The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, set forth in Item 8,"Financial Statements and Supplementary Data" of this Form 10-K. For additional information, see "Disclosure Regarding Forward Looking Statements" in

Executive Overview

Please refer to Item 1. "Business" of this Form 10-K for a discussion of the Company's services and corporate strategy. Integrated Electrical Services, Inc., a Delaware corporation, is a leading provider of infrastructure services to the residential, commercial and industrial industries as well as for data centers and other mission critical environments. We operate primarily in the electrical infrastructure markets, with a corporate focus on expanding into other markets through strategic acquisitions or investments.

Industry Trends

Our performance is affected by a number of trends that drive the demand for our services. In particular, the residential, industrial, mission critical infrastructure and commercial industries in which we operate are exposed to many regional and national trends such as the demand for single and multi-family housing, the need for mission critical facilities as a result of technology-driven advancements, and changes in commercial, institutional, public infrastructure and electric utility spending. Over the long term, we believe that there are numerous factors that could positively drive demand and affect growth within the industries in which we operate, including (i) population growth, which will increase the need for commercial and residential facilities,
(ii) aging public infrastructure, which must be replaced or repaired,
(iii) increased emphasis on environmental and energy efficiency, which may lead to both increased public and private spending, and (iv) the low price of natural gas combined with an increase in domestic oil and gas output, which is expected to spur the construction of and modifications to heavy industrial facilities. However, there can be no assurance that we will not experience a decrease in demand for our services due to economic, technological or other factors. For a further discussion of the industries in which we operate, please see Item 1. "Business -Operating Segments"of this Form 10-K.

Business Outlook

While differences exist among the Company's segments, on an overall basis, demand for the Company's services increased in fiscal 2012 as compared to fiscal 2011 resulting in aggregate year-over-year revenue growth. In addition, the Company's previous investment in growth initiatives and other business-specific factors discussed below contributed to year-over-year revenue growth. Segment-wise, year-over-year revenue growth rates during fiscal 2012 were led primarily by growth in our Communications and Residential segments. The combination of increasing revenue, improved project execution within our Commercial & Industrial segment and lower costs due to our restructuring efforts resulted in a significant reduction in operating losses. Provided that no significant deterioration in general economic conditions occurs, the Company expects revenues from existing businesses to grow on a year-over-year basis during fiscal 2013 due to an increase in demand for our services.

To service our indebtedness and to fund working capital, we require a significant amount of cash. Our ability to generate cash depends on many factors that are beyond our control, including demand for our products and services, the availability of projects at margins acceptable to us, the ultimate collectability of our receivables and our ability to borrow on our 2012 Credit Facility, among many other factors. We anticipate that the combination of cash on hand, cash flows and available capacity under our 2012 Credit Facility will provide sufficient cash to enable us to meet our working capital needs, debt service requirements and capital expenditures for property and equipment through the next twelve months. We expect that our capital expenditures will range from $1.0 to $1.5 million for the fiscal year ending on September 30, 2013.

We report our operating results across three operating segments: Communications, Residential and Commercial & Industrial. Expenses associated with our Corporate office are classified as a fourth segment. The following table presents selected historical results of operations of IES and subsidiaries.

                                                            Years Ended September 30,
                                          2012                         2011                         2010
                                     $             %              $             %              $             %
                                                  (Dollars in thousands, Percentage of revenues)
Revenues                         $ 456,115        100.0 %     $ 406,141        100.0 %     $ 382,431        100.0 %
Cost of services                   398,063         87.3 %       361,757         89.1 %       326,939         85.5 %

Gross profit                        58,052         12.7 %        44,384         10.9 %        55,492         14.5 %
Selling, general and
administrative expenses             58,609         12.8 %        63,321         15.6 %        74,251         19.4 %
Gain on sale of assets                (168 )          - %        (6,555 )       (1.6 )%         (128 )          - %
Asset impairment                        -             - %         4,804          1.2 %            -             - %
Restructuring charges                   -             - %            -             - %           763          0.2 %

