You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements, the related notes, and management's discussion and analysis included in our Annual Report on Form 10-K for the year ended September 30, 2012. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to the risk factors discussed in the "Risk Factors" sections of our annual report on Form 10-K for the year ended September 30, 2012, and elsewhere in this Quarterly Report on form 10-Q. Actual results may differ materially from those contained in any forward-looking statements.

Executive Overview

Please refer to Item 1. "Business" of our Annual Report on Form 10-K for the year ended September 30, 2012 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.

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.

                                                             Three Months Ended December 31,
                                                           2012                             2011
                                                    $                  %               $             %
                                                     (Dollars in thousands, Percentage of revenues)
Revenues                                       $    127,264           100.0  %     $ 108,998        100.0  %
Cost of services                                    109,284            85.9  %        95,805         87.9  %

Gross profit                                         17,980            14.1  %        13,193         12.1  %
Selling, general and administrative expenses         14,922             11.7 %        12,655          11.6 %
Gain on sale of assets                                  (19 )            -   %          (137 )        (0.1 )%

Income from operations                                3,077             2.4  %           675          0.6  %

Interest and other expense, net                       2,329             1.8  %           502          0.5  %

Income from operations before income taxes              748             0.6  %           173          0.1  %
Provision (benefit) for income taxes                    115             0.1  %           (19 )         -   %

Net income from continuing operations                   633             0.5  %           192          0.1  %

Net loss from discontinued operations                  (138 )           (0.1 )%       (3,726 )        (3.4 )%
(Benefit) provision for income taxes                    (15 )            -   %           187          0.2  %

Net loss from discontinued operations                  (123 )           (0.1 )%       (3,913 )        (3.6 )%

Net income (loss)                              $        510             0.6  %     $  (3,721 )        3.5  %

Consolidated revenues for the three months ended December 31, 2012 were $18.3 million greater than for the three months ended December 31, 2011, an increase of 16.8%. The increase in revenues resulted from a higher volume of projects throughout the organization as economic conditions improved year over year, and the increased activity from multiple large projects in our Communications segment during the three months ended December 31, 2012.

The $4.8 million increase in our consolidated gross profit for the three months ended December 31, 2012, as compared to the three months ended December 31, 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 14.1% during the three months ended December 31, 2012 as compared to 12.1% during the three months ended December 31, 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 three months ended December 31, 2012, our selling, general and administrative expenses were $14.9 million, an increase of $2.3 million, or 17.9%, as compared to the three months ended December 31, 2011. The increase in selling, general and administrative expenses resulted as we increased staffing in response to revenue growth across each segment, and incentive awards incurred in conjunction with specific profitability-based performance goals. Additionally, we incurred $0.5 million in equity compensation expense due to an unusual amount of restricted stock vesting within our corporate segment during the three months ended December 31, 2012, as compared to $0.1 million during the three months ended December 31, 2011.

Communications



                                                              Three Months Ended December 31,
                                                           2012                               2011
                                                    $                 %                  $              %
                                                      (Dollars in thousands, Percentage of revenues)
Revenue                                        $     40,119            100.0 %      $     25,162       100.0 %
Gross Profit                                          7,232             18.0 %             3,565        14.2 %
Selling, general and administrative expenses          3,558              8.9 %             2,710        10.8 %

Revenue. Our Communications segment revenues increased $15.0 million during the three months ended December 31, 2012, a 59.4% increase compared to the three months ended December 31, 2011. This increase is primarily due to the increased activity from multiple large data center and high tech manufacturing projects during the three months ended December 31, 2013. 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 $13.9 million for the quarter ended December 31, 2012 compared to $10.2 million for the quarter ended December 31, 2011. Revenues from high tech manufacturing projects were $11.6 million during the quarter ended December 31, 2012, and $2.8 million during the quarter ended December 31, 2011. Although the growth in data center and high tech manufacturing projects continued to be significant for the quarter ended December 31, 2012, and we continue to bid on significant project opportunities, we do not necessarily expect this level of business or growth will continue, as our large size project work is periodically awarded.

Gross Profit. Our Communications segment's gross profit during the three months ended December 31, 2012 increased $3.7 million, or 102.9%, as compared to the three months ended December 31, 2011. Gross profit as a percentage of revenue increased 3.8% to 18.0% for the quarter ended December 31, 2012, due primarily to the increased activity from data center and high tech manufacturing projects, and to a lesser extent, increased supplier rebates during the three months ended December 31, 2012.

