UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K


þ
            ANNUAL
      REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





o
            TRANSITION
      REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the period
      from  July 1,
      2009to June
      30, 2010





Commission
file number: 0-19049


Fortune Industries,
Inc.


(Exact
name of registrant as specified in its charter)





Indiana
            
            20-2803889(State
      or other jurisdiction of
            
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)





6402 Corporate Drive, Indianapolis,
      Indiana
              
              46278(Address
      of principal executive offices)
              
              (Zip
      Code)





(317)
532-1374


(Registrant’s
telephone number, including area code)





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





Common
      Stock ($0.10 par value per share) (“Common
                Stock”);
              
              NYSE
      Amex(Title
      of Class)
              
              (Name
      of Exchange on Which
Registered)





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





None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈No þ





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes  ̈No þ





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).





Large
      accelerated filer
                 ̈
                Accelerated
      filer
                 ̈Non-accelerated
      filer
                 ̈
                Smaller
      reporting company
                þ(Do
      not check if a smaller reporting
company)





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





As of
December 31, 2009, the last business day of the registrant’s most recently
completed second fiscal quarter, the aggregate market value of the registrant’s
Common Stock and Preferred Stock held by non-affiliates, based upon the closing
price per share for the registrant’s common stock as reported on the NYSE Amex,
was approximately $2.8 million.





The
number of shares of the registrant’s Common Stock, outstanding as of September
28, 2010 was 12,234,290. The number of shares of the registrant’s Preferred
Stock, outstanding as of September 28, 2010 was 296,180.





For the
purpose of calculating the aggregate market value of the Company’s Common Stock
held by non-affiliates, the Company utilized the definition of “affiliates”
provided by Rule 12b-2 of the Exchange Act. In applying that definition, the
Company has considered all individual members of the “Control Group” as
designated in the Schedule 13D filed by the Company on August 7, 2000 and on any
amendments thereto to be affiliates, as well as all then current directors and
officers. As used for purposes of determining the aggregate market value of the
Voting Common Stock held by non-affiliates, “beneficial ownership” of securities
means the sole or shared power to vote, or to direct the voting of, such
securities, or the sole or shared investment power with respect to such
securities, including the power to dispose of, or to direct the disposition of,
such securities. In addition, for purposes of this calculation, a person is
deemed to have beneficial ownership of any security that such person had the
right to acquire within 60 days after December 31, 2009. The Company then
multiplied the beneficial ownership of the non-affiliates by the closing price
of the Company’s Common Stock, as of the date stated above, to derive the market
value, or ‘float.’





DOCUMENTS
INCORPORATED BY REFERENCE





None.








TABLE
OF CONTENTS





PART IItem 1.
                      Business
                      
                      3Item 1A.
                      Risk Factors
                      
                      8Item 1B.
                      Unresolved Staff Comments
                      
                      12Item 2.
                      Properties
                      
                      12Item 3.
                      Legal Proceedings
                      
                      12Item 4.
                      (Removed and Reserved)
                      
                      12PART IIItem 5.
                      Market for the Registrant’s Common Equity, Related
      Shareholder Matters and Issuer Purchases of Equity
      Securities
                      
                      13Item 6.
                      Selected Financial Data
                      
                      13Item 7.
                      Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                      
                      14Item 7A.
                      Quantitative and Qualitative Disclosures about Market
      Risk
                      
                      25Item 8.
                      Financial Statements and Supplementary
      Data
                      
                      25Item 9.
                      Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
                      
                      53Item 9A.
                      Controls and Procedures
                      
                      53Item 9B.
                      Other Information
                      
                      53PART IIIItem 10.
                      Directors and Executive Officers of the Registrant and
      Corporate Governance
                      
                      54Item 11.
                      Executive Compensation
                      
                      56Item 12.
                      Security Ownership of Certain Beneficial Owners and
      Management and Related Shareholder Matters
                      
                      59Item 13.
                      Certain Relationships and Related Transactions, and
      Director Independence
                      
                      60Item 14.
                      Principal Accountant Fees and
      Services
                      
                      61PART IVItem 15.
                      Exhibits and Financial Statement
      Schedules
                      
                      62SIGNATURES
                      
                      62


2


PART I





Item 1. Business





General





Fortune
Industries, Inc. is a holding company of providers of full service human
resources outsourcing services through co-employment relationships with the
company’s clients.  The terms “we,” “our,” “us,” “the Company,” and
“management” as used herein refers to Fortune Industries, Inc. and its
subsidiaries unless the context otherwise requires.  Effective
November 30, 2008, we approved the sale of all of our remaining operating
subsidiaries within four of our five segments (Wireless Infrastructure,
Transportation Infrastructure, Ultraviolet Technologies, and Electronics
Integration) to a related party.  Consequently, as of the effective
date of the transaction, our Business Solutions segment is the Company’s
remaining operating segment.  The sales transaction, combined with
other significant events disclosed in Note 2 of our financial statements in Item
8, have changed the focus of our Company in fiscal 2009 and
thereafter.  This operational change in our Company will impact the
comparability of our financial information compared to historical data presented
in past filings.





Our
operations are largely decentralized from the corporate
office.  Autonomy is given to subsidiary entities, and there are few
integrated business functions (i.e. sales, marketing, purchasing and human
resources).  Day-to-day operating decisions are made by subsidiary
management teams.  Our corporate management team assists in
operational decisions when deemed necessary, selects subsidiary management teams
and handles capital allocation among our operations.





We were
incorporated in the state of Delaware in 1988, restructured in 2000 and
redomesticated to the state of Indiana in May 2005.  Prior to 2001, we
conducted business mainly in the entertainment industry.





Recent
Developments





On
January 15, 2010, the Company entered into a Settlement Agreement with its Chief
Executive Officer John F. Fisbeck which included (a) immediate resignation of
Mr. Fisbeck as CEO of the company, (b) immediate resignation of Mr. Fisbeck from
the Company’s board of directors, and (c) waiver of certain severance payments
included in is current Employment Agreement.





On
January 15, 2010, our Board of Directors appointed Tena Mayberry to the position
of Chief Executive Officer of the Company. Ms. Mayberry replaced John F. Fisbeck
as the Company’s Chief Executive Officer.





On April
13, 2009, our Board of Directors approved a change in the Company’s fiscal year
end from August 31st to June
30th
commencing with our fiscal year 2009.  This resulted in our fiscal
year 2009 being shortened from 12 months to 10 months and ended on June 30,
2009.





Effective
November 30, 2008, the Company completed a transaction to sell all of the
outstanding shares of common stock of the following wholly-owned subsidiaries:
James H Drew Corporation, Nor-Cote International, Inc., Fortune Wireless, Inc.
and Commercial Solutions, Inc.  The subsidiaries were sold to related
parties entities owned by the Company’s majority shareholders in exchange for a
$10,000,000 reduction in the outstanding balance of the term loan note due to
the majority shareholder and a three-year term note in the amount of
$3,240,000.  The transaction also included the conversion of the
remaining term loan note balance to Preferred Stock and the issuance of
additional warrants.  For further discussion of this transaction, see
Note 2 - Disposition of Assets and ProForma Results in the Notes to the
Consolidated Financial Statements.





Effective
November 30, 2008, the Company no longer operated in the Wireless
Infrastructure, Transportation Infrastructure, Ultraviolet Technologies and
Electronics Integration Segments.





Business
Solutions Segment





The
Business Solutions segment is comprised of Professional Employer Organizations
(PEOs) which provide full-service human resources outsourcing services through
co-employment relationships with their clients.  Companies operating
in the Business Solutions Segment include Professional Staff Management, Inc.
and related entities (“PSM”); CSM, Inc. and related subsidiaries (“CSM”);
Precision Employee Management, LLC (“PEM”); and Employer Solutions Group, Inc.
and related entities (“ESG”).





The
Companies in the Business Solutions segment bill their clients under
Professional Services Agreements as licensed PEOs.  The billing
includes amounts for the client’s gross wages, payroll taxes, employee benefits,
workers’ compensation insurance and an administration fee.  The
administration fee charged by the companies in this segment is typically a
percentage of the gross payroll and is sufficient to allow the companies in this
segment to provide payroll administration services, human resources consulting
services, worksite safety training, and employment regulatory compliance for no
additional fees.





The
component of the administration fee related to administration varies, in part,
according to the size of the client, the amount and frequency of payroll
payments and the delivery method of such payments.  The component of
the administration fee related to health, workers’ compensation and unemployment
insurance is based, in part, on the client’s historical claims
experience.  Charges by the Companies in this segment are invoiced
along with each periodic payroll delivered to the client.


3


Through
the co-employment contractual relationship, the Companies in the Business
Solutions segment become the statutory employer and, as such, all
payroll-related taxes are filed on these Companies’ federal, state, and local
tax identification numbers.  The clients are not required to file any
payroll related taxes on their own behalf.  The calculations of
amounts the Companies in this segment owe and pay the various government and
employment insurance vendors are based on the experience levels and activity of
the companies in this segment.





The
services rendered by this segment accounted for 100% of our consolidated revenue
in fiscal 2010, 73% of our consolidated revenues in 2009, and 47% of our
consolidated revenues in 2008.





Customers





Customers
in this segment represent a wide variety of industries including healthcare,
professional services, software development, manufacturing logistics,
telemarketing and construction. Combined, these organizations provide
co-employment services to approximately 14,000 employees in 48 states.
Management’s focus is on providing PEO services to small and medium-sized
businesses with 10 to 1,000 employees.  The Business Solutions
segment’s customer base is diverse with only one customer with more than 10% of
sales and no customers exceeding 15% of sales.  While worksite
employees are located throughout the United States, the segment’s client
operations are primarily headquartered in Utah, Colorado, Arizona, Indiana, and
Tennessee.





Competition





The
Companies in our Business Solutions segment compete with other PEOs, third-party
payroll processing and human resources consulting companies, and in-house human
resources divisions.  The PEO industry is highly fragmented between
local, regional and national PEO operators.





Vendor
Relationships





The
Companies in the Business Solutions segment provide employee benefits to
worksite employees under arrangements with a variety of
vendors.  These companies provide group health insurance coverage to
the customers’ worksite employees through a partially self-funded health
arrangement with AIU Insurance Company for reinsurance and the United Healthcare
Networks and various other fully-insured policies or service
contracts.





Under the
partially self-funded health insurance policy one of our wholly owned
subsidiaries is liable for the first $225,000 of claims per individual per plan
year.  The total annual corporate claims aggregate is $7.6M per plan
year.  AIU is responsible for all claims over the individual $225,000
and corporate aggregate $7.6M.





The PEO’s
also provide collateralized high deductible workers compensation insurance
coverage for our customers’ worksite employees through Liberty Mutual
(“Liberty”) and Lumberman’s Underwriting Alliance (“LUA”) and various other
fully insured policies.  Under the Liberty policy, the PEO’s are
liable for the first $250,000 of claims per accident with a $1.75M annual
corporate aggregate.  Under the LUA policy, the PEO’s are liable for
the first $350,000 of claims per accident.  The LUA policy has no
aggregate coverage.





Industry
Regulation




Numerous
federal and state laws and regulations relating to employment matters, benefit
plans and employment taxes affect the operations of the Company or specifically
address issues associated with co-employment.  Many of these federal
and state laws were enacted before the development of non-traditional employment
relationships, such as professional employer organizations, temporary employment
and other employment-related outsourcing arrangements and, therefore, do not
specifically address the obligations and responsibilities of a professional
employer organization.




Other
federal and state laws and regulations are relatively new, and administrative
agencies and federal and state courts have not yet interpreted or applied these
regulations to the Company’s business or its industry.  The
development of additional regulations and interpretation of those regulations
can be expected to evolve over time. In addition, from time to time, states have
considered, and may in the future consider, imposing certain taxes on gross
revenues or service fees of the Company and its competitors.




Many
states have passed laws that have licensing, registration or other regulatory
requirements for professional employer organizations and several other states
are currently considering similar regulations. Such laws vary from state to
state, but generally codify the requirements that a professional employer
organization must reserve a right to hire, terminate and discipline client
employees and secure workers’ compensation insurance coverage.  The
Company delegates or assigns such rights to the client where allowed under state
law.  The laws also generally provide for monitoring the fiscal
responsibility of professional employer organizations and, in many cases, the
licensure of the controlling officers of the professional employer
organization.


4


In
addition, some states through legislative or other regulatory action may propose
to modify the manner in which the Company is allowed to provide services to its
clients.  Such regulatory action could increase the administrative
cost associated with providing such services.





ERISA
Requirements




Employee
pension and welfare benefit plans are also governed by the Employee Retirement
Income Security Act (ERISA).  ERISA defines an “employer” as “any
person acting directly as an employer, or indirectly in the interest of an
employer, in relation to an employee benefit plan.”  ERISA defines the
term “employee” as “any individual employed by an employer.”  The
courts have held that the common law test of employment must be applied to
determine whether an individual is an employee or an independent contractor
under ERISA. However, in applying that test, control and supervision are less
important for ERISA purposes when determining whether an employer has assumed
responsibility for an individual’s benefits status.  A definitive
judicial interpretation of “employer” in the context of a professional employer
organization or employee leasing arrangement has not been
established.




If the
Company were found not to be an employer for ERISA, Code purposes, or the tax
qualification requirements of the Code, the Company would be subject to
liabilities, including penalties, with respect to its cafeteria benefits plan
for failure to withhold and pay taxes applicable to salary deferral
contributions by its clients’ employees.  In addition, as a result of
such a finding, the Company and its plans would not enjoy, with respect to
client employees, the preemption of state laws provided by ERISA and could be
subject to varying state laws and regulation, as well as to claims based upon
state common laws.





Government
Regulation





Companies
in our Business Solutions segment are subject to various federal, state and
local laws and regulations pertaining to various employee benefit plans,
employee retirement plans (such as the 401(k)), Section 125 cafeteria plans,
group health plans, welfare benefit plans and health care flexible spending
accounts.





The
federal, state, and local regulations also apply to the payment of taxes based
upon wages paid to the employees through the payroll process.  These
taxes include the withholding of income tax, obligations under the Federal
Income Contribution Act (“FICA”) which includes both Social Security and
Medicare taxes, the Federal Unemployment Tax Act (“FUTA”) and the State
Unemployment Tax Act (“SUTA”).





In
addition, compliance with COBRA, HIPAA and ERISA (for employee benefit plans
sponsored solely by our PEOs) regulations are required.  Certain
states also have varying regulations regarding licensing, registration or
certification requirements for PEOs.





Healthcare
Reform Legislation





The
Patient Protection and Affordable Care Act (“PPACA”) became law on March 23,
2010 and amended on March 30, 2010 by the Health Care and Education
Reconciliation Act of 2010 (the “Reconciliation Act”).  The PPACA and
Reconciliation Act (collectively the “Act”) set forth a number of health care
reforms, effective between 2010 through 2018.  Until more guidance and
information relating to employer responsibilities is determined, the full effect
of the Act upon the Company and its customers is unknown at this
time.  However, we believe that we will be able to provide a valuable
service for our existing and potential customers by providing the necessary
expertise to ensure compliance with the new regulations, because most of our
customer base consists of small to medium-sized businesses without the in-house
proficiency to do so.





Our
initial interpretations of the Act include certain requirements that we
anticipate to materially affect the Company.  The most immediate
provision, effective in 2010, would enable eligible small business to receive a
tax credit for offering health care coverage to employees.  The Act
does not expressly address whether small business that are in co-employer
relationships with a PEO would receive these tax credits, but discussion in the
Congressional Record leads us to believe our qualifying customers and potential
customers would be entitled to such tax credits.





The Act
contains a number of mandates for health insurance plans to be implemented
starting in 2011.  We anticipate the ability to meet all of the
requirements we do not already meet and provide that service to our
customers.   The Company’s cost of implementing any necessary changes
may be passed through to our customers, which may affect our ability to attract
and retain customers.  If we are unable to pass those increases along
to our customers for any reason, such as contractual obligations, the increases
may negatively impact the Company’s earnings.





The Act
provides for the establishment of state insurance exchanges effective in 2014,
which would make health insurance available to individuals and small employers
with 100 or less employees. Tax credits and subsidies will be provided to
eligible small businesses, as well as individuals who purchase health insurance
through the state insurance exchanges. Employers with at least 50 full-time
employees will incur penalties if they fail to offer the minimal essential
coverage as defined in the Act to eligible employees.


5


The Act
includes an excise tax provision which levies a 40% nondeductible tax to the
employer on the annual value of health plan costs for employees that exceed
$10,200 for single coverage or $27,500 for family coverage in
2018.  The effect this tax will have on the Company and our customers
will depend on the benefit plans offered to our customers’
employees.  We believe our expertise will allow us to provide guidance
to our customers on the best ways to avoid incurring any such excise
taxes.





At this
time, we do not know what effect, if any, the Act will have on our
business.  The overall interpretation and implementation of the
requirements in the Act will likely be determined by future guidance from
various governmental entities.  Based on our initial research and
interpretations, and due to the scheduled implementation of the provisions of
the Act, we do not expect the Act to have a material adverse impact on our
results of operations in 2011.