Loss from operations                  (389 )       (0.1 )%      (17,186 )       (4.3 )%      (19,394 )       (5.1 )%

Interest and other expense,
net                                  2,228          0.5 %         2,203          0.5 %         3,253          0.9 %

Loss from operations before
income taxes                        (2,617 )       (0.6 )%      (19,389 )       (4.8 )%      (22,647 )       (6.0 )%
Provision (benefit) for income
taxes                                   38            - %           172            - %           (36 )          - %

Net loss from continuing
operations                          (2,655 )       (0.6 )%      (19,561 )       (4.8 )%      (22,611 )       (6.0 )%

Net income from discontinued
operations                          (9,158 )       (2.0 )%      (18,288 )       (4.5 )%       (8,539 )       (2.2 )%
(Benefit) provision for income
taxes                                  (11 )          - %           (26 )          - %             5            - %

Net loss from discontinued
operations                          (9,147 )       (2.0 )%      (18,262 )       (4.5 )%       (8,544 )       (2.2 )%

Net loss                         $ (11,802 )       1.4  %     $ (37,823 )       (0.3 )%    $ (31,155 )       (3.8 )%

Consolidated revenues for the year ended September 30, 2012 were $50.0 million greater than for the year ended September 30, 2011, an increase of 12.3%.

The $13.7 million increase in our consolidated gross profit for the year ended September 30, 2012, as compared to the year ended September 30, 2011, was primarily the result of company-wide concerted efforts to return the organization to profitability. Our organization as a whole, and each segment individually, was successful in executing projects, and managing costs to maximize gross profits. Our overall gross profit percentage increased to 12.7% during the year ended September 30, 2012 as compared to 10.9% during the year ended September 30, 2011.

Selling, general and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily of compensation and benefits related to corporate, division and branch

management, occupancy and utilities, training, professional services, information technology costs, consulting

fees, travel and certain types of depreciation and amortization. We allocate certain corporate selling, general and administrative costs across our segments as we believe this more accurately reflects the costs associated with operating each segment.

During the year ended September 30, 2012, our selling, general and administrative expenses were $58.6 million, a decrease of $4.7 million, or 7.4%, as compared to the year ended September 30, 2011. Included in the year ended September 30, 2012 is $0.9 million of severance attributable to the departures of our former CFO and our former Senior Vice President and General Counsel. Included in year ended September 30, 2011 is $2.9 million of accelerated amortization attributable to the discontinuance of certain software and $1.3 million of severance attributable to the former CEO's departure.

During the year ended September 30, 2011, our results of operations included a gain on sale of a non-strategic facility of $6.8 million, partially offset by $4.8 million in asset impairments with no comparable charges in the current year.

Communications

2012 Compared to 2011



                                                                   Years Ended September 30,
                                                              2012                               2011
                                                       $                  %                 $              %
                                                         (Dollars in thousands, Percentage of revenues)
Revenue                                          $     121,492             100.0 %      $  83,615         100.0 %
Gross Profit                                            18,204              15.0 %         12,473          14.9 %
Selling, general and administrative expenses            13,431              11.1 %          9,578          11.5 %

Revenue. Our Communications segment revenues increased $37.9 million during the year ended September 30, 2012, a 45.3% increase compared to the year ended September 30, 2011. This increase is primarily due to an increase in data center projects and high tech manufacturing projects during 2012, along with our establishment of an operation in San Diego, California. We believe the expansion of technology, cloud computing and increased demands for consumer focused data storage and collection, has led to an increase in demand for additional data center capacity. Revenues attributable to data centers were $38.9 million for the year ended September 30, 2012 compared to $29.9 million for the year ended September 30, 2011. The increase in high tech manufacturing projects is related to a major expansion by a high tech manufacturer in the greater Phoenix, Arizona area. Revenues from high tech manufacturing projects were $28.1 million during the year ended September 30, 2012, and $9.4 million during the year ended September 30, 2011. Although the growth in data center and high tech manufacturing projects was significant for the year ended September 30, 2012, there can be no assurance that this level of business or growth will continue, as a significant amount of our project work is awarded through a competitive bid process. Revenue from the establishment of our San Diego operations increased overall revenue by $10.5 million for the year ended September 30, 2012.