Selling, General and Administrative Expenses.Our Communications segment's selling, general and administrative expenses increased $0.8 million, or 31.3%, during the three months ended December 31, 2012 compared to the three months ended December 31, 2011. Selling, general and administrative expenses as a percentage of revenues in the Communication segment decreased 1.9% to 8.9% of segment revenue during the quarter ended December 31, 2012. While higher expenses associated with our increased staffing in response to revenue growth, and incentive awards for achieving specific performance goals increased for the three months ended December 31, 2012, selling, general and administrative expenses as a percent of revenue decreased. During the three months ended December 31, 2011, we experienced higher selling, general and administrative costs in our San Diego operations, due primarily to legal fees. These costs were not duplicated in the three months ended December 31, 2012.

Residential



                                                              Three Months Ended December 31,
                                                           2012                               2011
                                                    $                 %                  $              %
                                                      (Dollars in thousands, Percentage of revenues)
Revenue                                        $     36,005            100.0 %      $     29,272       100.0 %
Gross Profit                                          6,106             17.0 %             4,646        15.9 %
Selling, general and administrative expenses          5,228             14.5 %             4,414        15.1 %

Revenue. Our Residential segment revenues increased $6.7 million during the three months ended December 31, 2012, an increase of 23.0% as compared to the three months ended December 31, 2011. Revenues for our multi-family construction increased by $3.4 million during the quarter ended December 31, 2012, primarily driven by the increased 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 $4.0 million, primarily in the Texas markets, as overall market conditions have started to improve. During the three months ended December 31, 2012, we determined the collectability of a receivable balance related to our solar division had become uncertain. As such, we did not recognize $1.9 million in revenue earned and $1.5 million in associated costs during the three months ended December 31, 2012 related to the receivable balance in question. We have subsequently entered into an asset purchase agreement with our customer, as described in Item 5 of this Quarterly Report on Form 10-Q, and will incorporate the $1.5 million in deferred costs within the purchase accounting. For additional information, please refer to our discussion of subsequent events within Note 1, Business, and to Item 5 of this Quarterly Report on Form 10-Q.

Gross Profit. During the three months ended December 31, 2012, our Residential segment experienced a $1.5 million, or 31.4%, increase in gross profit as compared to the three months ended December 31, 2011. Gross margin percentage in the Residential segment increased 1.1% to 17.0% during the three months ended December 31, 2012. We attribute much of the increase in Residential's gross margin primarily to the higher volume of single family projects. During the three months ended December 31, 2012, we determined the collectability of a receivable balance related to our solar division had become uncertain. As such, we did not recognize $1.9 million in revenue earned and $1.5 million in associated costs during the three months ended December 31, 2012

related to the receivable balance in question. We have subsequently entered into an asset purchase agreement with our customer, as described in Item 5 of this Quarterly Report on Form 10-Q, and will incorporate the $1.5 million in deferred costs within the purchase accounting. For additional information, please refer to our discussion of subsequent events within Note 1, Business, and to Item 5 of this Quarterly Report on Form 10-Q.

Selling, General and Administrative Expenses. Our Residential segment experienced a $0.8 million, or 18.4%, increase in selling, general and administrative expenses during the three months ended December 31, 2012 compared to the three months ended December 31, 2011. Selling, general and administrative expenses as a percentage of revenues in the Residential segment decreased 0.6% to 14.5% of segment revenue during the three months ended December 31, 2012. Much of the increased selling, general and administrative expenses is attributed to increased staffing associated with revenue growth.

Commercial & Industrial



                                                              Three Months Ended December 31,
                                                           2012                               2011
                                                    $                 %                  $              %
                                                      (Dollars in thousands, Percentage of revenues)
Revenue                                        $     51,140            100.0 %      $     54,564       100.0 %
Gross Profit                                          4,642              9.1 %             4,982         9.1 %
Selling, general and administrative expenses          3,736              7.3 %             4,071         7.5 %

Revenue. Revenues in our Commercial & Industrial segment decreased $3.4 million during the three months ended December 31, 2012, a decrease of 6.3% compared to the three months ended December 31, 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. 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 three months ended December 31, 2012 decreased $0.3 million, or 6.8%, as compared to the three months ended December 31, 2011. Commercial & Industrial's gross margin percentage remained constant at 9.1% during the three months ended December 31, 2012. 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 2012, we focused our efforts on winning projects within our areas of expertise, and significantly reduced 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 three months ended December 31, 2012 decreased $0.3 million, or 8.2%, compared to the three months ended December 31, 2011. Selling, general and administrative expenses as a percentage of revenues in the Commercial & Industrial segment decreased 0.2% during the three months ended December 31, 2012, reflective of improved management of overhead costs and scaled operations.