Wireless
Infrastructure Segment





Through
November 30, 2008, we invested in wireless infrastructure businesses, having
completed six acquisitions primarily related to infrastructure products and
service offerings related to the development, marketing, management, maintenance
and upgrading of wireless telecommunications sites.  While services
are still offered under certain subsidiaries, in November 2005 we began
marketing the consolidated services of these subsidiaries under the Fortune
Wireless name brand to promote our ‘turn-key’ service offerings whereby we
assist with multiple areas of wireless infrastructure under integrated
contracting arrangements.  Turn-key services include site acquisition,
engineering, architecture and design, and construction/technical
services.





Subsidiaries
operating in the Company’s Wireless Infrastructure segment included Fortune
Wireless, Magtech Services, Inc., Cornerstone Wireless Construction Services,
Inc. and James Westbrook & Associates, LLC.





The
services rendered by this segment accounted for 0% of our revenue in fiscal
2010, 5% of our consolidated revenues in 2009, and 10% of our consolidated
revenues in 2008.





Effective
November 30, 2008, the Company sold its subsidiaries operating in the Wireless
Infrastructure segment and was no longer active in this segment.  The
Wireless Infrastructure entities continued operations as wholly-owned
subsidiaries of the acquiring entity.





Transportation
Infrastructure Segment





The
Transportation Infrastructure segment assists customers with the development,
maintenance and upgrading of transportation infrastructure and commercial
construction projects.  Transportation infrastructure products and
services are performed by James H Drew Corp. and subsidiaries (JH
Drew).  JH Drew was acquired in April 2004 and has been operating for
over fifty years servicing contractors and state departments of transportation
throughout the Midwestern United States.  JH Drew is a leading
specialty contractor in the field of transportation infrastructure, including
guardrail, electrical components, and the fabrication and installation of
structural steel for commercial buildings.





The
products and services rendered by this segment accounted for 0% of our revenue
in fiscal 2010, 17% of our consolidated revenues in 2009, and 28% of our
consolidated revenues in 2008.





Effective
November 30, 2008, the Company sold its subsidiary operating in the
Transportation Infrastructure segment and was no longer active in this
segment.  The Transportation Infrastructure entity continued
operations as a wholly-owned subsidiary of the acquiring entity.





Ultraviolet
Technologies Segment





The
Ultraviolet (UV) Technologies segment manufactures UV curable screen printing
inks.  UV Technologies products are manufactured by Nor-Cote
International, Inc. and subsidiaries (Nor-Cote), which we acquired in July 2003.
 These ink products are printed on many types of plastic, metals and other
substrates that are compatible with the UV curing process.  Typical
applications are plastic sheets, point-of-purchase (POP) signage, banners,
decals, cell phones, bottles and containers, CD and DVD, rotary-screen printed
labels, and membrane switch overlays for conductive ink.  Nor-Cote has
operating facilities in the United States, United Kingdom, China, Singapore and
Mexico, with worldwide distributors located in South Africa, Australia, Canada,
China, Colombia, Hong Kong, India, Indonesia, Italy, Japan, Korea, Mexico, New
Zealand, Poland, Spain, Taiwan, Thailand and the United States.





The
products produced by this segment accounted for 0% of our revenue in fiscal
2010, 4% of our consolidated revenues in 2009, and 8% of our consolidated
revenues in 2008.





Effective
November 30, 2008, the Company sold its subsidiary operating in the Ultraviolet
Technology segment and was no longer active in this segment.  The
Ultraviolet Technology entity continued operations as a wholly-owned subsidiary
of the acquiring entity.


6


Electronics
Integration Segment





The
Electronics Integration segment sells and installs a variety of electronic
products and equipment, including video, sound and security
products.  Subsidiaries include Kingston Sales Corporation (Kingston),
Commercial Solutions, Inc. (Commercial Solutions) and Telecom Technologies,
Corp. (TTC).





Kingston
and Commercial Solutions are distributors for prominent national companies in
the electronic, sound, security, and video markets.  Customers include
businesses in the hospitality, healthcare, education, transportation and retail
industries.  Product offerings include the latest technology in HDTV
displays, including LCD and plasma televisions, sound systems, electronic
locking devices, wire, cable and fiber optics, and intercom
systems.  The Electronics Integration segment also includes mobile
audio products for the RV and marine industry as well as telecommunications
products for commercial and residential applications.





TTC
provides a wide range of design, engineering and installation of residential,
commercial, and retail audio and video systems including video-conferencing,
digital signage, touch panel control systems, board-room, home-theater, surround
sound audio and security and CCTV systems, as well as design, engineering and
installation of structured cabling systems, digital satellite television and
wireless and network high speed (broadband) internet.





The
products and services rendered by this segment accounted for 0% of our revenue
in fiscal 2010, 2% of our consolidated revenues in 2009, and 8% of our
consolidated revenues in 2008.





Effective
November 30, 2008, the Company sold Commercial Solutions, and Kingston and TTC
ceased operations.  The Company was no longer active in the
Electronics Integration segment.  Commercial Solutions continued
operations as a wholly-owned subsidiary of the acquiring entity.





Employees





As of
September 1, 2010, we employed approximately 93 full-time
employees.  Additionally, within the Business Solutions segment, we
had approximately 14,000 co-employees under customer-contract
relationships.  Our in-house staff is supplemented with contract
personnel on an as-needed basis.  Management believes that its
relationships with its employees are generally satisfactory.





Control
Group





At July
1, 2009, a Control Group held 72.5% or 8,756,874 shares of our outstanding
common stock.  Members of the control group included our CEO, Mr. John
F. Fisbeck, and our Chairman of the Board, Mr. Carter M. Fortune.
 Individually, each of the above persons or entities had the sole voting
and dispositive power over the following number of shares of the Company’s
Common Stock as of July 1, 2009: John F. Fisbeck, 1,637,701 (or 13.6%) and
Carter M. Fortune, 4,135,010 (or 34.2%). In addition to the above shares,
Messrs. Fisbeck and Fortune shared dispositive control over 2,682,073 (or 22.2%)
shares of the Company’s Common Stock held by 14 West, LLC.





Effective
January 15, 2010, John F. Fisbeck resigned as CEO of the Company and a member of
the Board of Directors of the Company, and as a result, the Control Group ceased
to exist.





Fisbeck
Fortune Development, LLC





Through
November 30, 2008, the Company leased a total of five facilities from a
consolidated variable interest entity, whose primary purpose is to own and lease
these properties to the Company.  Effective November 30, 2008, the
Company terminated its lease agreement for its corporate headquarters and sold
its JH Drew and Nor-Cote subsidiaries which leased facilities from the variable
interest entity; therefore, the Company was no longer required to consolidate
the variable interest entity because the Company was no longer the primary
beneficiary as defined by Financial Accounting Standards Board (“FASB”) ASC
810-10 (formerly FIN46R), “Consolidation - Variable Interest
Entities”.





As
described in Note 4 of the accompanying consolidated financial statements, the
termination of the lease and the sale of subsidiaries provided for a triggering
event under ASC 810-10.  As a result, effective November 30, 2008 the
Company was no longer considered the primary beneficiary of the variable
interest entity and was not required to consolidate Fisbeck-Fortune Development
as of this date.





Additional
information with respect to the Company’s businesses





The
amounts of assets, revenues and earnings attributable to the aforementioned
operating segments are included in Note 22 to the Company’s Consolidated
Financial Statements contained in Item 8, Financial Statements and Supplementary
Data.


7


Our
common stock is traded on the NYSE Amex under the symbol “FFI”.  We
maintain a website (http://www.ffi.net)
where our annual reports, certain corporate governance documents, press
releases, interim shareholder reports and links to our subsidiaries’ websites
can be found. The Company’s periodic reports filed with the SEC, which include
Form 10-K’s, Form 10-Q’s, Form 8-K’s and amendments thereto, are included on our
website and may be accessed by the public free of charge from the SEC and
through the Company. Electronic copies of these reports can be accessed at the
SEC’s website (http://www.sec.gov)
and indirectly through our website (http://www.ffi.net).
Copies of these reports may also be obtained, free of charge, upon written
request to the Company’s principal executive office at: Fortune Industries,
Inc., 6402 Corporate Drive, Indianapolis, IN 46278, Attn: Corporate Secretary
(1-317-532-1374) or may be obtained from the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, D.C. 20549 (1-800-SEC-0330).





Item 1A. Risk
Factors





Our
businesses are subject to a variety of risks and uncertainties which are
described below. These risks and uncertainties are not the only ones we face.
Additional risks and uncertainties not described or not known to management of
the Company may also impair business operations. If any of the following risks
actually occur, our business, financial condition and results of operations
could be materially and adversely affected.





We
could have unfavorable health insurance and workers’ compensation claim
experiences.





The
Business Solutions segment calculates reserves for workers’ compensation and
health insurance claims by estimating unpaid losses and loss expenses with
respect to claims occurring on or before the balance sheet date, and in certain
instances, we carry high deductibles on these policies.  Such estimates
include provisions for reported claims and provisions for
incurred-but-not-reported claims.  The estimates of unpaid losses are
established and continually reviewed by the Company using a variety of
statistical and analytical techniques.  Reserve estimates reflect past
claims experience, currently known factors and trends and estimates of future
claim trends.  We cannot be certain that future claims will be
consistent with past experience.





We
could face additional liability for worksite employee payroll and benefits
costs.





Under
customer service agreements in our Business Solutions segment, we become a
co-employer of worksite employees and assume the obligations to pay the
salaries, wages and related benefits costs and payroll taxes of such worksite
employees.  Our obligations include responsibility for:





§
            payment
      of the salaries and wages for work performed by worksite employees,
      regardless of whether the client timely pays us the associated service
      fee; and


§
            providing
      benefits to worksite employees even if our costs to provide such benefits
      exceed the fees the client pays us.





If a
client does not pay us, or if the costs of benefits we provide to worksite
employees exceed the fees a client pays us, our ultimate liability for worksite
employee payroll and benefits costs could have a material adverse effect on our
financial condition or results of operations.





We
may face operational challenges as a result of changes in federal, state and
local regulations.





As a
major employer, our operations in the Business Solutions segment are affected by
numerous federal, state and local laws and regulations relating to labor, tax
and employment matters. By entering into a co-employer relationship with
employees of our clients, we assume certain obligations and responsibilities of
an employer under these laws. However, many of these laws (such as ERISA and
federal and state employment tax laws) do not specifically address the
obligations and responsibilities of non-traditional employers such as PEOs, and
the definition of “employer” under these laws is not uniform. In addition, some
of the states in which we operate have not addressed the PEO relationship for
purposes of compliance with applicable state laws governing the
employer/employee relationship. Any adverse application of these other federal
or state laws to the PEO relationship with our worksite employees could have a
material adverse effect on our results of operations or financial
condition.  However, due to the strong legislative efforts of the
National Association of Professional Employer Organizations (NAPEO), much of
this risk is being mitigated, as NAPEO has put in place in many states, via
legislation, regulations that satisfy most state legislatures.  These
self-imposed industry regulations also help to clarify or define the PEO
co-employment relationship in various areas of state employment law and have
greatly reduced the risk of legislative change negatively affecting PEOs at the
state level.





While
many states do not explicitly regulate PEOs, various states have passed or may
be considering passing laws that have licensing or registration requirements for
PEOs. Such laws vary from state to state, but generally provide for monitoring
the fiscal responsibility of PEOs, and in some cases codify and clarify the
co-employment relationship for unemployment, workers’ compensation and other
purposes under state law. While we generally support licensing regulation
because it serves to validate the PEO relationship, we typically satisfy
licensing requirements or other applicable regulations for the states we
currently operate in. However, there can be no assurance that we will
be able to obtain licenses in all states.


8


We
may face additional liabilities as a result of increases in unemployment tax
rates.





We record
our state unemployment tax expense based on taxable wages and tax rates assigned
by each state. State unemployment tax rates vary by state and are determined, in
part, based on prior years’ compensation experience in each state. Should our
claim experience increase, our unemployment tax rates could increase. In
addition, states have the ability under law to increase unemployment tax rates
to cover deficiencies in the unemployment tax fund. Some states have implemented
retroactive cost increases.  Some client contractual arrangements
limit our ability to incorporate such increases into service fees, which could
result in a delay before such increases could be reflected in service
fees.





Our
results of operations could be adversely affected as a result of goodwill
impairments.





When we
acquire a business, we record goodwill equal to the excess amount we pay for the
business, including liabilities assumed, over the fair value of the tangible and
intangible assets of the business we acquire. FASB ASC 350 (formerly SFAS 142),
“Intangibles - Goodwill and Other” which provides that goodwill and other
intangible assets that have indefinite useful lives not be amortized, but
instead must be tested at least annually for impairment, and intangible assets
that have finite useful lives should continue to be amortized over their useful
lives. ASC 350 also provides specific guidance for testing goodwill and other
non-amortized intangible assets for impairment. ASC 350 requires management to
make certain estimates and assumptions when allocating goodwill to reporting
units and determining the fair value of reporting unit net assets and
liabilities, including, among other things, an assessment of market conditions,
projected cash flows, investment rates, cost of capital and growth rates, which
could significantly impact the reported value of goodwill and other intangible
assets. Fair value is determined using a combination of the discounted cash
flow, market multiple and market capitalization valuation approaches. Absent any
impairment indicators, we perform our impairment tests annually as of the end of
the fiscal first quarter. Future impairments, if any, will be recognized as
operating expenses.





We
may not be able to successfully achieve the expected benefits of acquisitions,
which expose us to risks associated with these transactions.





We have
made and may continue to make acquisitions or investments in or engage in
strategic partnering relationships with other companies or technologies. We may
not be able to successfully achieve expected benefits.  Additionally,
we may be exposed to factors including but not limited to unanticipated
contingent liabilities, additional expenses, loss of key employees or customers,
or other contingencies consistent with acquisition risks, which ultimately could
result in significantly decreased earnings and material and adverse effects on
our business, financial condition and results of operations.





The
departure of key personnel could disrupt our business, and few of our key
personnel have employment contracts requiring a service commitment.





We depend
on the continued efforts of our executive officers and on the senior management
of the businesses we acquire. Although we intend to enter into an employment
agreement with each of our executive officers and certain other key employees,
we cannot be certain that any individual will continue in such capacity for any
particular period of time.  The loss of key personnel, or the
inability to hire and retain qualified employees, could adversely affect our
business, financial condition and results of operations.  We do not
carry key-person life insurance on some key employees, including our majority
shareholder that guarantees certain debt obligations.





If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud. In the past we have
reported material weaknesses in our internal control over financial reporting
that, if we do not substantially remedy, could result in material misstatements
in our financial statements, cause investors to lose confidence in our reported
financial information and have a negative effect on the trading price of our
stock.





Certain
businesses we have acquired may have had limited infrastructure and systems of
internal controls. Performing assessments of internal controls, implementing
necessary changes, and maintaining an effective internal controls process is
costly and requires considerable management attention, particularly in the case
of newly acquired entities. Internal control systems are designed in part upon
assumptions about the likelihood of future events, and all such systems, however
well designed and operated, can provide only reasonable, and not absolute,
assurance that the objectives of the system are met. Because of these and other
inherent limitations of control systems, there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.





We also
cannot assure that we will implement and maintain adequate controls over our
financial processes and reporting in the future or that additional material
weaknesses or significant deficiencies in our internal controls will not be
discovered in the future. Any failure to remediate any future material
weaknesses or implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating results, cause us
to fail to meet our reporting obligations or result in material misstatements in
our financial statements or other public disclosures. Inferior internal controls
could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
stock.


9


The
requirements of being a public company may strain our resources and require
significant management time and attention.





As a
public company we are subject to the reporting requirements of the Securities
Exchange Act of 1934 and the rules of the NYSE Amex.  The requirements of
these rules and regulations have increased, and may further increase in the
future, our legal and financial compliance costs, make some activities more
difficult, time consuming or costly and may also place undue strain on our
systems and resources.  The Securities Exchange Act of 1934 requires, among
other things, that we file annual, quarterly and current reports with respect to
our business and financial condition.  In order to maintain and
improve the effectiveness of our disclosure controls and procedures, and
internal controls over financial reporting, significant resources and management
oversight will be required.  These rules and regulations could also
make it more difficult for us to attract and retain qualified independent
members of our Board of Directors and qualified members of our management
team.





The
financial markets have recently experienced significant turmoil which may
negatively impact our liquidity, our ability to obtain financing and our ability
to process transactions through the banking system.




Our
liquidity and our ability to obtain financing may be negatively impacted if one
of our Lenders under our credit facility, or another financial institution,
suffers liquidity issues or ceases operations.  In such an event, we may
not be able to draw on all, or a substantial portion of, our credit facility or
timely process payroll and collection transactions through the banking
system.  Also, if we attempt to obtain future financing, in addition to our
current credit facility, we may be unable to obtain such financing which could
materially adversely affect our operations, financial condition and cash
flows.





Our short-term
results may be negatively impacted due to changes in health insurance
claims,
state unemployment tax rates and workers’ compensation rates, which we
may not be able to
immediately pass through to our clients.




Health
insurance costs, workers’ compensation and employment practices liability
insurance rates and state unemployment taxes are primarily determined by our
claims experience and comprise a significant portion of our actual
costs.  Should we experience a significant increase in claims
activity, due to the current economic downturn or otherwise, we may experience a
substantial increase in our health insurance premiums, unemployment taxes, or
workers’ compensation and employment practices liability insurance
rates.  Our ability to pass such increases through to our clients on a
timely basis may be delayed and our clients may not agree to the increases,
which could have a material adverse effect on our financial condition, results
of operations and cash flows.