Gross Profit. Our Communications segment's gross profit during the year ended September 30, 2012 increased $5.7 million, or 46.0%, as compared to the year ended September 30, 2011. The increase in gross profit is attributable to a higher volume of contract revenues as noted in the revenue analysis above. Overall gross profit as a percentage of revenue remained unchanged during 2012. Exclusive of our San Diego operations, which were established in the fourth quarter of 2011, gross profit increased 0.9%.

Selling, General and Administrative Expenses. Our Communications segment's selling, general and administrative expenses increased $3.9 million, or 40.2%, during the year ended September 30, 2012 compared to the year ended September 30, 2011. Selling, general and administrative expenses as a percentage of revenues in the Communication segment decreased to 11.1% of segment revenue during the year ended September 30, 2012. The increase in selling, general and administrative expenses is primarily due to a $1.2 million legal

settlement reserve, detailed in Note 16, "Commitment and Contingencies-TekWorks, Inc" in the notes to our Consolidated Financial Statements. Additionally, we incurred higher expenses associated with our expansion of facilities in Southern California, including litigation expenses, increased staff in response to revenue growth, and to a lesser extent, incentive awards for achieving specific performance goals.

2011 Compared to 2010



                                                                    Years Ended September 30,
                                                              2011                                2010
                                                      $                  %                  $                %
                                                          (Dollars in thousands, Percentage of revenues)
Revenue                                          $     83,615             100.0 %      $     69,171         100.0 %
Gross Profit                                           12,473              14.9 %            12,411          17.9 %
Selling, general and administrative expenses            9,578              11.5 %             7,298          10.6 %

Revenue. Our Communications segment revenues increased $14.4 million during the year ended September 30, 2011, a 20.9% increase compared to the year ended September 30, 2010. This increase is primarily due to an increase in data center projects and national account activity. We believe the expansion of technology, cloud computing and increased demands for consumer focused data storage and collection have led to an increase in demand for additional data center capacity. Revenues attributable to data centers were $29.9 million for the year ended September 30, 2011 compared to $18.4 million for the year ended September 30, 2010. National accounts are used within this segment to describe customers who have multiple mission critical facilities throughout the United States; we provide a wide range of project and maintenance services to these customers. Revenues from our national accounts were $21.5 million during the year ended September 30, 2011, and $12.8 million during the year ended September 30, 2010. Although the growth in data center and national account projects was significant for the year ended September 30, 2011, there can be no assurance that this level of business or growth will continue, as substantially all of our project work is awarded through a competitive bid process.

Gross Profit. Our Communications segment's gross profit during the year ended September 30, 2011 increased $0.1 million, as compared to the year ended September 30, 2010. Gross profit as a percent of revenue decreased to 14.9% in 2011, compared to 17.9% in 2010. The decrease in gross profit percentage is attributed to increased competition driving down margin rates on individual contracts when compared to 2010.

Selling, General and Administrative Expenses Our Communications segment's selling, general and administrative expenses increased $2.3 million, or 31.2%, during the year ended September 30, 2011 compared to the year ended September 30, 2010. Selling, general and administrative expenses as a percentage of revenues in the Communication segment increased to 11.5% of segment revenue during the year ended September 30, 2011. The increase can be attributed to higher expenses associated with our expansion of facilities in San Diego, and to a lesser extent, incentive awards for achieving specific performance goals.