Restructuring Charges

In the second quarter of our 2011 fiscal year, we began the 2011 Restructuring Plan that was designed to consolidate operations within our Commercial & Industrial business. Pursuant to the 2011 Restructuring Plan, we planned to either sell or close certain underperforming facilities within our Commercial & Industrial operations. The 2011 Restructuring Plan was a key element of our commitment to return the Company to profitability. The results of operations related to the 2011 Restructuring Plan are included in the net loss from discontinued operations within our Consolidated Statements of Operations for the years ended September 30, 2012 and 2011.

The facilities directly affected by the 2011 Restructuring Plan were in several locations throughout the country, including Arizona, Florida, Iowa, Louisiana, Massachusetts, Nevada and Texas. These facilities were selected due to their business prospects at that time and the extended time frame needed to return the facilities to a profitable position. As part of our restructuring charges within our Commercial & Industrial segment we recognized $(4) and $69 in severance costs, $47 and $483 in consulting services, and $0 and $48 in costs related to lease terminations for the three months ended December 31, 2012 and 2011, respectively.

The following table presents the elements of costs incurred for the 2011 Restructuring Plan:

                                           Three Months Ended December 31,
                                          2012                     2011
                                                   (In thousands)
        Severance compensation         $       (4 )          $           1,455
        Consulting and other charges           47                        1,531
        Lease termination costs                -                           799

        Total restructuring charges    $       43            $           3,785

Interest and Other (Income) Expense, net



                                               Three Months Ended December 31,
                                                 2012                     2011
                                                       (In thousands)
   Interest expense                        $            472           $        530
   Deferred financing charges                           135                     91

   Total interest expense                               607                    621

   Interest income                                      (12 )                  (85 )
   Other (income) expense, net                        1,734                    (64 )

   Total interest and other expense, net   $          2,329           $        472

During the three months ended December 31, 2012, we incurred interest expense of $472 thousand primarily comprised of interest expense from the Tontine Term Loan (as defined in "Working Capital" below) and the Insurance Financing Agreements (as defined in "Working Capital" below), an average letter of credit balance of $8.5 million under the 2012 Credit Facility (as defined in "Working Capital" below) and an average unused line of credit balance of $21.5 million. This compares to interest expense of $530 thousand for the three months ended December 31, 2011, on a debt balance primarily comprised of the Tontine Term Loan and the Insurance Financing Agreements, an average letter of credit balance of $10.7 million under the 2006 Credit Facility and an average unused line of credit balance of $47.5 million.

For the three months ended December 31, 2012 and 2011, we earned interest income of $12 thousand and $85 thousand, respectively, on the average Cash and Cash Equivalents balances of $19 million and $21.6 million, respectively.

During the three months ended December 31, 2012, we fully reserved for an outstanding receivable for a settlement agreement with a former surety. The surety has failed to make payments in accordance with the settlement agreement, and has proposed a modified payment structure to satisfy the debt. Currently the Company is not likely to enter into a modified payment structure. The Company has concluded that collectability is not probable as of December 31, 2012, and has recorded a reserve for the entire balance of $1.7 million. The reserve was recorded as other expense within our Consolidated Statements of Operations. Please refer to Note 11, "Commitments and Contingencies" for additional information.

Sale of Non-Strategic Manufacturing Facility

On November 30, 2010, a subsidiary of the Company sold substantially all the assets and certain liabilities of a non-strategic manufacturing facility engaged in manufacturing and selling fabricated metal buildings housing electrical equipment, such as switchgears, motor starters and control systems, to Siemens Energy, Inc. As part of this transaction, Siemens Energy, Inc. also acquired certain real property where the fabrication facilities are located from another subsidiary of the Company. The purchase price of $10.1 million was adjusted to reflect working capital variances. The transaction was completed on December 10, 2010 at which time we recognized a gain of $6.8 million.