Our
insurance-related loss reserves may be inadequate to cover our ultimate
liability for losses and as
a result our financial results could be materially and adversely affected.




We
maintain loss reserves to cover our liabilities for the costs of our health care
and workers’ compensation programs.  These reserves are not an exact
calculation of our liability, but rather are estimates based on a number of
factors including but not limited to actuarial calculations, current and
historical loss trends and payment patterns, the number of open claims,
developments relating to the actual claims incurred, medical trend rates and the
impact of acquisitions, if any.  Variables in the reserve estimation
may be affected by both internal and external factors, such as changes in claims
handling procedures, fluctuations in the administrative costs associated with
the program, economic conditions, fiscal policies, interest rates, legal
determinations and legislative and regulatory changes.  Although our
reserves estimates are regularly refined as historical loss experience develops
and additional claims are reported and settled, because of the uncertainties of
estimating loss reserves, we cannot assure you that our reserves are adequate,
and actual costs and expenses may exceed our reserves.  If our
reserves are insufficient to cover actual losses we may incur potentially
material charges to our earnings.





Our
ability to manage health care costs affects our profitability.





Our
profitability depends in part on our ability to appropriately predict and manage
future health care costs through underwriting criteria and negotiation of
favorable contracts with health care plan providers.  The aging of the
population and other demographic characteristics, the introduction of new or
costly treatments resulting from advances in medical technology and other
factors continue to contribute to rising health care
costs.  Government-imposed limitations on Medicare and Medicaid
reimbursements have also caused the private sector to assume a greater share of
increasing health care costs.  Changes in health care practices,
inflation, new technologies, increases in the cost of prescription drugs,
direct-to-consumer marketing by pharmaceutical companies, clusters of high cost
cases, utilization levels, changes in the regulatory environment, health care
provider or member fraud, and numerous other factors affecting the cost of
health care can be beyond any health plan provider’s control and may adversely
affect our ability to predict and manage health care costs, as well as our
business, financial condition and operating results.





We use
actuarial data to assist us in analyzing and projecting these amounts, however,
we and our carriers may not be successful in managing the cost of our
plans.  Accordingly, our costs under our health benefit plans may
exceed our estimates, requiring us to fund the difference.  Any
significant funding obligation may have a material adverse effect on our
financial condition, results of operations and liquidity.


10


We operate in a
complex regulatory environment and failure to comply with applicable
laws and
regulations could adversely affect our business.





The human
resource outsourcing and PEO environment is subject to a number of federal and
state laws and regulations, including those applicable to payroll practices,
taxes, benefits administration, insurance, wage and hour, employment practices
and data privacy.    As many of these laws do not
specifically address the obligations and responsibilities of a professional
employer organization, assuring compliance with such laws and assessing the
financial impact of such compliance can be difficult.




Because
our clients have employees in states throughout the United States, we must also
perform our services in compliance with the legal and regulatory requirements of
multiple jurisdictions.  Some of these laws and regulations may be
difficult to ascertain or interpret, may conflict and may change over time, and
the addition of new services may subject us to additional laws and
regulations.  Many of these laws and regulations were instituted prior
to the development of the professional employer organization industry, and
therefore can be difficult to interpret or assess and may change over
time.  As a result of uncertainty and inconsistency in the
interpretation and application of many of these laws and regulations, from time
to time we have had disagreements with regulatory agencies in various states,
some of which have resulted in administrative proceedings between a state agency
and us.  If we are unable to continue to provide certain contractual
obligations, such as the payment of employment taxes on the salaries and wages
paid to client employees, due to an adverse determination regarding our
regulatory status as an “employer”, our clients may be held jointly and
severally liable for such payments.  Violation of these laws and
regulations could subject us to fines and penalties, damage our reputation,
constitute breach of our client contracts and impair our ability to do business
in various jurisdictions or in accordance with established
processes.




In
addition, many states in which we operate have enacted laws that require
licensing or registration of professional employer organizations, including
Florida and Texas, and additional states are considering such
legislation.  We may not be able to satisfy the licensing requirements
or other applicable regulations of any particular state, or we may be unable to
renew our licenses in the states in which we currently operate upon expiration
of such licenses, which could prevent us from providing services to client
employees in a certain state.  In addition, many of these states have
reciprocal disciplinary arrangements under which disciplinary action in one
state can be the basis for disciplinary action in one or more other
states.  Future changes in or additions to these requirements may require
us to modify the manner in which we provide services to our clients, which may
increase our costs in providing such services.





We are
also increasingly affected by legal requirements relating to privacy of
information.  We anticipate that additional federal and state privacy
laws and regulations beyond the federal Health Insurance Portability and
Accountability Act of 1996 and the regulations promulgated there under will
continue to be enacted and implemented.  The scope of any such new
laws and regulations may be very broad and entail significant costs for us to be
in compliance.





As a result of
our co-employment relationship with most of our clients and client employees, we may
be subject to liabilities as a result of their acts or
omissions.




We enter
into a contractual relationship with each of our clients, whereby the client
transfers certain employment-related risks and liabilities to us and retains
other risks and liabilities. Many federal and state laws that apply to the
employer-employee relationship do not specifically address the obligations and
responsibilities of this “co-employment” relationship.  Consequently,
we may be subject to liability for violations of employment or discrimination
laws, including violations of federal and state wage and hour laws, by our
clients despite the contractual division of responsibilities between us, even if
we do not participate in such violations.   In addition, our
client employees may also be deemed to be acting as our agents, subjecting us to
further liability for the acts or omissions of such client
employees.  Although our professional services agreement provides that
the client will indemnify us for any liability attributable to its own or its
employees’ conduct, we may not be able to effectively enforce or collect such
contractual indemnification.  While we do maintain Employer Practices
Liability Insurance (“EPLI”) to mitigate some of this risk, any such liability
imposed upon us could have a material adverse impact on our results of
operations, financial condition and cash flows.





Because we assume
the obligation to make wage, tax and regulatory payments on behalf of our clients,
we are exposed to certain credit risks with respect to our
clients.




Under the
terms of our professional services agreement, for clients serviced on a
co-employed basis we generally assume responsibility for and manage the risks
associated with each of our client’s employee payroll obligations, including the
payment of salaries, wages and associated taxes, and, at the client’s option,
the responsibility for providing group health, welfare and retirement benefits
to each client employee.  In this “co-employment” relationship, we
directly assume these obligations, and unlike payroll processing service
providers, we issue payroll checks to each client employee drawn on our own bank
accounts.  In several states, we are required to pay wages, payroll
taxes and other amounts related to payroll regardless of whether the client
timely funds such payments to us.  For clients serviced either on a
co-employed or non co-employed basis, who meet certain financial underwriting
requirements, the Company may issue payroll to a client’s employees prior to
irrevocable receipt of payroll, taxes and associated service fees.  If
we are unable to collect these payments from our larger clients, there may be a
material adverse effect on our results of operations, financial condition and
cash flows.


11


Our
majority shareholder owns a substantial majority of our common stock and 100
percent of the company’s outstanding preferred stock.





As of
June 30, 2010, our majority shareholder, Carter M. Fortune owns 6,084,853 shares
(or 49.8%) of our outstanding common stock.  In addition to the above
shares, Mr. Fortune has dispositive control over 1,259,834 shares (or 10.3%) of
the Company’s Common Stock held by 14 West, LLC as of June 30,
2010.





As a
result, this person could have a controlling influence in determining the
outcome of any corporate matters submitted to our shareholders for approval,
including mergers, consolidations, election of directors and any other
significant corporate actions.  The interests of this shareholder may
differ from the interests of the Company’s other shareholders and their stock
ownership and thereby may limit the ability of other shareholders to influence
the management and affairs of the Company.





Our
majority shareholder has pledged his ownership holdings in the Company as
collateral on certain personal debt obligations. If our majority shareholder
were to default on these debt obligations and the collateral is called upon by
the lending institution, it could result in a potential change in ownership of
the public company which could be viewed as a negative occurrence by vendors,
customers and/or various contractual partners. The occurrence of such an event
could have a material adverse effect on the operations of the Company as a
whole.





Item 1B.
Unresolved
Staff Comments





Not
applicable.





Item 2. Properties





As of
June 30, 2010, we maintained the following operating facilities:





Segment
                
                Location(s)
                
                Description
                
                Owned /
                  Leased
                
                Approximate
                  Square
                  FootageCorporate
                
                Indianapolis,
      IN
                
                Corporate
      offices
                
                Leased
      (1)
                
                10,500Business
      Solutions
                
                Richmond,
      IN
                
                Offices
                
                Leased
      (2)
                
                10,000Brentwood,
      TN
                
                Offices
                
                Leased
                
                10,000Provo,
      UT
                
                Offices
                
                Leased
      (3)
                
                13,000Tucson,
      AZ
                
                Offices
                
                Leased
                
                2,700Loveland,
      CO
                
                Offices
                
                Leased
                
                1,400Phoenix,
      AZ
                
                Offices
                
                Leased
                
                1,000





(1)
            The
      leases on these properties are with an entity owned by the Company’s
      majority shareholder. Refer to the consolidated financial statements and
      notes thereto included elsewhere in this Form
  10-K.


(2)
            The
      leases on this property are with a limited liability company owned by the
      former Chief Operating Officer of the Company.  Refer to the
      consolidated financial statements and notes thereto included elsewhere in
      this Form 10-K.


(3)
              The
      leases on this property are with a limited liability company in which
      ESG’s former President is a member of the limited liability
      company.





In the
opinion of management of the Company, its properties are adequate for its
present needs. We do not anticipate difficulty in renewing existing leases as
they expire or in finding alternative facilities.





Item 3. Legal
Proceedings





The
Company is a party to certain pending claims that have arisen in the ordinary
course of business, none of which, in the opinion of management, is expected to
have a material adverse effect on the consolidated financial position, results
of operations, or cash flows if adversely resolved.





Item 4. (Removed
and Reserved)


12


PART II





Item 5. Market
for the Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities





Market
Information





The
Common Stock of Fortune Industries, Inc. is traded on the NYSE Amex (Symbol:
FFI). As of June 30, 2010, there were 249 holders of record of the common
stock.  This number does not include shareholders for whom shares were
held in “nominee” or “street name”.  Prior to June 23, 2005, our stock
traded on the NASD OTC Bulletin Board under the symbol "FDVI" for the period
June 17, 2001 through June 1, 2005 and under the symbol "FDVF" for the period
June 2, 2005 through June 22, 2005. High and low quotations reported by the NYSE
Amex during the periods indicated are shown below. These quotations reflect
inter-dealer prices, without retail mark-ups, markdowns or commissions and may
not represent actual transactions.





High
                
                
                LowFiscal
      Year Ending June 30, 2010Fourth
      Quarter
                
                $
                0.67
                
                
                $
                0.31Third
      Quarter
                
                
                0.80
                
                
                
                0.41Second
      Quarter
                
                
                1.25
                
                
                
                0.73First
      Quarter
                
                
                1.06
                
                
                
                0.37Fiscal
      Ten Months Ending June 30, 2009Fourth
      Quarter
                
                $
                0.71
                
                
                $
                0.60Third
      Quarter
                
                
                0.71
                
                
                
                0.36Second
      Quarter
                
                
                0.80
                
                
                
                0.20First
      Quarter
                
                
                1.15
                
                
                
                0.29





The
Company has never declared or paid any dividends on its Common
Stock.  Future dividends, if any, will be at the discretion of the
Board of Directors and will depend upon our operating performance, capital
requirements, contractual restrictions, and other factors deemed relevant by the
Board of Directors.





Unregistered
Shares Issuances





There
were no issuances of unregistered shares of Company stock that were not reported
by the Company in a Current Report on Form 8-K or in a Quarterly Report on Form
10-Q during the fiscal year ended June 30, 2010.





Item 6. Selected Financial
Data





The
following selected financial data as of and for each of the previous five fiscal
periods ending June 30 and August 31, which have been derived from our
consolidated financial statements.





Year Ended
                  June 30,
                
                
                Ten Months
                  Ending June 30,
                
                
                Year Ended August 31,2010
                
                
                2009
                
                
                2008
                
                
                2007 (1)
                
                
                2006 (2)(Dollars in thousands, except per share data)Total
      Revenues
                
                $
                60,694
                
                
                $
                72,906
                
                
                $
                158,399
                
                
                $
                158,349
                
                
                $
                157,113Net
      Income (Loss) from Continuing Operations
                
                
                1,440
                
                
                
                1,458
                
                
                
                (19,035
                )
                
                
                (7,286
                )
                
                
                2,219Net
      Income (Loss) from Discontinued Operations
                
                
                (19
                )
                
                
                (74
                )
                
                
                -
                
                
                
                -
                
                
                
                -Net
      Income (Loss)
                
                
                1,421
                
                
                
                1,384
                
                
                
                (19,035
                )
                
                
                (7,286
                )
                
                
                2,219Net
      Income (Loss) Available to Common Shareholders
                
                
                828
                
                
                
                446
                
                
                
                (19,581
                )
                
                
                (7,782
                )
                
                
                1,888Basic
      Income (Loss) per share:Income
      (Loss) from Continuing Operations
                
                $
                0.07
                
                
                $
                0.05
                
                
                $
                (1.72
                )
                
                $
                (0.72
                )
                
                $
                0.18Income
      (Loss) from Discontinued Operations
                
                $
                0.00
                
                
                $
                (0.01
                )
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00Net
      Income (Loss)
                
                $
                0.07
                
                
                $
                0.04
                
                
                $
                (1.72
                )
                
                $
                (0.72
                )
                
                $
                0.18Diluted
      Income (Loss) per share:Income
      (Loss) from Continuing Operations
                
                $
                0.06
                
                
                $
                0.04
                
                
                $
                (1.72
                )
                
                $
                (0.72
                )
                
                $
                0.18Income
      (Loss) from Discontinued Operations
                
                $
                0.00
                
                
                $
                (0.01
                )
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00Net
      Income (Loss)
                
                $
                0.06
                
                
                $
                0.03
                
                
                $
                (1.72
                )
                
                $
                (0.72
                )
                
                $
                0.18Weighted
      Average Shares Outstanding:Basic
                
                
                12,178
                
                
                
                11,854
                
                
                
                11,391
                
                
                
                10,841
                
                
                
                10,582Diluted
                
                
                14,688
                
                
                
                13,825
                
                
                
                11,720
                
                
                
                12,394
                
                
                
                11,845Consolidated
      Balance Sheet Data:Cash
      and Short-Term Investments
                
                $
                2,324
                
                
                $
                1,686
                
                
                $
                4,740
                
                
                $
                9,830
                
                
                $
                4,913Working
      Capital
                
                
                1,212
                
                
                
                (1,009
                )
                
                
                3,694
                
                
                
                (15,896
                )
                
                
                23,383Goodwill
      and Intangibles, net
                
                
                15,196
                
                
                
                15,602
                
                
                
                16,093
                
                
                
                25,911
                
                
                
                16,283Total
      Assets
                
                
                29,341
                
                
                
                30,513
                
                
                
                66,112
                
                
                
                88,355
                
                
                
                74,285Long-Term
      Obligations and Preferred Stock
                
                
                30,471
                
                
                
                29,629
                
                
                
                43,389
                
                
                
                16,364
                
                
                
                34,512Shareholders'
      Equity
                
                
                19,609
                
                
                
                18,685
                
                
                
                (3,413
                )
                
                
                14,089
                
                
                
                20,950




(1)
              Includes
      the acquisition of PEM in February 2007 and ESG in March
    2007.


13





Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations





The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and notes thereto and the other financial data
appearing elsewhere in this Form 10-K.





Overview





As a
holding company of various product and service entities, we have historically
invested in businesses that we believe are undervalued or underperforming, and
/or in operations that are poised for significant
growth.  Management’s strategic focus is to support the growth of its
operations by increasing revenues and revenue streams, managing costs and
creating earnings growth.





Our
operations are largely decentralized from the corporate
office.  Autonomy is given to subsidiary entities, and there are few
integrated business functions (i.e. sales, marketing, purchasing and human
resources).  Day-to-day operating decisions are made by subsidiary
management teams.  Our Corporate management team assists in
operational decisions when deemed necessary, selects subsidiary management teams
and handles capital allocation among our operations.





We were
incorporated in the state of Delaware in 1988, restructured in 2000 and
redomesticated to the state of Indiana in May 2005.  Prior to 2001, we
conducted business mainly in the entertainment industry.





Until
November 30, 2008, we classified our businesses under five operating
segments:  Business Solutions; Wireless Infrastructure; Transportation
Infrastructure; Ultraviolet Technologies; and Electronics Integration.  
Effective November 30, 2008, we approved the sale of all of our remaining
operating subsidiaries within four of our five segments (Wireless
Infrastructure, Transportation Infrastructure, Ultraviolet Infrastructure, and
Electronics Integration).  Consequently, as of the effective date of
the transaction, our Business Solutions segment is the Company’s remaining
operating segment.  The sales transaction, combined with other
significant events disclosed in Note 2 of our financial statements in Item
8,changed the focus of our Company in fiscal 2009 and
thereafter.  This operational change in our Company will impact the
comparability of our financial information compared to historical data presented
in past filings.