Residential

2012 Compared to 2011



                                                                   Years Ended September 30,
                                                              2012                               2011
                                                       $                  %                 $              %
                                                         (Dollars in thousands, Percentage of revenues)
Revenue                                          $     129,974             100.0 %      $ 114,732         100.0 %
Gross Profit                                            20,700              15.9 %         18,690          16.3 %
Selling, general and administrative expenses            19,703              15.2 %         18,441          16.1 %

Revenue. Our Residential segment revenues increased $15.3 million during the year ended September 30, 2012, an increase of 13.3% as compared to the year ended September 30, 2011. Revenues for our multi-family construction increased by $4.2 million. In 2012, multi-family industry starts were attributed to improved demand for rental housing. Rental housing demand was partially driven by the deferral of purchases of single family homes due to continued restrictive lending practices for single family purchases, an uncertain job market and lower apartment vacancy rates. Single family construction revenues increased by $11.6 million, primarily in the Texas markets. We entered into the solar installation market during fiscal 2012, resulting in revenues of $9.5 million. Included in our fiscal 2011 balance are revenues attributable to a non-core electrical distribution facility, totaling $13.1 million. We sold this business in February 2011, and as such, no revenues from this facility are included in our fiscal 2012 balance.

Gross Profit. During the year ended September 30, 2012, our Residential segment experienced a $2.0 million, or 10.8%, increase in gross profit as compared to the year ended September 30, 2011. Gross margin percentage in the Residential segment decreased to 15.9% during the year ended September 30, 2012. We attribute much of the increase in Residential's gross margin primarily to the higher volume of single family projects.

Selling, General and Administrative Expenses. Our Residential segment experienced a $1.3 million, or 6.8%, increase in selling, general and administrative expenses during the year ended September 30, 2012 compared to the year ended September 30, 2011. Selling, general and administrative expenses as a percentage of revenues in the Residential segment decreased to 15.2% of segment revenue during the year ended September 30, 2012. We attribute much of the increase in Residential selling, general and administrative expenses primarily to increased incentives and our expansion into the solar installation market.

2011 Compared to 2010



                                                                   Years Ended September 30,
                                                              2011                               2010
                                                       $                  %                 $              %
                                                         (Dollars in thousands, Percentage of revenues)
Revenue                                          $     114,732             100.0 %      $ 115,947         100.0 %
Gross Profit                                            18,690              16.3 %         23,525          20.3 %
Selling, general and administrative expenses            18,441              16.1 %         23,736          20.5 %

Revenue. Our Residential segment revenues decreased $1.2 million during the year ended September 30, 2011, a decrease of 1.0% as compared to the year ended September 30, 2010. Approximately $4.4 million of this decrease is primarily attributable to the sale of a non-core electrical distribution facility in February 2011. Revenues for our multi-family construction increased by $10.7 million as multi-family industry project starts increased to 195,000 units from 154,000 units in 2010. In 2011, multi-family industry starts were attributed to improved demand for rental housing. Rental housing demand was partially driven by the deferral of purchases of single family homes due to more restrictive lending practices for single family purchases, an uncertain job market and lower apartment vacancy rates. Single family construction revenues declined by $6.6 million, partially due to the end in tax stimulus for new home buyers, more restrictive lending practices and an uncertain job market. Nationwide demand for single-family homes declined, particularly in markets such as Southern California, Arizona, Nevada, Texas and Georgia.

Gross Profit. During the year ended September 30, 2011, our Residential segment experienced a $4.8 million, or 20.6%, reduction in gross profit as compared to the year ended September 30, 2010. Gross margin percentage in the Residential segment decreased to 16.1% during the year ended September 30, 2011. We attribute much of the decline in Residential's gross margin to increased competition and increased costs of materials creating lower margins in both single-family and multi-family construction. As our contracts provide for fixed prices, near term increases in costs for raw materials, such as copper, steel and fuel can significantly erode the margins which currently exist in the highly competitive residential construction marketplace. For example, copper prices are

particularly volatile. During the year ended September 30, 2011, commodity prices for copper ranged from $3.15 to $4.62 per pound. The average spot price for copper was $4.13 per pound during the twelve months ended September 30, 2011, an increase of 29.0% over the prior twelve month period.