Sale of Non-Core Electrical Distribution Facility

On February 28, 2011, Key Electrical Supply, Inc, a wholly owned subsidiary of the Company, sold substantially all the assets and certain liabilities of a non-core electrical distribution facility engaged in distributing wiring, lighting, electrical distribution, power control and generators for residential and commercial applications to Elliot Electric Supply, Inc. The purchase price of $6.7 million was adjusted to reflect working capital variances. The loss on this transaction was immaterial.

Our provision for income taxes increased from a benefit $19 thousand for the three months ended December 31, 2011 to an expense of $0.1 million for the three months ended December 31, 2012. The increase is mainly attributable to an increase federal tax expense and an increase in state tax expense. We provided a valuation allowance for the federal tax benefit resulting from the loss of operations for the three months ended December 31, 2011. As a result, we did not recognize any net benefit for federal taxes for the years ended December 31, 2011.

During the three months ended December 31, 2012, working capital decreased by $12.0 million from December 31, 2011, reflecting a $6.1 million increase in current assets and an $18.1 million increase in current liabilities during the period.

During the three months ended December 31, 2012, our current assets increased by $6.1 million, or 4.3%, to $149.5 million, as compared to $143.4 million as of December 31, 2011. Cash and cash equivalents increased by $2.3 million during the quarter ended December 31, 2012 as compared to December 31, 2011. The current trade accounts receivables, net, decreased by $4.9 million at December 31, 2012, as compared to December 31, 2011. Days sales outstanding ("DSOs") decreased to 56 as of December 31, 2012 from 67 as of December 31, 2011. The improvement was driven predominantly by increased collection efforts. While the rate of collections may vary, our secured position, resulting from our ability to secure liens against our customers' overdue receivables, reasonably assures that collection will occur eventually to the extent that our security retains value. We also experienced a $2.9 million increase in retainage and a $0.2 million decrease in costs in excess of billings during the quarter ended December 31, 2012 compared to December 31, 2011.

During the three months ended December 31, 2012, our total current liabilities increased by $18.1 million to $101.6 million, compared to $83.5 million as of December 31, 2011. During the quarter ended December 31, 2012 accounts payable and accrued expenses increased $6.0 million. Billings in excess of costs increased by $4.7 million during the quarter ended December 31, 2012 compared to December 31, 2011. Finally, current maturities of long-term debt increased by $7.4 million during the quarter ended December 31, 2012 compared to December 31, 2011 primarily due to the shifting of classification of the Tontine Term Loan from long term to current portion of long-term debt.

Surety

Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a surety. These bonds provide a guarantee to the customer that we will perform under the terms of our contract and that we will pay our subcontractors and vendors. If we fail to perform under the terms of our contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the sureties for any expenses or outlays they incur on our behalf. To date, we have not been required to make any reimbursements to our sureties for bond-related costs.

As is common in the surety industry, sureties issue bonds on a project-by-project basis and can decline to issue bonds at any time. We believe that our relationships with our sureties will allow us to provide surety bonds as they are required. However, current market conditions, as well as changes in our sureties' assessment of our operating and financial risk, could cause our sureties to decline to issue bonds for our work. If our sureties decline to issue bonds for our work, our alternatives would include posting other forms of collateral for project performance, such as letters of credit or cash, seeking bonding capacity from other sureties, or engaging in more projects that do not require surety bonds. In addition, if we are awarded a project for which a surety bond is required but we are unable to obtain a surety bond, the result could be a claim for damages by the customer for the costs of replacing us with another contractor.

As of December 31, 2012, the estimated cost to complete our bonded projects was approximately $70.2 million. We believe the bonding capacity presently provided by our sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. As of December 31, 2012, we utilized $1.0 million of cash (as is included in "Other Non-Current Assets" in our Consolidated Balance Sheet) as collateral for certain of our previous bonding programs.

The 2012 Revolving Credit Facility

On August 9, 2012, we entered into a Credit and Security Agreement (the "Credit Agreement"), for a $30.0 million revolving credit facility (the "2012 Credit Facility") with Wells Fargo Bank, National Association ("Wells Fargo"). The 2012 Credit Facility originally matured on August 9, 2015, unless earlier terminated. On February 12, 2013, we entered into an amendment of our 2012 Credit Facility . . .