Key
Factors Affecting or Potentially Affecting Results of Operations and Financial
Condition





Management
considers the following factors, events, trends and uncertainties to be
important to understanding its results of operations and financial
condition:





Holding
Company





Over the
past eight fiscal periods, we have completed six key
acquisitions.  Four of these key acquisitions have been in the PEO
industry.  In February 2007, the Company acquired PEM, a PEO located
in Arizona.  In March 2007, the Company acquired ESG, a PEO located in
Utah and Colorado.  The Company’s acquisition of ESG enabled the
Company to expand its geographic presence in the PEO marketplace.  In
April 2005, we acquired CSM, a PEO located in Nashville,
Tennessee.  This acquisition of the oldest PEO in the state expanded
our Business Solutions segment service offerings.  In April 2004, we
acquired JH Drew, a construction installer of highway-products and commercial
structural steel.  This acquisition allowed us to gain entry into the
transportation infrastructure business in the Midwestern United
States.  In October 2003 we acquired PSM, a PEO located in
Indianapolis, Indiana.  This acquisition allowed us to gain entry into
the PEO market.  In July 2003 we acquired Nor-Cote, a specialty ink
manufacturer with worldwide distribution channels.  This acquisition
allowed us to gain entry into the ultraviolet ink business.


14


There are
several key factors that have affected or potentially may affect our results of
operations including the following:





§
            Earnings
      are dependent on a number of factors including our ability to execute
      operational strategies and integrate acquired companies into our existing
      operations.  Our historical growth has been due to several
      significant acquisitions over the past eight fiscal
      periods.  Future growth in revenues and earnings may not
      increase at the same rate as historical
growth.


§
            Certain
      expenses, such as wages, benefits and rent, are subject to normal
      inflationary pressures.  Inflation for medical costs can impact
      both our reserves for self-funded medical plans as well as our reserves
      for workers' compensation claims.


§
            Ourmajority
      shareholder effectively owns 59.7% of the outstanding Common Stock and
      100% of the outstanding Preferred Stock of the Company.  As a
      result, he could have a controlling influence in determining the outcome
      of any corporate matters submitted to our shareholders for approval,
      including mergers, consolidations, election of directors and any other
      significant corporate actions.  The interests of this
      shareholder may differ from the interests of the Company’s other
      shareholders and his stock ownership may thereby limit the ability of
      other shareholders to influence the management and affairs of the
      Company.





Business
Solutions





Our PEOs
provide services typically managed by a company’s internal human resources and
accounting departments, including payroll and tax processing and management,
worker’s compensation and risk management, benefits administration, unemployment
administration, human resource compliance services, 401k and retirement plan
administration and employee assessments.  The majority of customer
operations are concentrated in the Arizona, Colorado, Indiana, Tennessee and
Utah markets. Financial results may be affected by changes in the state
regulatory environments, results under our partially self-funded health and
partially self-funded workers’ compensation insurance plans, and economic
conditions.





Wireless
Infrastructure





Through
November 30, 2008, we invested in wireless infrastructure businesses, having
completed six acquisitions primarily related to infrastructure products and
service offerings related to the development, marketing, management, maintenance
and upgrading of wireless telecommunications sites.  Subsidiaries
operating in the Company’s Wireless Infrastructure segment included Fortune
Wireless, Magtech Services, Inc., Cornerstone Wireless Construction Services,
Inc. and James Westbrook & Associates, LLC.





Effective
November 30, 2008, the Company sold its subsidiaries operating in the Wireless
Infrastructure segment.





Transportation
Infrastructure





Through
November 30, 2008, the Company owned subsidiaries in its Transportation
Infrastructure segment that assist customers with the development, maintenance
and upgrading of transportation infrastructure and commercial construction
projects.  Transportation infrastructure products and services are
performed by JH Drew.  JH Drew was acquired in April 2004 and has been
operating for over fifty years servicing contractors and state departments of
transportation throughout the Midwestern United States.  JH Drew is a
leading specialty contractor in the field of transportation infrastructure,
including guardrail, electrical components, and the fabrication and installation
of structural steel for commercial buildings.





Effective
November 30, 2008, the Company sold its subsidiaries operating in the
Transportation Infrastructure segment.





Ultraviolet
Technologies





Through
November 30, 2008, the Company owned subsidiaries in its Ultraviolet (UV)
Technologies segment that manufactured UV curable screen printing
inks.  UV Technologies products are manufactured by Nor-Cote, which we
acquired in July 2003. These ink products are printed on many types of plastic,
metals and other substrates that are compatible with the UV curing
process.  Typical applications are plastic sheets, point-of-purchase
(POP) signage, banners, decals, cell phones, bottles and containers, CD and DVD,
rotary-screen printed labels, and membrane switch overlays for conductive
ink.  Nor-Cote has operating facilities in the United States, United
Kingdom, China, Singapore and Mexico, with worldwide distributors located in
South Africa, Australia, Canada, China, Colombia, Hong Kong, India, Indonesia,
Italy, Japan, Korea, Mexico, New Zealand, Poland, Spain, Taiwan, Thailand and
the United States.





Effective
November 30, 2008, the Company sold its subsidiaries operating in the
Ultraviolet Technologies segment.


15


Electronics
Integration





Through
November 30, 2008, the Company owned subsidiaries in its Electronics Integration
segment that sell and install a variety of electronic products and equipment,
including video, sound and security products.  Subsidiaries included
Kingston, Commercial Solutions and Telecom Technology Corp. (TTC) d/b/a
Audio-Video Revolution, Inc. (AVR).





Effective
November 30, 2008, the Company sold its subsidiary Commercial Solutions and
discontinued operations of its subsidiaries Kingston and TTC d/b/a AVR in its
Electronics Integration segment.





Results
of Operations





Results
of operations for the fiscal periods ended June 30, 2010 and 2009 and August 31,
2008 are as follows:




Revenue for the
                                                                                          
                                                                                          
                                                                                          Operating income (loss) for theYear Ended
                                                                                            June 30,
                                                                                          
                                                                                          
                                                                                          Ten
                                                                                            Months
                                                                                            Ended
                                                                                            June 30,
                                                                                          
                                                                                          
                                                                                          Year Ended
                                                                                            August 31,
                                                                                          
                                                                                          
                                                                                          Year
                                                                                            Ended
                                                                                            June,
                                                                                          
                                                                                          
                                                                                          Ten
                                                                                            Months
                                                                                            Ended
                                                                                            June 30,
                                                                                          
                                                                                          
                                                                                          Year Ended
                                                                                            August 31,2010
                                                                                          
                                                                                          
                                                                                          2009
                                                                                          
                                                                                          
                                                                                          2008
                                                                                          
                                                                                          
                                                                                          2010
                                                                                          
                                                                                          
                                                                                          2009
                                                                                          
                                                                                          
                                                                                          2008(Dollars in thousands)Business
      Solutions
                                                                                          
                                                                                          $
                                                                                          60,694
                                                                                          
                                                                                          
                                                                                          $
                                                                                          53,482
                                                                                          
                                                                                          
                                                                                          $
                                                                                          74,894
                                                                                          
                                                                                          
                                                                                          $
                                                                                          810
                                                                                          
                                                                                          
                                                                                          $
                                                                                          366
                                                                                          
                                                                                          
                                                                                          $
                                                                                          (4,207
                                                                                          )Wireless
      Infrastructure
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          3,312
                                                                                          
                                                                                          
                                                                                          
                                                                                          15,683
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          193
                                                                                          
                                                                                          
                                                                                          
                                                                                          (638
                                                                                          )Transportation
      Infrastructure
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          12,090
                                                                                          
                                                                                          
                                                                                          
                                                                                          43,757
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          557
                                                                                          
                                                                                          
                                                                                          
                                                                                          867Ultraviolet
      Technologies
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,771
                                                                                          
                                                                                          
                                                                                          
                                                                                          11,965
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          (204
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (5,385
                                                                                          )Electronics
      Integration
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,251
                                                                                          
                                                                                          
                                                                                          
                                                                                          12,094
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          100
                                                                                          
                                                                                          
                                                                                          
                                                                                          (2,648
                                                                                          )Holding
      Company
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          (600
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (4,187
                                                                                          )Variable
      Interest Entity
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,725
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,495Variable
      Interest Entity Elimination
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          (1,719
                                                                                          )
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -Segment
      Totals
                                                                                          
                                                                                          $
                                                                                          60,694
                                                                                          
                                                                                          
                                                                                          $
                                                                                          72,906
                                                                                          
                                                                                          
                                                                                          $
                                                                                          158,399
                                                                                          
                                                                                          
                                                                                          $
                                                                                          810
                                                                                          
                                                                                          
                                                                                          $
                                                                                          412
                                                                                          
                                                                                          
                                                                                          $
                                                                                          (14,703
                                                                                          )Net
      Income (Loss) Available to Common Shareholders
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          828
                                                                                          
                                                                                          
                                                                                          $
                                                                                          446
                                                                                          
                                                                                          
                                                                                          $
                                                                                          (19,581
                                                                                          )





Year
ended June 30, 2010 versus Fiscal period ended June 30, 2009





Net
income allocable to common stock shareholders was $0.8 million, or $0.06 per
diluted share on revenues of $60.7 million for the year ended June 30, 2010
compared with net income of $0.4 million, or $0.03 per diluted share on revenues
of $72.9 million for the ten months ended June 30, 2009.  The decrease
in revenue is a direct result of the sale of the non PEO subsidiaries in the
prior fiscal year along with a decrease in worksite employee accounts and
processed payroll during the current year. The increase in operating income is
due to the reduction of losses on the health care plan and continued efficiency
improvements and expense reductions in all aspects of the companies
operations.





Fiscal
period ended June 30, 2009 versus August 31, 2008





Net
income allocable to common stock shareholders was $0.4 million, or $0.03 per
diluted share on revenues of $72.9 million for the ten months ended June 30,
2009 compared with a net loss of $19.6 million, or $1.72 per diluted share on
revenues of $158.4 million for the year ended August 31, 2008.  The
decrease in revenue and increase in operating income is due to the sale of
subsidiaries and or discontinuation of operations within our Wireless,
Transportation, Ultraviolet, and Electronics segments.





The
following factors contributed to the increases and decreases in revenues in
fiscal 2009:





§
            The
      Business Solutions decreases are due to a decrease in the total number of
      worksite employees as a result of clients reducing their payrolls, bonus
      programs and overall staffing levels in the current year. The decrease is
      also due to an overall loss in customers as a direct result of the overall
      downturn in economic conditions during the current
  year.


§
            The
      Wireless Infrastructure, Ultraviolet Technologies, and the Electronics
      Integration decreases are due to the sale and or discontinuation of
      operations for the subsidiaries in these
  divisions.





The
following factors contributed to the increases in net income in fiscal
2009:





§
            Increases
      in the Business Solutions are due to a reduction in amortization due to
      prior year impairment charges, an overall reduction of internal staffing
      and continued efficiency improvements and expense reductions in all
      aspects of the companies operations. The increases in net income as a
      result of these initiatives were offset by an increase in health care
      claims.


§
            The
      Wireless Infrastructure, Ultraviolet Technologies, and the Electronics
      Integration increases are due to the sale and or discontinuation of
      operations for the subsidiaries in these
  divisions.


16


Results
by segment are described in further details as follows:





Business
Solutions





Business
Solutions segment operating results for the fiscal periods ended June 30, 2010
and 2009 and August 31, 2008 are as follows:





Year Ended
                                              
                                              
                                              Ten Month Period
                                                Ended
                                              
                                              Year EndedJune 30, 2010
                                              
                                              
                                              June 30, 2009
                                              
                                              
                                              August 31, 2008(Dollars in thousands)Revenues
                                              
                                              $
                                              60,694
                                              
                                              
                                              
                                              100
                                              %
                                              
                                              $
                                              53,482
                                              
                                              
                                              
                                              100
                                              %
                                              
                                              $
                                              74,894
                                              
                                              
                                              
                                              100
                                              %Cost
      of revenues
                                              
                                              
                                              48,068
                                              
                                              
                                              
                                              79.2
                                              %
                                              
                                              
                                              43,317
                                              
                                              
                                              
                                              81.0
                                              %
                                              
                                              
                                              61,459
                                              
                                              
                                              
                                              82.1
                                              %Gross
      profit
                                              
                                              
                                              12,626
                                              
                                              
                                              
                                              20.8
                                              %
                                              
                                              
                                              10,165
                                              
                                              
                                              
                                              19.0
                                              %
                                              
                                              
                                              
                                              13,435
                                              
                                              
                                              
                                              17.9
                                              %Operating
      expensesSelling,
      general and administrative
                                              
                                              
                                              11,046
                                              
                                              
                                              
                                              18.2
                                              %
                                              
                                              
                                              9,251
                                              
                                              
                                              
                                              17.2
                                              %
                                              
                                              
                                              
                                              14,079
                                              
                                              
                                              
                                              18.8
                                              %Depreciation
      and amortization
                                              
                                              
                                              770
                                              
                                              
                                              
                                              1.3
                                              %
                                              
                                              
                                              548
                                              
                                              
                                              
                                              1.0
                                              %
                                              
                                              
                                              
                                              1,267
                                              
                                              
                                              
                                              1.7
                                              %Impairment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              0.0
                                              %
                                              
                                              
                                              -
                                              
                                              
                                              
                                              0.0
                                              %
                                              
                                              
                                              2,296
                                              
                                              
                                              
                                              3.1
                                              %Total
      operating expenses
                                              
                                              
                                              11,816
                                              
                                              
                                              
                                              19.5
                                              %
                                              
                                              
                                              9,799
                                              
                                              
                                              
                                              18.3
                                              %
                                              
                                              
                                              17,642
                                              
                                              
                                              
                                              23.6
                                              %Segment
      operating income (loss)
                                              
                                              $
                                              810
                                              
                                              
                                              
                                              1.3
                                              %
                                              
                                              $
                                              366
                                              
                                              
                                              
                                              0.7
                                              %
                                              
                                              $
                                              (4,207
                                              )
                                              
                                              
                                              -5.6
                                              %





Revenues





Revenues
for the year ended June 30, 2010 were $60.7 million, compared to $53.4 million
for the ten months ended June 30, 2009, an increase of $7.2 million, or
13%.  Revenue increased primarily due to reporting a twelve-month
fiscal year versus a ten-month interim reporting period. Average monthly revenue
for the year ended June 30, 2010 was approximately $300,000 less (or 4.7%) than
the prior year ending. This was a direct result of a reduction of worksite
employees and decreased levels of payroll during the current year.





Revenues
for the ten months ended June 30, 2009 were $53.5 million, compared to $74.9
million for the year ended August 31, 2008, a decrease of $21.4 million, or
29%.  Revenue decreased primarily due to attrition of customers and
the impact of the economic slowdown on our customers.





Gross
Profit





Gross
profit for the year ended June 30, 2010 was $12.6 million, representing 21% of
revenue, compared to $10.2 million, representing 19% of revenues for the ten
months ended June 30, 2009.  Gross profit dollars increased largely
due to the current year being a 12 month fiscal period as compared to a 10 month
fiscal period. Gross profit percentage increased due to a reduction in losses on
the health plan during the current fiscal year.





Gross
profit for the ten months ended June 30, 2009 was $10.2 million, representing
19% of revenue, compared to $13.4 million, representing 18% of revenues for the
year ended August 31, 2008.  Gross profit as a dollar amount decreased
due to the reduction in revenue.  Gross profit as a percentage of
revenue increased due to a decrease in claims related to the workers’
compensation plan and implementing a more efficient tracking system for the
benefit plans.





Operating
Income





Operating
income for the year ended June 30, 2010 was $0.8 million, compared to operating
income of $0.4 million for the ten months ended June 30, 2009, an increase
of $0.4 million, or 100%.  Operating income increased due to a
reduction in losses on the health plan and overall efficiency improvements and
expense reductions in all areas of the companies operations.





Operating
income for the ten months ended June 30, 2009 was $0.4 million, compared to
operating loss of $(4.2) million for the year ended August 31, 2008,
an increase of $4.6 million, or 109%.  Operating income increased
due to a reduction in amortization of prior year impairment charges, reductions
in internal staffing levels and overall efficiency improvements and expense
reductions in all areas of the companies operations.





Wireless
Infrastructure





Wireless
Infrastructure segment operating results for the fiscal period ended June 30,
2010 and 2009 and August 31, 2008 are as follows:


17





Year Ended
                                        
                                        
                                        Ten Month Period
                                          Ended
                                        
                                        
                                        Year EndedJune 30, 2010
                                        
                                        
                                        June 30, 2009
                                        
                                        
                                        August 31, 2008(Dollars
      in thousands)Revenues
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        3,312
                                        
                                        
                                        
                                        100
                                        %
                                        
                                        $
                                        15,683
                                        
                                        
                                        
                                        100
                                        %Cost
      of revenues
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,458
                                        
                                        
                                        
                                        74.2
                                        %
                                        
                                        
                                        11,991
                                        
                                        
                                        
                                        76.5
                                        %Gross
      profit
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        854
                                        
                                        
                                        
                                        25.8
                                        %
                                        
                                        
                                        3,692
                                        
                                        
                                        
                                        23.5
                                        %Operating
      expensesSelling,
      general and administrative
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        650
                                        
                                        
                                        
                                        19.6
                                        %
                                        
                                        
                                        4,177
                                        
                                        
                                        
                                        26.6
                                        %Depreciation
      and amortization
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        0.3
                                        %
                                        
                                        
                                        153
                                        
                                        
                                        
                                        1.0
                                        %Impairment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        0.0
                                        %
                                        
                                        
                                        -
                                        
                                        
                                        
                                        0.0
                                        %Total
      operating expenses
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        661
                                        
                                        
                                        
                                        20.0
                                        %
                                        
                                        
                                        4,330
                                        
                                        
                                        
                                        27.6
                                        %Segment
      operating income (loss)
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        193
                                        
                                        
                                        
                                        5.8
                                        %
                                        
                                        $
                                        (638
                                        )
                                        
                                        
                                        -4.1
                                        %





Revenues





Effective
November 30, 2008, the Company sold its subsidiaries operating in the Wireless
Infrastructure segment resulting in the decrease in revenues for the ten month
period ending June 30, 2009.