Selling, General and Administrative Expenses. Our Residential segment experienced a $5.3 million, or 22.3%, reduction in selling, general and administrative expenses during the year ended September 30, 2011 compared to the year ended September 30, 2010. Selling, general and administrative expenses as a percentage of revenues in the Residential segment declined to 16.1% of segment revenue during the year ended September 30, 2011. We attribute much of the decline in Residential selling, general and administrative expenses to lower management and incentive compensation expense.

Commercial & Industrial

2012 Compared to 2011



                                                                   Years Ended September 30,
                                                              2012                               2011
                                                       $                  %                 $              %
                                                         (Dollars in thousands, Percentage of revenues)
Revenue                                          $     204,649             100.0 %      $ 207,794         100.0 %
Gross Profit                                            19,148               9.4 %         13,221           6.4 %
Selling, general and administrative expenses            17,166               8.4 %         21,788          10.5 %

Revenue. Revenues in our Commercial & Industrial segment decreased $3.2 million during the year ended September 30, 2012, a decrease of 1.5% compared to the year ended September 30, 2011. Our Commercial & Industrial segment is impacted not only by industry construction trends, but also specific industry and local economic trends. Impacts from these trends on our revenues may be delayed due to the long lead time of our projects. Our revenues were also impacted by a refocusing of our business development strategy on projects within our demonstrated areas of expertise and with increased margin expectations. Projects in all sectors remain subject to delays or cancellation with little advance notice. In many of our Commercial markets, we continue to experience increased competition from new entrants, including residential contractors or contractors from other geographic markets.

Gross Profit. Our Commercial & Industrial segment's gross profit during the year ended September 30, 2012 increased $5.9 million, or 44.8%, as compared to the year ended September 30, 2011. Commercial & Industrial's gross margin percentage increased to 9.4% during the year ended September 30, 2012, primarily due to improved execution of projects in all locations. Although the competitive market that has existed during the prolonged recession has continued to depress project bid margins, we have begun to experience some reprieve. In 2011, we experienced margin erosion and project difficulties due to a combination of project management turnover, projects outside our historical area of expertise, and delays in receipt of material and labor productivity, all of which significantly increased our cost on those projects. In 2012, we focused our efforts on winning projects within our areas of expertise, and significantly reduced the project inefficiencies due to delay and labor turnover.

Selling, General and Administrative Expenses. Our Commercial & Industrial segment's selling, general and administrative expenses during the year ended September 30, 2012 decreased $4.6 million, or 21.2%, compared to the year ended September 30, 2011. Selling, general and administrative expenses as a percentage of revenues in the Commercial & Industrial segment decreased to 8.4% of segment revenue during the year ended September 30, 2012. This decrease is primarily attributed to the consolidation of back offices in several locations late in fiscal 2011.

2011 Compared to 2010



                                                                   Years Ended September 30,
                                                              2011                               2010
                                                       $                  %                 $              %
                                                         (Dollars in thousands, Percentage of revenues)
Revenue                                          $     207,794             100.0 %      $ 197,313         100.0 %
Gross Profit                                            13,221               6.4 %         19,556           9.9 %
Selling, general and administrative expenses            21,788              10.5 %         29,047          14.7 %

Revenue. Revenues in our Commercial & Industrial segment increased $10.5 million during the year ended September 30, 2011, an increase of 5.3% compared to the year ended September 30, 2010. Our Commercial & Industrial segment is impacted not only by industry construction trends, but also specific industry and local economic trends. Impacts from these trends on our revenues may be delayed due to the long lead time of our projects. According to McGraw Hill, total nonresidential building starts in the United States, in terms of millions of square feet, decreased 13% in 2010 and was unchanged in 2011. Our Industrial projects experienced revenue increases while our Commercial projects were . . .