated Deferred Compensation Plan for Members of the Board of Directors.
Exhibit 10.2:	Form of Amendment to Severance Agreement (Senior Executives).
Exhibit 10.3:	Form of Amendment to Severance Agreement (Key Employees).
Exhibit 31.1:	Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – CEO.
Exhibit 31.2:	Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – CFO.
Exhibit 32.1:	Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) – CEO.
Exhibit 32.2:	Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) – CFO.

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