Gross
Profit





Effective
November 30, 2008, the Company sold its subsidiaries operating in the Wireless
Infrastructure segment resulting in the decrease in gross profit for the ten
month period ending June 30, 2009.





Operating
Income (Loss)





Effective
November 30, 2008, the Company sold its subsidiaries operating in the Wireless
Infrastructure segment resulting in the increase in operating income for the ten
month period ending June 30, 2009.





Transportation
Infrastructure





Transportation
Infrastructure segment operating results for the fiscal period ended June 30,
2010 and 2009 and August 31, 2008 are as follows:





Year Ended
                                
                                
                                Ten Month Period
                                  Ended
                                
                                
                                Year EndedJune 30, 2010
                                
                                
                                June 30, 2009
                                
                                
                                August 31, 2008(Dollars
      in thousands)Revenues
                                
                                $
                                -
                                
                                
                                
                                -
                                
                                
                                $
                                12,090
                                
                                
                                
                                100
                                %
                                
                                $
                                43,757
                                
                                
                                
                                100
                                %Cost
      of revenues
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                10,747
                                
                                
                                
                                88.9
                                %
                                
                                
                                39,005
                                
                                
                                
                                89.1
                                %Gross
      profit
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,343
                                
                                
                                
                                11.1
                                %
                                
                                
                                4,752
                                
                                
                                
                                10.9
                                %Operating
      expensesSelling,
      general and administrative
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                781
                                
                                
                                
                                6.5
                                %
                                
                                
                                3,861
                                
                                
                                
                                8.8
                                %Depreciation
      and amortization
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5
                                
                                
                                
                                0.0
                                %
                                
                                
                                24
                                
                                
                                
                                0.1
                                %Total
      operating expenses
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                786
                                
                                
                                
                                6.5
                                %
                                
                                
                                3,885
                                
                                
                                
                                8.9
                                %Segment
      operating income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                $
                                557
                                
                                
                                
                                4.6
                                %
                                
                                $
                                867
                                
                                
                                
                                2.0
                                %





Revenues





Effective
November 30, 2008, the Company sold its subsidiary operating in the
Transportation Infrastructure segment resulting in the decrease in revenues for
the ten month period ending June 30, 2009.





Gross
Profit





Effective
November 30, 2008, the Company sold its subsidiary operating in the
Transportation Infrastructure segment resulting in the decrease in gross profit
for the ten month period ending June 30, 2009.


18


Operating
Income





Effective
November 30, 2008, the Company sold its subsidiary operating in the
Transportation Infrastructure segment resulting in the decrease in operating
income for the ten month period ending June 30, 2009.





Ultraviolet
Technologies





Ultraviolet
Technologies segment operating results for the fiscal period ended June 30, 2010
and 2009 and August 31, 2008 are as follows:




Year Ended
                                                                
                                                                
                                                                Ten Month Period
                                                                  Ended
                                                                
                                                                
                                                                Year EndedJune 30, 2010
                                                                
                                                                
                                                                June 30, 2009
                                                                
                                                                
                                                                August 31, 2008(Dollars
      in thousands)Revenues
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                $
                                                                2,771
                                                                
                                                                
                                                                
                                                                100
                                                                %
                                                                
                                                                $
                                                                11,965
                                                                
                                                                
                                                                
                                                                100
                                                                %Cost
      of revenues
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,596
                                                                
                                                                
                                                                
                                                                57.6
                                                                %
                                                                
                                                                
                                                                6,904
                                                                
                                                                
                                                                
                                                                57.7
                                                                %Gross
      profit
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,175
                                                                
                                                                
                                                                
                                                                42.4
                                                                %
                                                                
                                                                
                                                                5,061
                                                                
                                                                
                                                                
                                                                42.3
                                                                %Operating
      expensesSelling,
      general and administrative
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,320
                                                                
                                                                
                                                                
                                                                47.6
                                                                %
                                                                
                                                                
                                                                4,956
                                                                
                                                                
                                                                
                                                                41.4
                                                                %Depreciation
      and amortization
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                59
                                                                
                                                                
                                                                
                                                                2.1
                                                                %
                                                                
                                                                
                                                                322
                                                                
                                                                
                                                                
                                                                2.7
                                                                %Impairment
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                0.0
                                                                %
                                                                
                                                                
                                                                5,168
                                                                
                                                                
                                                                
                                                                43.2
                                                                %Total
      operating expenses
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,379
                                                                
                                                                
                                                                
                                                                49.8
                                                                %
                                                                
                                                                
                                                                10,446
                                                                
                                                                
                                                                
                                                                87.3
                                                                %Segment
      operating income (loss)
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                $
                                                                (204
                                                                )
                                                                
                                                                
                                                                - 7.4
                                                                %
                                                                
                                                                $
                                                                (5,385
                                                                )
                                                                
                                                                
                                                                -45.0
                                                                %





Revenues





Effective
November 30, 2008, the Company sold its subsidiary operating in the Ultraviolet
Technologies segment resulting in the decrease in revenues for the ten month
period ending June 30, 2009.





Gross
Profit





Effective
November 30, 2008, the Company sold its subsidiary operating in the Ultraviolet
Technologies segment resulting in the decrease in gross profit for the ten month
period ending June 30, 2009.





Operating
Income (Loss)





Effective
November 30, 2008, the Company sold its subsidiary operating in the Ultraviolet
Technologies segment resulting in the increase in operating income for the ten
month period ending June 30, 2009.





Electronics
Integration





Electronics
Integration segment operating results for the fiscal period ended June 30, 2010
and 2009 and August 31, 2008 are as follows:




Year Ended
                                                        
                                                        
                                                        Ten Month Period
                                                          Ended
                                                        
                                                        
                                                        Year EndedJune 30, 2010
                                                        
                                                        
                                                        June 30, 2009
                                                        
                                                        
                                                        August 31, 2008(Dollars
      in thousands)Revenues
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        $
                                                        1,251
                                                        
                                                        
                                                        
                                                        100
                                                        %
                                                        
                                                        $
                                                        12,094
                                                        
                                                        
                                                        
                                                        100
                                                        %Cost
      of revenues
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        912
                                                        
                                                        
                                                        
                                                        72.9
                                                        %
                                                        
                                                        
                                                        11,119
                                                        
                                                        
                                                        
                                                        91.9
                                                        %Gross
      profit
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        339
                                                        
                                                        
                                                        
                                                        27.1
                                                        %
                                                        
                                                        
                                                        975
                                                        
                                                        
                                                        
                                                        8.1
                                                        %Operating
      expensesSelling,
      general and administrative
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        238
                                                        
                                                        
                                                        
                                                        19.0
                                                        %
                                                        
                                                        
                                                        2,300
                                                        
                                                        
                                                        
                                                        19.0
                                                        %Depreciation
      and amortization
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1
                                                        
                                                        
                                                        
                                                        0.1
                                                        %
                                                        
                                                        
                                                        47
                                                        
                                                        
                                                        
                                                        0.4
                                                        %Impairment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        0.0
                                                        %
                                                        
                                                        
                                                        1,276
                                                        
                                                        
                                                        
                                                        10.6
                                                        %Total
      operating expenses
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        239
                                                        
                                                        
                                                        
                                                        19.1
                                                        %
                                                        
                                                        
                                                        3,623
                                                        
                                                        
                                                        
                                                        30.0
                                                        %Segment
      operating income (loss)
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        $
                                                        100
                                                        
                                                        
                                                        
                                                        8.0
                                                        %
                                                        
                                                        $
                                                        (2,648
                                                        )
                                                        
                                                        
                                                        -21.9
                                                        %


19


Revenues





Effective
November 30, 2008, the Company sold its subsidiary Commercial Solutions and
discontinued operations of its subsidiaries Kingston and TTC d/b/a AVR in its
Electronics Integration segment resulting in the decrease in revenues for the
ten months ending June 30, 2009.





Gross
Profit





Effective
November 30, 2008, the Company sold its subsidiary Commercial Solutions and
discontinued operations of its subsidiaries Kingston and TTC d/b/a AVR in its
Electronics Integration segment resulting in the decrease in gross profit for
the ten months ending June 30, 2009.





Operating
Income (Loss)





Effective
November 30, 2008, the Company sold its subsidiary Commercial Solutions and
discontinued operations of its subsidiaries Kingston and TTC d/b/a AVR in its
Electronics Integration segment resulting in the increase in operating income
for the ten months ending June 30, 2009.





Holding
Company





Interest
Expense





Interest
expense was $0.1 million for the year ended June 30, 2010, compared to $0.1
million for the ten months ended June 30, 2009.  There was no
significant change to interest expense.





Interest
expense was $0.1 million for the ten months ended June 30, 2009, compared to
$3.1 million for the year ended August 31, 2008, a decrease of $2.9 million or
96%.  The decrease was primarily due to eliminating the consolidation
of the VIE as a result of terminating the lease agreement with the VIE as of
November 30, 2008 and due to the sale of our subsidiaries for satisfaction of
our related party debt.





Income
Taxes





There was
$0.3 and $0.9 million of income tax benefit for the year ended June 30, 2010 and
for the ten months ended June 30, 2009, respectively.  A valuation
allowance is necessary to reduce the deferred tax assets, if the Company had a
federal tax operating loss and based on the weight of the evidence; it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.  Management has determined that a $7.0 million valuation
allowance at June 30, 2010 is necessary to reduce the deferred tax assets to the
amount that will more likely than not be realized.  The change in the
valuation allowance for the current period is ($0.6) million.





There was
($0.9) and $0.1 million of income tax expense (benefit) for the ten months ended
June 30, 2009 and for the year ended August 31, 2008, respectively.  A
valuation allowance is necessary to reduce the deferred tax assets, if the
Company had a federal tax operating loss and based on the weight of the
evidence; it is more likely than not that some portion or all of the deferred
tax assets will not be realized.  Management has determined that a
$7.6 million valuation allowance at June 30, 2009 is necessary to reduce the
deferred tax assets to the amount that will more likely than not be
realized.  The change in the valuation allowance for the current
period is ($0.9) million.





Liquidity
and Capital Resources





Our
principal sources of liquidity include cash and equivalents, marketable
securities and proceeds from debt borrowings.  We had $2.3 million and
$1.7 million of cash and equivalents and marketable securities at June 30, 2010
and 2009, respectively.





We had
working capital of $1.2 million at June 30, 2010 compared with $(1.0) million at
June 30, 2009. The increase in working capital was primarily due to the positive
cash flow generated by operations during the current year. Current assets are
composed primarily of cash and equivalents, net accounts receivable, and prepaid
expenses.





The
Company is required to collateralize its obligations under its workers’
compensation and health benefit plans and certain general insurance coverage.
The Company uses its cash and cash equivalents to collateralize these
obligations. Restricted cash was approximately $2.8 and $3.1 at June 30, 2010
and June 30, 2009, respectively.





Total
debt was $0.9 and $0.3 million at June 30, 2010 and 2009,
respectively.  The increase in debt was due to the addition of a $1.0
million term note put in place during the current year less the extinguishment
of the term note in place in the prior year.





The debt
agreement contains restrictive covenants which limit, among other things,
certain mergers and acquisitions, redemptions of common stock, and payment of
dividends. In addition, we must meet certain financial ratios.


20


Cash
Flows





Net cash
provided by operating activities were $0.8 million each for the year ended June
30, 2010 and the ten months ended June 30, 2009.





Net cash
used in investing activities was $0.1 each for the year ended June 30, 2010 and
the ten months ended June 30, 2009.





Net cash
flow used in financing activities was $(.10) million and $(3.7) million for the
year ended June 30, 2010 and the ten months ended June 30, 2009,
respectively.  The increase is primarily due to the fact that the
prior year cash outflow was significant due to the final balloon payment made on
outstanding convertible debt.





Contractual
Obligations and Commercial Commitments





The
following table summarizes our contractual obligations as of June 30,
2010:





Payments Due ByContractual obligation
                
                Total
                
                
                Less than 1
                  year
                
                
                1-2 years
                
                
                3-5 years
                
                
                More than 5
                  years(Dollars
      in thousands)Debt
      and capital lease obligations
                
                $
                928
                
                
                $
                511
                
                
                $
                417
                
                
                $
                -
                
                
                $
                -Operating
      lease (1)
                
                
                1,913
                
                
                
                742
                
                
                
                614
                
                
                
                557
                
                
                
                -Common
      stock put liability - ESG (2)
                
                
                248
                
                
                
                248
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                3,089
                
                
                $
                1,501
                
                
                $
                1,031
                
                
                $
                557
                
                
                $
                -





(1)
            Operating
      leases represent the total future minimum lease
  payments.


(2)
            Contractual
      obligation for put options with a put date of March 1, 2010. See Note 13
      for more detail.





Off
Balance Sheet Arrangements





As is
common in the industries in which we operate, we have entered into certain
off-balance sheet arrangements in the ordinary course of business that result in
risks not directly reflected in our balance sheets. Our significant off-balance
sheet transactions include transactions with related parties, liabilities
associated with guaranties and letter of credit obligations.





Transactions
with Related Parties





We have
entered into various acquisition agreements over the past three years that
contain option agreements or rights between the sellers of the acquired entities
and our majority shareholder, the Chairman, related to the Company’s stock
provided as consideration under the acquisitions.  As more fully
described in Note 17, the option agreements provide for put/call options on the
Company’s common stock held by the sellers of the acquired companies.





Guaranties





A
significant portion of our debt and letters of credit are personally guaranteed
by the Company’s Chairman.  Future changes to these guarantees would
affect financing capacity of the Company.  As of June 30, 2010 and 2009,
the Chairman of the Board had personally guaranteed Company debt and obligations
under irrevocable letter of credit arrangements in the amount of $3.0 million
and $2.3million, respectively..  Prior to August 31, 2007, the Company
had not paid any guarantee fees to the Chairman of the Board or the Chief
Executive Officer for their personal guarantees of Company
debt.  During the fiscal year ended August 31, 2008, the Board
approved the payment of certain guarantee fees to the CEO.  The
Company paid guarantee fees of $0.2 million for the ten months ending June 30,
2009.   The Company did not pay any guarantee fees during the
year ended June 30, 2010.





Restricted
Cash





Certain
states and vendors require us to post letters of credit to ensure payment of
taxes or payments to our vendors under workers’ compensation contracts and to
guarantee performance under our contracts. Such letters of credit are generally
issued by a bank or similar financial institution. The letter of credit commits
the issuer to pay specified amounts to the holder of the letter of credit if the
holder demonstrates that we have failed to perform specified actions. If this
were to occur, we would be required to reimburse the issuer of the letter of
credit. Depending on the circumstances of such a reimbursement, we may also have
to record a charge to earnings for the reimbursement. We do not believe that it
is likely that any claims will be made under a letter of credit in the
foreseeable future.  As of June 30, 2010, we had approximately $2.8
million in restricted cash primarily to secure obligations under our PEO
contracts in the Business Solutions segment.


21


Majority
Shareholder





As of
June 30, 2010, our Chairman of the Board, Mr. Carter M. Fortune effectively
owned and controlled 7,294,687 shares (or 59.7%) of our outstanding common
stock. Mr. Fortune also is the sole owner of 100% of the 296,180 shares of
Series C Preferred Stock outstanding at June 30, 2010. The common stock and
preferred stock owned and held by Mr. Fortune serves as collateral for certain
personal debt obligations of Mr. Fortune that do not represent liabilities of
the Company.





Critical
Accounting Policies





The
Company has identified the following policies as critical to its business and
the understanding of its results of operations.  The impact of these
policies is discussed throughout Management’s Discussion and Analysis of
Financial Condition and Results of Operations where these policies affect
reported and anticipated financial results.  For a detailed discussion on
the application of these and other accounting policies see the Notes to the
Consolidated Financial Statements.  Preparation of this report requires the
Company’s use of estimates and assumptions that affect the reported amounts of
assets, liabilities, disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported revenue and expense
amounts for the periods being reported.  On an ongoing basis, the Company
evaluates these estimates, including those related to the valuation of accounts
receivable and inventory reserves, the potential impairment of long-lived assets
and income taxes, valuation of contingent consideration resulting from
acquisitions, and valuation of certain liability reserves.  The Company
bases the estimates on historical experience and on various other assumptions
that are believed to be reasonable, the results of which forms the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.  Senior management has discussed the development, selection, and
disclosure of these estimates with the Company’s audit committee.





Management
believes the following critical accounting policies affect its more significant
judgments and estimates used in preparation of its consolidated financial
statements.





Revenue
and Cost Recognition





In the
Business Solutions segment, PSM, CSM, and ESG and related entities bill clients
under their Professional Services Agreement as licensed Professional Employer
Organizations (collectively the “PEOs”), which includes each worksite employee’s
gross wages, plus additional charges for employment related taxes, benefits,
workers’ compensation insurance, administrative and record keeping, as well as
safety, human resources, and regulatory compliance consultation. Most wages,
taxes and insurance coverage are provided under the PEOs’ federal, state, and
local or vendor identification numbers. No identification or recognition is
given to the client when these monies are remitted or calculations are reported.
Most calculations or amounts the PEOs owe the government and its employment
insurance vendors are based on the experience levels and activity of the PEOs
with no consideration to client detail. The PEOs bill the client their worksite
employees’ gross wages plus an overall service fee that includes components of
employment related taxes, employment benefits insurance, and administration of
those items. The component of the service fee related to administration varies,
in part, according to the size of the client, the amount and frequency of
payroll payments and the method of delivery of such payments. The component of
the service fee related to health, workers’ compensation and unemployment
insurance is based, in part, on the client’s historical claims experience.
Charges by the PEOs are invoiced along with each periodic payroll delivered to
the client.





The PEOs
report revenues in accordance FASB ASC 605-45 (formerly EITF 99-19), “Revenue
Recognition - Principal Agent Considerations.”  The PEOs report
revenues on a gross basis, the total amount billed to clients for service fees
which includes health and welfare benefit plan fees, workers’ compensation
insurance, unemployment insurance fees, and employment-related taxes. The PEOs
report revenues on a gross basis for such fees because the PEOs are the primary
obligor and deemed to be the principal in these transactions under ASC
605-45.  The PEOs report revenues on a net basis for the amount billed
to clients for worksite employee salaries and wages. This accounting policy of
reporting revenue net as an agent versus gross as a principal has no effect on
gross profit, operating income, or net income.





The PEOs
account for their revenues using the accrual method of accounting. Under the
accrual method of accounting, revenues are recognized in the period in which the
worksite employee performs work. The PEOs accrue revenues for service fees and
payroll taxes relating to work performed by worksite employees but unpaid at the
end of each period. The PEOs accrue unbilled receivables for payroll taxes and
service fees relating to work performed by worksite employees but unpaid at the
end of each period. In addition, the related costs of services are accrued as a
liability for the same period. Subsequent to the end of each period, such costs
are paid and the related service fees are billed.





Consistent
with their revenue recognition policy, the PEOs direct costs do not include the
payroll cost of its worksite employees. The Company’s direct costs associated
with its revenue generating activities are comprised of all other costs related
to its worksite employees, such as the employer portion of payroll-related
taxes, employee benefit plan premiums and workers’ compensation insurance
costs.


22


In the
Wireless Infrastructure segment, Fortune Wireless enters into contracts
principally on the basis of competitive bids, the final terms and prices of
which are frequently negotiated with the customer. Although the terms of its
contracts vary considerably, most are made on a unit price basis in which the
Company agrees to do the work for units of work performed. The Company also
performs services on a cost-plus or time and materials basis. The Company
completes most projects within twelve months. The Company generally recognizes
revenue utilizing output measures, such as when services are performed, units
are delivered or when contract milestones are reached.  Cornerstone
Construction recognizes revenue solely using the percentage of completion method
on contracts in process. Under this method, the portion of the contract price
recognized as revenue is based on the ratio of costs incurred to the total
estimated cost of the contract. The estimated total cost of a contract is based
upon management’s best estimate of the remaining costs that will be required to
complete a project. The actual costs required to complete a project and,
therefore, the profit eventually realized, could differ materially in the near
term. Costs and estimated earnings in excess of billings on uncompleted
contracts are shown as a current asset. Billings in excess of costs and
estimated earnings on uncompleted contracts are shown as a current liability.
Anticipated losses on contracts, if any, are recognized when they become
evident.





In the
Transportation Infrastructure segment, JH Drew recognizes revenue using the
percentage of completion method on contracts in process. Under this method, the
portion of the contract price recognized as revenue is based on the ratio of
costs incurred to the total estimated cost of the contract. The estimated total
cost of a contract is based upon management’s best estimate of the remaining
costs that will be required to complete a project. The actual costs required to
complete a project and, therefore, the profit eventually realized, could differ
materially in the near term. Costs and estimated earnings in excess of billings
on uncompleted contracts are reported as a current asset. Billings in excess of
costs and estimated earnings on uncompleted contracts are reported as a current
liability. Anticipated losses on contracts, if any, are recognized when they
become evident.





In the
Ultraviolet Technologies segment, revenue from the sale of products at Nor-Cote
is recognized according to the terms of the sales arrangement, which is
generally upon shipment. Revenues are recognized, net of estimated costs of
returns, allowances and sales incentives, title and principal ownership
transfers to the customer, which is generally when products are shipped to
customers. Products are generally sold on open account under credit terms
customary to the geographic region of distribution. Ongoing credit evaluations
are performed on customers and the Company does not generally require collateral
to secure accounts receivable.





In the
Electronics Integration segment, revenue from the sale of products at Kingston
and Commercial Solutions is recognized according to the terms of the sales
arrangement.  Revenues are recognized when title and principal
ownership transfers to the customer, which is generally when products are
shipped to customers. Products are generally sold on open account under credit
terms customary to the geographic region of distribution. Ongoing credit
evaluations are performed on customers and the Company does not generally
require collateral to secure accounts receivable.  TTC enters into
contracts principally on the basis of competitive bids, the final terms and
prices of which are frequently negotiated with the customer. Although the terms
of its contracts vary considerably, most are made on a unit price basis in which
the Company agrees to do the work for units of work performed. The Company also
performs services on a cost-plus or time and materials basis. The Company
completes most projects within one month. The Company generally recognizes
revenue utilizing output measures, such as when services are performed, units
are delivered or when contract milestones are reached.





Revenue
is reduced by appropriate allowances, estimated returns, price concessions, and
similar adjustments, as applicable.





Valuation
of Accounts Receivable and Inventory Reserves:





Collectability
of accounts receivable is evaluated for each subsidiary based on the
subsidiary’s industry and current economic conditions. Other factors include
analysis of historical bad debts, projected losses, and current past due
accounts. Inventories are valued at lower of cost or market using the first-in,
first-out method based on average cost. The Company’s valuation of inventory
includes both a markdown reserve for inventory that will be sold below original
cost, and a usage reserve. The reserve values are evaluated by each subsidiary
based upon historical information and assumptions about future demand and market
conditions. The usage reserve value is based on historical information and
assumptions as to usage of current product in inventory and related usage
trends. The Company’s accounts receivable and inventory reserves decreased by
$.07 million and $0.1 million respectively, at June 30, 2010 compared to June
30, 2009.  It is possible that changes to the markdown and usage reserves
could be required in future periods due to changes in market
conditions.





Goodwill
and Other Intangible Assets:





With the
adoption of ASC 350, material goodwill included in the Company’s Business
Solutions segment was assessed for impairment. In making this assessment,
management relies on a number of factors including operating results, business
plans, economic projections, anticipated future cash flows, and transactions and
market place data. There are inherent uncertainties related to these factors and
management’s judgment in applying them to the analysis of goodwill impairment.
Since management’s judgment is involved in performing goodwill and other
intangible assets valuation analyses, there is risk that the carrying value of
the goodwill and other intangible assets may be overstated or
understated.





In the
fiscal year ended August 31, 2008, the Company recognized impairment on certain
intangible assets in its Business Solutions segment of $2.3
million.  Management determined the assets were impaired based upon
violation of non-compete agreements with certain terminated employees, a
substantial change in the customer mix and number of worksite employees within
our Business Solutions segment.


23


The
Company has elected to perform the annual impairment test of recorded goodwill
as required by ASC 350 as of the end of fiscal first quarter.





The
Company did not recognize any impairment of goodwill or intangible assets
for year ended June 30, 2010 and ten month period ended June 30,
2009.





Impairment
of Long-Lived Assets:





The
Company evaluates the recoverability of its long-lived assets in accordance with
FASB ASC 360 (formerly SFAS 144), “Property, Plant, and Equipment,” `which
generally requires the Company to assess these assets for recoverability
whenever events or changes in circumstance indicate that the carrying amounts of
such assets may not be recoverable. The Company considers historical
performances and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the estimated
non-discounted future cash flows expected to result from the use of the asset.
If such assets are considered to be impaired, the impairment recognized is
measured by comparing projected individual segment discounted cash flows to the
asset segment carrying values. The estimation of fair value is measured by
discounting expected future cash flows at the discount rate the Company utilizes
to evaluate potential investments. Actual results may differ from these
estimates and as a result the estimation of fair values may be adjusted in the
future.





Income
Taxes:




Deferred
tax assets are recognized for taxable temporary differences, tax credit and net
operating losscarryforwards. These
assets are reduced by a valuation allowance, which is established when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. As of June 30, 2010, Management has determined that a 100%
valuation allowance against the Company’s $4.9 million component of deferred tax
assets generated by the net operating loss carry forward of  $13.9
million is necessary to reduce the deferred tax assets to the amount that will
more likely than not be realized. As of June 30, 2010, Management has also
determined that a $2.2 million valuation allowance against the Company’s $4.9
million of deferred tax assets generated by book versus tax differences of
certain assets and liabilities is necessary to reduce the deferred tax assets to
the amount that will more likely than not be realized. The Company released $0.6
million of the valuation allowance in fiscal 2010 due to the positive earnings
in the Company’s operations and projected earnings in fiscal 2011 and
2012.




As of
June 30, 2009, Management utilized a 100% valuation against the Company’s $4.8
million component of deferred tax assets generated by the net operating loss
carry forward of $12.075 million to reduce the deferred tax assets to the amount
that will more likely than not be realized. As of June 30, 2009, Management
utilized a valuation allowance of $2.8 million against the Company’s $5.3
million component of deferred tax assets generated by book versus tax
differences to reduce the deferred tax assets to the amount that will more
likely than not be realized. During fiscal 2009, the Company released $1.25
million of the valuation allowance based on the Company’s earnings trend and
projected earnings.




In
addition, management is required to estimate taxable income for future years by
taxing jurisdictions and to consider this when making its judgment to determine
whether or not to record a valuation allowance for part or all of a deferred tax
asset. A one percent change in the Company’s overall statutory tax rate for 2010
would not have a material effect in the carrying value of the net deferred tax
assets or liabilities.





The
Company has operations in multiple taxing jurisdictions and is subject to audit
in these jurisdictions. Tax audits by their nature are often complex and can
require several years to resolve. Accruals of tax contingencies require
management to make estimates and judgments with respect to the ultimate outcome
of tax audits. Actual results could vary from these estimates.





Accrued
Insurance and Workmen’s Compensation Reserves:





The
Company’s Business Solutions segment recognizes significant reserves in relation
to its partially self-funded worksite employees’ health and partially
self-funded workers’ compensation programs based on (a) the amount of past
claims incurred and (b) the estimated time lag to report and pay such claims.
The Company’s policy for its partially self-funded health plan is to accrue
estimated unpaid claims incurred during the fiscal year based on the weighted
average historical claims paid over a 2-month to 3-month lag period. PSM is
insured for losses under its health plan in excess of approximately $225
thousand per person with an aggregate liability limit of approximately $7.6
million at June 30, 2010. Our deductible under our workers’ compensation
insurance at PSM and CSM is $0.25 million with an aggregate liability limit of
approximately $2.0 million.  Our deductible under the ESG LUA policy
is $0.35 million with no aggregate liability.  The combined reserve
recognized for unpaid health and workers’ compensation benefits on the Company’s
consolidated balance sheet is $1.7 million (for which approximately $1.7 million
of cash is restricted on the Company’s consolidated balance sheet) for the year
ended June 30, 2010.





New
Accounting Pronouncements





See Note
1 of the Notes to the Consolidated Financial Statements of this report for a
discussion of new accounting pronouncements.


24


Forward-Looking
Statements:





Statements
contained in this document, as well as some statements by the Company in
periodic press releases and oral statements of Company officials during
presentations about the Company constitute “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995 (the
“Act”). Forward-looking statements include statements that are predictive
in nature, depend on or refer to future events or conditions, which include
words such as “expect,” “estimate,” “anticipate,” “predict,” “believe” and
similar expressions. These statements are based on the current intent, belief or
expectation of the Company with respect to, among other things, trends affecting
the Company’s financial condition or results of operations. These
statements are not guaranties of future performance and the Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.





Actual
events and results involve risks and uncertainties and may differ materially
from those expressed or forecasted in forward-looking statements due to a number
of factors.  Factors that might cause or contribute to such
differences, include, but are not limited to, the risks and uncertainties that
are discussed under the heading “Risk Factors.” Readers should carefully review
the risk factors referred to above and the other documents filed by the Company
with the Securities and Exchange Commission.





Item 7A. Quantitative and Qualitative
Disclosures about Market Risk





Cash and
cash equivalents as of June 30, 2010 was $2.3 million and is primarily invested
in money market interest bearing accounts.  A hypothetical 10% adverse
change in the average interest rate on the Company’s investments would not have
had a material effect on net income for the year ended June 30, 2010. We do not
currently utilize any derivative financial instruments to hedge interest rate
risks.





Item 8. Financial Statements and
Supplementary Data





FORTUNE
INDUSTRIES, INC.





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





Report of Independent Registered Public Accounting
      Firm
              
              26Consolidated Balance Sheets as of June 30, 2010 and
      2009
              
              27Consolidated Statements of Operations for the fiscal
      periods ended June 30, 2010 and 2009 and August 31,
      2008
              
              29Consolidated Statements of Shareholders’ Equity
      (Deficit) for the fiscal periods ended June 30, 2010 and 2009 and August
      31, 2008
              
              30Consolidated Statements of Cash Flows for the fiscal
      periods ended June 30, 2010 and 2009 and August 31,
      2008
              
              31Notes to Consolidated Financial
      Statements
              
              33


25


Report of Independent Registered Public Accounting
Firm





Board of
Directors and Shareholders


Fortune
Industries, Inc. and Subsidiaries


Indianapolis,
IN 46278





We have
audited the accompanying consolidated balance sheets of Fortune Industries, Inc.
and subsidiaries (the “Company”) as of June 30, 2010 and 2009 and the related
consolidated statements of operations, changes in shareholders’ equity
(deficit), and cash flows for each of the fiscal periods ended June 30, 2010 and
2009 and August 31, 2008.  Our audits also included the financial
statement schedule listed in the Index at Part IV, Item 15.
 These consolidated financial statements and schedule are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinions.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Fortune Industries, Inc. and
subsidiaries as of June 30, 2010 and 2009, and the results of its operations and
its cash flows for each of the fiscal periods ended June 30, 2010 and 2009 and
August 31, 2008 in conformity with accounting principles generally accepted in
the United States of America.  Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.





/s/
Somerset CPAs, P.C.





Indianapolis,
Indiana


September
28, 2010


26


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(DOLLARS
IN THOUSANDS)





June 30,
                
                
                June 302010
                
                
                2009ASSETSCURRENT
      ASSETSCash
      and equivalents
                
                $
                2,324
                
                
                $
                1,686Restricted
      cash (Note 1)
                
                
                2,820
                
                
                
                3,142Accounts
      receivable, net (Note 5)
                
                
                2,247
                
                
                
                2,622Deferred
      tax asset (Note 10)
                
                
                1,750
                
                
                
                1,750Prepaid
      expenses and other current assets
                
                
                943
                
                
                
                1,483Inventory,
      net
                
                
                -
                
                
                
                13Assets
      of discontinued operations, net (Note 11)
                
                
                8
                
                
                
                112Total
      Current Assets
                
                
                10,092
                
                
                
                10,808OTHER
      ASSETSProperty,
      plant & equipment, net (Note 6)
                
                
                455
                
                
                
                764Term
      note receivable related party (Note 2)
                
                
                2,536
                
                
                
                2,546Deferred
      tax asset (Note 10)
                
                
                1,000
                
                
                
                750Goodwill
      (Note 7)
                
                
                12,339
                
                
                
                12,339Other
      intangible assets, net (Note 7)
                
                
                2,857
                
                
                
                3,263Other
      long-term assets
                
                
                62
                
                
                
                43Total
      Other Assets
                
                
                19,249
                
                
                
                19,705TOTAL
      ASSETS
                
                $
                29,341
                
                
                $
                30,513





See
Accompanying Notes to Consolidated Financial Statements.


27


FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS (CONTINUED)


(DOLLARS
IN THOUSANDS)





June 30,
                
                
                June 302010
                
                
                2009LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESShort-term
      debt and current maturities of long-term debt (Note 8)
                
                $
                511
                
                
                
                275Accounts
      payable
                
                
                909
                
                
                
                1,037Health
      and workers' compensation reserves
                
                
                1,696
                
                
                
                4,125Accrued
      expenses
                
                
                5,530
                
                
                
                5,376Other
      current liabilities
                
                
                234
                
                
                
                1,003Liabilities
      of discontinued operations, net (Note 11)
                
                
                -
                
                
                
                1Total
      Current Liabilities
                
                
                8,880
                
                
                
                11,817LONG-TERM
      LIABILITIESLong-term
      debt, less current maturities (Note 8)
                
                
                417
                
                
                
                11Long-term
      health and workers' compensation reserves
                
                
                435
                
                
                
                -Total
      Long-Term Liabilities
                
                
                852
                
                
                
                11Total
      Liabilities
                
                
                9,732
                
                
                
                11,828SHAREHOLDERS'
      EQUITY  (NOTE 13)Common
      stock, $0.10 par value; 150,000,000 authorized; 12,224,290 and 12,082,173
      outstanding at June 30, 2010 and 2009, respectively
                
                
                1,206
                
                
                
                1,187Series
      B and C Preferred stock, $0.10 par value; 1,000,000 authorized; 296,180
      issued and outstanding at June 30, 2010 and 2009
                
                
                29,618
                
                
                
                29,618Treasury
      stock, at cost, 48,263 shares
                
                
                (186
                )
                
                
                -Additional
      paid-in capital and warrants outstanding
                
                
                19,515
                
                
                
                19,253Accumulated
      deficit
                
                
                (30,544
                )
                
                
                (31,373
                )Total
      Shareholders' Equity
                
                
                19,609
                
                
                
                18,685TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                
                $
                29,341
                
                
                $
                30,513





See
Accompanying Notes to Consolidated Financial Statements.


28


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)





Year Ended
                  
                  
                  Ten Months Ended
                  
                  
                  Year EndedJune 30,
                  
                  
                  June 30,
                  
                  
                  August 31,2010
                  
                  
                  2009
                  
                  
                  2008REVENUESService
      revenues
                  
                  $
                  60,694
                  
                  
                  $
                  54,977
                  
                  
                  $
                  81,838Product
      revenues
                  
                  
                  -
                  
                  
                  
                  17,929
                  
                  
                  
                  76,561TOTAL
      REVENUES
                  
                  
                  60,694
                  
                  
                  
                  72,906
                  
                  
                  
                  158,399COST
      OF REVENUESService
      cost of revenues
                  
                  
                  48,068
                  
                  
                  
                  44,086
                  
                  
                  
                  65,350Product
      cost of revenues
                  
                  
                  -
                  
                  
                  
                  14,944
                  
                  
                  
                  65,128TOTAL
      COST OF REVENUES
                  
                  
                  48,068
                  
                  
                  
                  59,030
                  
                  
                  
                  130,478GROSS
      PROFIT
                  
                  
                  12,626
                  
                  
                  
                  13,876
                  
                  
                  
                  27,921OPERATING
      EXPENSESSelling,
      general and administrative expenses
                  
                  
                  11,046
                  
                  
                  
                  12,598
                  
                  
                  
                  31,102Depreciation
      and amortization
                  
                  
                  770
                  
                  
                  
                  866
                  
                  
                  
                  2,782Impairment
      (Note 1)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,740Total
      Operating Expenses
                  
                  
                  11,816
                  
                  
                  
                  13,464
                  
                  
                  
                  42,624OPERATING
      INCOME (LOSS)
                  
                  
                  810
                  
                  
                  
                  412
                  
                  
                  
                  (14,703
                  )OTHER
      INCOME (EXPENSE)Interest
      income
                  
                  
                  123
                  
                  
                  
                  159
                  
                  
                  
                  191Interest
      expense
                  
                  
                  (17
                  )
                  
                  
                  (114
                  )
                  
                  
                  (3,062
                  )Loss
      on disposal of assets
                  
                  
                  -
                  
                  
                  
                  (20
                  )
                  
                  
                  (350
                  )Exchange
      rate gain
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  36Other
      income
                  
                  
                  262
                  
                  
                  
                  76
                  
                  
                  
                  27Total
      Other Income (Expense)
                  
                  
                  368
                  
                  
                  
                  102
                  
                  
                  
                  (3,158
                  )INCOME
      (LOSS) BEFORE MINORITY INTEREST IN VARIABLE INTEREST
ENTITY
                  
                  
                  1,178
                  
                  
                  
                  514
                  
                  
                  
                  (17,861
                  )Minority
      Interest in Variable Interest Entity (Note 4)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,095INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  1,178
                  
                  
                  
                  514
                  
                  
                  
                  (18,956
                  )Provision
      for income taxes (Note 10)
                  
                  
                  (262
                  )
                  
                  
                  (944
                  )
                  
                  
                  79NET
      INCOME (LOSS) FROM CONTINUING OPERATIONS
                  
                  
                  1,440
                  
                  
                  
                  1,458
                  
                  
                  
                  (19,035
                  )DISCONTINUED
      OPERATIONSLoss
      from discontinued operations (Note 11)
                  
                  
                  (19
                  )
                  
                  
                  (74
                  )
                  
                  
                  -NET
      INCOME (LOSS)
                  
                  
                  1,421
                  
                  
                  
                  1,384
                  
                  
                  
                  (19,035
                  )Preferred
      stock dividends
                  
                  
                  592
                  
                  
                  
                  938
                  
                  
                  
                  546NET
      INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
                  
                  $
                  828
                  
                  
                  $
                  446
                  
                  
                  $
                  (19,581
                  )Basic
      Income (Loss) Per Common Share - Continuing Operations
                  
                  $
                  0.07
                  
                  
                  $
                  0.05
                  
                  
                  $
                  (1.72
                  )Basic
      Income (Loss) Per Common Share - Discontinued Operations
                  
                  $
                  -
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  -Basic
      Income (Loss) Per Common Share
                  
                  $
                  0.07
                  
                  
                  $
                  0.04
                  
                  
                  $
                  (1.72
                  )Basic
      weighted average shares outstanding
                  
                  
                  12,177,741
                  
                  
                  
                  11,853,957
                  
                  
                  
                  11,391,130Diluted
      Income (Loss) Per Common Share - Continuing Operations
                  
                  $
                  0.06
                  
                  
                  $
                  0.04
                  
                  
                  $
                  (1.72
                  )Diluted
      Income (Loss) Per Common Share - Discontinued Operations
                  
                  $
                  -
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  -Diluted
      Income (Loss) Per Common Share
                  
                  $
                  0.06
                  
                  
                  $
                  0.03
                  
                  
                  $
                  (1.72
                  )Diluted
      weighted average shares outstanding
                  
                  
                  14,687,904
                  
                  
                  
                  13,824,520
                  
                  
                  
                  11,719,806





See
Accompanying Notes to Consolidated Financial Statements.


29


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)


(DOLLARS
IN THOUSANDS)





Additional
                    
                    
                    
                    
                    
                    AccumulatedPaid-in Capital
                    
                    
                    
                    
                    
                    Other
                    
                    
                    TotalCommon
                    
                    
                    Treasury
                    
                    
                    Preferred
                    
                    
                    and Warrants
                    
                    
                    Accumulated
                    
                    
                    Comprehensive
                    
                    
                    Shareholders'
                    
                    
                    ComprehensiveStock
                    
                    
                    Stock
                    
                    
                    Stock
                    
                    
                    Outstanding
                    
                    
                    Deficit
                    
                    
                    Income
                    
                    
                    Equity(Deficit)
                    
                    
                    Income(Loss)BALANCE
      AT AUGUST 31, 2007 (Restated)
                    
                    $
                    1,117
                    
                    
                    $
                    (923
                    )
                    
                    $
                    6,618
                    
                    
                    $
                    19,317
                    
                    
                    $
                    (12,300
                    )
                    
                    $
                    260
                    
                    
                    $
                    14,089Issuance
      of 28,950 shares of common stock for compensation
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    56
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    59
                    
                    
                    
                    -Retirement
      of 30,270 shares of common stock
                    
                    
                    (3
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (132
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (135
                    )
                    
                    
                    -Net
      Loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (19,035
                    )
                    
                    
                    -
                    
                    
                    
                    (19,035
                    )
                    
                    
                    (19,035
                    )Retirement
      of 66,180 shares of series A preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (6,618
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (6,618
                    )
                    
                    
                    -Issuance
      of 79,180 shares of series B preferred stock
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    7,918
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,918
                    
                    
                    
                    -Preferred
      stock dividends
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (546
                    )
                    
                    
                    -
                    
                    
                    
                    (546
                    )
                    
                    
                    -Foreign
      currency translation adjustments, net of tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (68
                    )
                    
                    
                    (68
                    )
                    
                    
                    (68
                    )Distribution
      of 384,500 shares from variable interest entity
                    
                    
                    -
                    
                    
                    
                    923
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    923
                    
                    
                    
                    -Total
      comprehensive loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    (19,103
                    )BALANCE
      AT AUGUST 31, 2008
                    
                    $
                    1,117
                    
                    
                    $
                    -
                    
                    
                    $
                    7,918
                    
                    
                    $
                    19,241
                    
                    
                    $
                    (31,881
                    )
                    
                    $
                    192
                    
                    
                    $
                    (3,413
                    )Issuance
      of 708,800 shares of common stock for compensation
                    
                    
                    71
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    124
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    195
                    
                    
                    
                    -Retirement
      of 10,000 shares of common stock
                    
                    
                    (1
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (61
                    )
                    
                    
                    62
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,384
                    
                    
                    
                    -
                    
                    
                    
                    1,384
                    
                    
                    
                    1,384Retirement
      of 79,180 shares of series B preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7,918
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7,918
                    )
                    
                    
                    -Issuance
      of 100,880 shares of series C preferred stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    29,618
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    29,618
                    
                    
                    
                    -Disposition
      of productive business assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (51
                    )
                    
                    
                    -
                    
                    
                    
                    (192
                    )
                    
                    
                    (243
                    )
                    
                    
                    (192
                    )Preferred
      stock dividends
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (938
                    )
                    
                    
                    -
                    
                    
                    
                    (938
                    )
                    
                    
                    -Total
      comprehensive income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    1,192BALANCE
      AT JUNE 30, 2009
                    
                    $
                    1,187
                    
                    
                    $
                    -
                    
                    
                    $
                    29,618
                    
                    
                    $
                    19,253
                    
                    
                    $
                    (31,373
                    )
                    
                    $
                    -
                    
                    
                    $
                    18,685Issuance
      of 142,117 shares of common stock for compensation
                    
                    
                    14
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    81
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    95
                    
                    
                    
                    -Purchase
      of 48,263 shares of common stock for treasury at cost
                    
                    
                    5
                    
                    
                    
                    (186
                    )
                    
                    
                    -
                    
                    
                    
                    181
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,421
                    
                    
                    
                    -
                    
                    
                    
                    1,421
                    
                    
                    
                    1,421Preferred
      stock dividends
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (592
                    )
                    
                    
                    -
                    
                    
                    
                    (592
                    )
                    
                    
                    -BALANCE
      AT JUNE 30, 2010
                    
                    $
                    1,206
                    
                    
                    $
                    (186
                    )
                    
                    $
                    29,618
                    
                    
                    $
                    19,515
                    
                    
                    $
                    (30,544
                    )
                    
                    $
                    -
                    
                    
                    $
                    19,609
                    
                    
                    $
                    1,421





See
Accompanying Notes to Consolidated Financial Statements


30


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(DOLLARS
IN THOUSANDS)


YearEnded
                
                
                Ten Months
                  Ended
                
                
                Year EndedJune 30,
                
                
                June 30,
                
                
                August 31,2010
                
                
                2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Income (Loss)
                
                $
                1,421
                
                
                $
                1,384
                
                
                $
                (19,035
                )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                
                
                770
                
                
                
                1,033
                
                
                
                3,675Provision
      for gains (losses) on accounts receivable
                
                
                (111
                )
                
                
                (155
                )
                
                
                325Loss
      on disposal of assets
                
                
                -
                
                
                
                20
                
                
                
                350Stock
      based compensation
                
                
                95
                
                
                
                195
                
                
                
                59Extinguishment
      of debt
                
                
                (250
                )
                
                
                -
                
                
                
                (135
                )Minority
      interest in variable interest entity income
                
                
                -
                
                
                
                -
                
                
                
                1,095Deferred
      income taxes
                
                
                (250
                )
                
                
                (1,011
                )
                
                
                -Impairment
      on intangible assets
                
                
                -
                
                
                
                -
                
                
                
                8,740Changes
      in certain operating assets and liabilities:Restricted
      cash
                
                
                322
                
                
                
                2,228
                
                
                
                (279
                )Accounts
      receivable
                
                
                486
                
                
                
                914
                
                
                
                3,627Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                
                
                -
                
                
                
                -
                
                
                
                (1,506
                )Inventory,
      net
                
                
                -
                
                
                
                92
                
                
                
                2,289Prepaid
      assets and other current assets
                
                
                553
                
                
                
                (98
                )
                
                
                577Assets
      of discontinued operations
                
                
                106
                
                
                
                410
                
                
                
                -Other
      long-term assets
                
                
                (9
                )
                
                
                5
                
                
                
                73Accounts
      payable
                
                
                (128
                )
                
                
                332
                
                
                
                (3,618
                )Health
      and workers' compensation reserves
                
                
                (1,993
                )
                
                
                (1,125
                )
                
                
                307Accrued
      expenses and other current liabilities
                
                
                (256
                )
                
                
                (3,680
                )
                
                
                2,200Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                
                
                -
                
                
                
                -
                
                
                
                (546
                )Liabilities
      of discontinued operations
                
                
                -
                
                
                
                214
                
                
                
                -Net
      Cash Provided by (Used in) Operating Activities
                
                
                756
                
                
                
                758
                
                
                
                (1,802
                )CASH
      FLOWS FROM INVESTING ACTIVITIESCapital
      expenditures
                
                
                (55
                )
                
                
                (121
                )
                
                
                (1,333
                )Variable
      interest entity proceeds from sale of assets
                
                
                -
                
                
                
                -
                
                
                
                390Proceeds
      from sale of assets
                
                
                -
                
                
                
                12
                
                
                
                20Net
      Cash Used in Investing Activities
                
                
                (55
                )
                
                
                (109
                )
                
                
                (923
                )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      borrowings (payments) under line of credit
                
                
                -
                
                
                
                -
                
                
                
                (11,750
                )Borrowings
      (payments) on long-term debt majority shareholder
                
                
                -
                
                
                
                (300
                )
                
                
                32,300Proceeds
      from short and long-term debt
                
                
                1,000
                
                
                
                250
                
                
                
                -Payments
      on short and long-term debt
                
                
                (108
                )
                
                
                (50
                )
                
                
                (18,282
                )Variable
      interest entity payments on long-term debt
                
                
                -
                
                
                
                -
                
                
                
                (829
                )Payments
      on convertible debentures
                
                
                -
                
                
                
                (3,405
                )
                
                
                (2,272
                )Repurchases
      of common stock for treasury
                
                
                (557
                )
                
                
                -
                
                
                
                -Dividends
      paid on preferred stock
                
                
                (398
                )
                
                
                (198
                )
                
                
                (546
                )Proceeds
      from variable interest entity member contributions
                
                
                -
                
                
                
                -
                
                
                
                160Distributions
      to variable interest entity members
                
                
                -
                
                
                
                -
                
                
                
                (1,078
                )Net
      Cash Provided by (Used in) Financing Activities
                
                
                (63
                )
                
                
                (3,703
                )
                
                
                (2,297
                )Effect
      of exchange rate changes on cash
                
                
                -
                
                
                
                -
                
                
                
                (68
                )NET
      INCREASE (DECREASE) IN CASH AND EQUIVALENTS
                
                
                638
                
                
                
                (3,054
                )
                
                
                (5,090
                )CASH
      AND EQUIVALENTSBeginning
      of Period
                
                
                1,686
                
                
                
                4,740
                
                
                
                9,830End
      of Period
                
                $
                2,324
                
                
                $
                1,686
                
                
                $
                4,740





See
Accompanying Notes to Consolidated Financial Statements.


31


FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(DOLLARS
IN THOUSANDS)





Year
                  Ended
                
                
                TenMonthsEnded
                
                
                YearEndedJune 30,
                
                
                June 30,
                
                
                August 31,2010
                
                
                2009
                
                
                2008SUPPLEMENTAL
      DISCLOSURESInterest
      paid
                
                $
                17
                
                
                $
                80
                
                
                $
                2,735Income
      taxes paid
                
                $
                49
                
                
                $
                67
                
                
                $
                256Non-cash
      investing and financing activities:Stock
      distribution to variable interest entity members
                
                $
                -
                
                
                $
                -
                
                
                $
                1,846Retirement
      of series A preferred stock as exchange for series B
                
                
                -
                
                
                
                -
                
                
                
                (6,618
                )Issuance
      of series B preferred stock for debt extinguishment
                
                
                -
                
                
                
                -
                
                
                
                7,918Retirement
      of series B preferred stock in exchange for series C
                
                
                -
                
                
                
                (7,918
                )
                
                
                -Issuance
      of series C preferred stock in exchange for series B
                
                
                -
                
                
                
                7,918
                
                
                
                -Issuance
      of series C preferred stock for debt extinguishment
                
                
                -
                
                
                
                21,700
                
                
                
                -Term
      note receivable for disposition of assets
                
                
                -
                
                
                
                (3,240
                )
                
                
                -Reduction
      in term loan in exchange for disposition of assets
                
                
                -
                
                
                
                (10,000
                )
                
                
                -Reduction
      in accrued dividend in exchange for term note receivable
      offset
                
                
                -
                
                
                
                740
                
                
                
                -Reduction
      in term note receivable with accrued dividend offset
                
                
                -
                
                
                
                (740
                )
                
                
                -$
                -
                
                
                $
                8,460
                
                
                $
                3,146





See
Accompanying Notes to Consolidated Financial Statements.


32




FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(DOLLARS
IN THOUSANDS UNLESS OTHERWISE INDICATED,


EXCEPT
PER SHARE DATA)





NOTE
1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





General





Fortune
Industries, Inc. (formerly known as Fortune Diversified Industries, Inc.) is an
Indiana corporation, originally incorporated in Delaware in 1988. The term
“Company” as used herein refers to Fortune Industries, Inc. and its subsidiaries
unless the context otherwise requires.  The Company provides full
service human resources outsourcing services through co-employment relationships
with its clients.  As a holding company, the Company has historically
invested in businesses that are undervalued, underperforming, or in operations
that are poised for significant growth.  Management’s strategic focus
is to support the revenue and earnings growth of its operations by creating
synergies that can be leveraged to enhance the performance of the Company’s
entities and by investing capital to fund expansion.  Effective
November 30, 2008, the Company sold its subsidiaries in its Wireless
Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and
Electronics Integration business segments to a related party.  Refer
to Note 2 for further details.  As of this date, management will focus
all its financial and human capital resources on its subsidiaries in the
Business Solutions segment.  The effect of this sale will impact the
comparability of the Company’s financial information in future
filings.





On April
13, 2009, our Board of Directors approved a change in the Company’s fiscal year
end from August 31st to June 30thcommencing
with our fiscal year 2009.  This resulted in our fiscal year 2009
being shortened from 12 months to 10 months and ending on June 30,
2009.





Principles of
Consolidation: The accompanying consolidated financial statements
include the accounts of Fortune Industries, Inc., its wholly owned subsidiaries,
and a variable interest entity as described in Note 4.  Nor-Cote
International, Inc., a wholly-owned subsidiary until November 30, 2008, contains
foreign subsidiaries from the United Kingdom, China, and Singapore, which have
been eliminated in consolidation at the Nor-Cote subsidiary level (Collectively,
“Nor-Cote”).  Refer to Note 2 for further details.  As of
November 30, 2008, the Company did not consolidate the VIE.  Refer to
Note 4 for further details.  All significant inter-company accounts
and transactions of the Company have been eliminated.





Foreign Currency
Translation: Assets and liabilities of the foreign subsidiaries of
Nor-Cote are translated into U.S. dollars at the exchange rate in effect during
the three months ending November 30, 2008. Translation adjustments that arise
from translating the subsidiaries’ financial statements from local currency to
U.S. dollars are accumulated and presented, net of tax, as a separate component
of shareholders’ equity (deficit).





Comprehensive Income
(Loss):Comprehensive income
(loss) refers to the change in an entity’s equity during a period resulting from
all transactions and events other than capital contributed by and distributions
to the entity’s owners. For the Company, comprehensive income (loss) is equal to
net income plus the change in unrealized gains or losses on investments and the
change in foreign currency translation adjustments. The Company reports
comprehensive income (loss) in the consolidated statement of shareholders’
equity (deficit).





Estimates: Management
uses estimates and assumptions in preparing consolidated financial statements in
accordance with accounting principles generally accepted in the United States.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported revenues and expenses. Actual results could vary from the estimates
that were used.





Significant
estimates used in preparing these consolidated financial statements include
those assumed in computing profit percentages under the percentage-of-completion
revenue recognition method. It is reasonably possible that the significant
estimates used will change within the next year.





Revenue and Cost
Recognition: In the Business Solutions segment, Professional Staff
Management, Inc. and related entities (“PSM”); CSM, Inc. and subsidiaries
(“CSM”); Precision Employee Management, LLC (“PEM”); and Employer Solutions
Group, Inc. and related entities (“ESG”) bill clients under their Professional
Services Agreement as licensed Professional Employer Organizations (collectively
the “PEOs”), which includes each worksite employee’s gross wages, plus
additional charges for employment related taxes, benefits, workers’ compensation
insurance, administrative and record keeping, as well as safety, human
resources, and regulatory compliance consultation.  Most wages, taxes
and insurance coverage are provided under the PEOs’ federal, state, and local or
vendor identification numbers.  No identification or recognition is
given to the client when these monies are remitted or calculations are
reported.  Most calculations or amounts the PEOs owe the government
and its employment insurance vendors are based on the experience levels and
activity of the PEOs with no consideration to client detail.  The PEOs
bill the client their worksite employees’ gross wages plus an overall service
fee that includes components of employment related taxes, employment benefits
insurance, and administration of those items.  The component of the
service fee related to administration varies, in part, according to the size of
the client, the amount and frequency of payroll payments and the method of
delivery of such payments.  The component of the service fee related
to health, workers’ compensation and unemployment insurance is based, in part,
on the client’s historical claims experience.  Charges by the PEOs are
invoiced along with each periodic payroll delivered to the
client.


33





The PEOs
report revenue in accordance with Financial Accounting Standards Board (“FASB”)
ASC 605-45 (formerly EITF 99-19), “Revenue Recognition - Principal Agent
Considerations.” The PEOs report revenue on a gross basis for the total amount
billed to clients for service fees, which includes health and welfare benefit
plan fees, workers’ compensation insurance, unemployment insurance fees, and
employment-related taxes.  The PEOs report revenue on a gross basis
for such fees because the PEOs are the primary obligor and deemed to be the
principal in these transactions under ASC 605-45.  The PEOs report
revenue on a net basis for the amount billed to clients for worksite employee
salaries and wages and outside benefit plans.  This accounting policy
of reporting revenue net as an agent versus gross as a principal has no effect
on gross profit, operating income, or net income.





The PEOs
account for their revenue using the accrual method of
accounting.  Under the accrual method of accounting, revenues are
recognized in the period in which the worksite employee performs work. The PEOs
accrue unbilled receivables for service fees, health and welfare benefits plan
fees, workers’ compensation and unemployment insurance fees relating to work
performed by worksite employees but unpaid at the end of each
period.  In addition, the related costs of services are accrued as a
liability for the same period.  Subsequent to the end of each period,
such costs are paid and the related service fees are billed.





Consistent
with their revenue recognition policy, the PEOs’ direct costs do not include the
payroll cost of its worksite employees.  The Company’s direct costs
associated with its revenue generating activities are comprised of all other
costs related to its worksite employees, such as the employer portion of
payroll-related taxes, employee benefit plan premiums and workers’ compensation
insurance costs.





In the
Wireless Infrastructure segment, Fortune Wireless, Inc. (“Fortune Wireless”)
enters into contracts principally on the basis of competitive bids, the final
terms and prices of which are frequently negotiated with the
customer.  Although the terms of its contracts vary considerably, most
are made on a unit price basis in which Fortune Wireless agrees to do the work
for units of work performed.  Fortune Wireless also performs services
on a cost-plus or time and material basis.  Fortune Wireless completes
most projects within twelve months.  Fortune Wireless generally
recognizes revenue utilizing output measures, such as when services are
performed, units are delivered or when contract milestones are reached or under
the percentage of completion method as appropriate.  Cornerstone
Wireless Construction Services, Inc. recognizes revenue solely using the
percentage of completion method on contracts in process.  Under this
method, the portion of the contract price recognized as revenue is based on the
ratio of costs incurred to the total estimated cost of the
contract.  The estimated total cost of a contract is based upon
management’s best estimate of the remaining costs that will be required to
complete a project.  The actual costs required to complete a project
and, therefore, the profit eventually realized, could differ materially in the
near term.  Costs and estimated earnings in excess of billings on
uncompleted contracts are shown as a current asset.  Billings in
excess of costs and estimated earnings on uncompleted contracts are shown as a
current liability. Anticipated losses on contracts, if any, are recognized when
they become evident.





In the
Transportation Infrastructure segment, James H Drew Corporation and its
subsidiaries (“JH Drew”) recognize revenue using the percentage of completion
method on contracts in process.  Under this method, the portion of the
contract price recognized as revenue is based on the ratio of costs incurred to
the total estimated cost of the contract.  The estimated total cost of
a contract is based upon management’s best estimate of the remaining costs that
will be required to complete a project.  The actual costs required to
complete a project and, therefore, the profit eventually realized, could differ
materially in the near term.  Costs and estimated earnings in excess
of billings on uncompleted contracts are shown as a current
asset.  Billings in excess of costs and estimated earnings on
uncompleted contracts are shown as a current liability.  Anticipated
losses on contracts, if any, are recognized when they become
evident.




In the
Ultraviolet Technologies segment, revenue from the sale of products at Nor-Cote
is recognized according to the terms of the sales arrangement, which is
generally upon shipment.  Revenues are recognized, net of estimated
costs of returns, allowances and sales incentives, when title and principal
ownership transfers to the customer, which is generally when products are
shipped to customers.  Products are generally sold on open account
under credit terms customary to the geographic region of
distribution.  Ongoing credit evaluations are performed on customers
and Nor-Cote does not generally require collateral to secure accounts
receivable.





In the
Electronics Integration segment, revenue from the sale of products at Kingston
Sales Corporation (“Kingston”) and Commercial Solutions, Inc. (“Commercial
Solutions”) is recognized according to the terms of the sales arrangement, which
is generally upon shipment.  Revenue is recognized when title and
principal ownership transfers to the customer, which is generally when products
are shipped to customers.  Products are generally sold on open account
under credit terms customary to the geographic region of
distribution.  Ongoing credit evaluations are performed on customers
and Kingston and Commercial Solutions do not generally require collateral to
secure accounts receivable.





Revenue
is reduced by appropriate allowances, estimated returns, price concessions, and
similar adjustments, as applicable.


34





Cash and Equivalents: Cash
and equivalents may include money market fund shares, bank time deposits,
certificates of deposits, and other instruments with original maturities of
three months or less.





Restricted Cash: Restricted
cash includes certificates of deposits and letters of credit issued to
collateralize its obligations under its workers’ compensation program and
certain general insurance coverage related to the Company’s Business Solutions
segment. At June 30, 2010, the Company had $2.8 million in total restricted
cash. Of this, $2.5 million is restricted for the Company’s workers’
compensation program in accordance with terms of its insurance carrier
agreement, and the remainder is restricted for certain standby letters of
credits in accordance with various state regulations.





Accounts
Receivable: Accounts receivable is stated at the amount billable to
customers. Accounts receivable are ordinarily due 30-60 days after the issuance
of the invoice. The Company provides allowances for estimated doubtful accounts
and for returns and sales allowances, based on the Company’s assessment of known
delinquent accounts, historical experience, and other currently available
evidence of the collectability and the aging of the accounts receivable.
Delinquent receivables that are deemed uncollectible are written off based on
individual credit evaluation and specific circumstances of the customer. The
Company’s policy is not to accrue interest on past due trade
receivables.





Inventories: Inventories are
recorded at the lower of cost or market value. Costs are determined primarily
under the first-in, first-out method (FIFO) method of accounting.





Shipping and Handling: Costs
incurred for shipping and handling are included in the Company's consolidated
financial statements as a component of costs of revenue.





Property, Plant, Equipment, and
Depreciation: Property, plant and equipment are carried at cost and
include expenditures for new additions and those which substantially increase
the useful lives of existing assets. Depreciation is computed principally on the
straight-line method over the estimated useful life. Depreciable lives range
from 3 to 30 years.





Expenditures
for normal repairs and maintenance are charged to operations as incurred. The
cost of property or equipment retired or otherwise disposed of and the related
accumulated depreciation are removed from the accounts in the period of disposal
with the resulting gain or loss reflected in earnings or in the cost of the
replacement asset.





Goodwill and Other Indefinite-Lived
Intangible Assets: The Company accounts for goodwill and other
indefinite-lived intangible assets under FASB ASC 350 (formerly SFAS 142),
“Intangibles - Goodwill and Other.” Under ASC 350, goodwill and other intangible
assets with indeterminate lives are assessed for impairment at least annually
and more often as triggering events occur. In making this assessment, management
relies on a number of factors including operating results, business plans,
economic projections, anticipated future cash flows, and transactions and market
place data. There are inherent uncertainties related to these factors and
management’s judgment in applying them to the analysis of both goodwill and
other intangible assets impairment. Since management’s judgment is involved in
performing goodwill and other intangible assets valuation analyses, there is
risk that the carrying value of the goodwill and other intangible assets may be
overstated or understated.





As
described in Note 7, the Company recognized impairment charges amounting to
$8,740 during fiscal 2008 as a result of triggering events primarily within its
Business Solutions, Ultraviolet Technologies and Electronics Integration
segments. Triggering events include a) violation of non-compete agreements
with certain terminated employees within the Business Solutions segment, b) a
substantial change in the customer mix and number of worksite employees within
the Business Solutions segment, c) losses incurred within certain operating
units, d) significant downsizing of personnel and operations,  e)
restructuring of management.





The
Company has elected to perform the annual impairment test of recorded goodwill
and other indefinite-lived intangible assets as required by ASC 350 as of the
end of fiscal first quarter of 2011. The required annual impairment test may
result in future periodic write-downs.





Long-lived Assets: The
Company evaluates the carrying value of long-lived assets, primarily property,
plant and equipment and other definite-lived intangible assets, whenever
significant events or changes in circumstances indicate the carrying value of
these assets may be impaired. If such indicators of impairment are present, the
Company determines whether the sum of the estimated undiscounted cash flows
attributable to the assets in question is less than their carrying value. If
less, the Company recognizes an impairment loss based on the excess of the
carrying amount of the assets over their respective fair values. The fair value
of the asset then becomes the asset’s new carrying value, which the Company
depreciates over the remaining estimated useful life of the asset. Fair value is
determined by discounted future cash flows, appraisals or other
methods.





Fair Value of Financial
Instruments: The fair value of financial instruments is estimated using
relevant market information and other assumptions. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
prepayments, and other factors. Changes in assumptions or market conditions
could significantly affect these estimates. The amounts reported in the
consolidated balance sheets for cash and equivalents, receivables, and payables
approximate fair value.


35





Stock-based Compensation:The
Company accounts for stock-based compensation under the provisions of FASB ASC
718 (formerly SFAS 123R), “Stock Compensation” using the modified prospective
method.  The Company recognizes compensation expense for awards of
equity instruments to employees based on the grant-date fair value of those
awards.





Earningsper Common Share:Income per
common share has been computed in accordance with FASB ASC 260 (formerly SFAS
128), “Earnings per Share” basic income per common share is computed based on
net income applicable to common stock divided by the weighted average number of
common shares outstanding for the period. Diluted income per common share is
computed based on net income applicable to common stock divided by the weighted
average number of shares of common stock outstanding during the period after
giving effect to securities considered to be dilutive common stock
equivalents.





Income Taxes: The
Company accounts for income taxes under the provisions of FASB ASC 740 (formerly
SFAS 109), “Income Taxes.” Accordingly, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates. Changes in
deferred income tax assets and liabilities that are associated with components
of other comprehensive income, primarily unrealized investment gains, are
charged or credited directly to other comprehensive income. Otherwise, changes
in deferred income tax assets and liabilities are included as a component of
income tax expense. Prior to fiscal year end 2010 the Company filed separate
United States, United Kingdom, Mexico and Singapore income tax returns.
Effective with the current fiscal year, the Company will only be required to
file a United States tax return.





Research and Development
Costs: Research and development costs are expensed as incurred and
totaled $0, $131, and $573 for the fiscal periods ended June 30, 2010 and 2009
and August 31, 2008, respectively. Research and development expense was incurred
and recorded in the Company’s Ultraviolet Technologies business segment in prior
years.





Advertising Costs:
Advertising costs including marketing, advertising, publicity, promotion and
other distribution costs, are expensed as incurred and totaled $99, $213 and
$573, for the fiscal periods ended June 30, 2010 and 2009, and  August
31, 2008, respectively.





Warrants: The Company has
issued and anticipates issuing warrants along with debt and equity instruments
to third parties. These issuances are recorded based on the fair value of these
instruments. Warrants and equity instruments require valuation using the
Black-Scholes model and other techniques, as applicable, and consideration of
various assumptions including but not limited to the volatility of the Company’s
stock, risk free rates and the expected lives of these equity
instruments.





In
conjunction with the disposition of assets (see Note 2), the Company issued
2,200,000 warrants to the Chairman of the Board. The warrants have a ten-year
term and an exercise price of $.40 per share during the year ended June 30,
2009. Upon utilization of the valuation models described above, it was
determined that the warrants had no value at the time of issuance.





The
Company also has 286,363 warrants outstanding in conjunction with convertible
debt issued prior to the August 31, 2008 fiscal year end.





Debt and
equity issuances may have features which allow the holder to convert at
beneficial conversion terms, which are then measured using similar valuation
techniques and amortized to interest expense in the case of debt or recorded as
dividends in the case of preferred stock instruments. No issuances have
beneficial conversion terms for any of the fiscal periods ended June 30, 2010
and 2009and August 31, 2008.





SelfInsurance: The Company’s PSM
subsidiary maintains a loss-sensitive worksite employees’ health and accident
benefit program. Under the insurance policy, PSM’s self-funded liability is
limited to $225 per employee, with an aggregate liability limit of approximately
$7.6 million. The aggregate liability limits are adjusted annually, based on the
number of participants.





Workers’ Compensation: The
Company’s PSM and CSM subsidiaries maintain partially self-funded workers’
compensation insurance programs. Under the insurance policies established at
each company, PSM and CSM’s deductible liability is limited to $250 per
incident, with an aggregate liability limit of approximately $2,000. Under
the insurance policy established at ESG, the deductible liability is limited to
$350 per incident, with no aggregate annual liability limit.





New
Accounting Pronouncements:





In
September 2006, the FASB ASC 820-10 (formerly SFAS 157), “Fair Value
Measurements” was issued.  ASC 820-10 establishes a framework for measuring
fair value by providing a standard definition of fair value as it applies to
assets and liabilities.  ASC 820-10, which does not require any new fair
value measurements, clarifies the application of other accounting pronouncements
that require or permit fair value measurements.  The standard was effective
for fiscal years beginning after November 15, 2007.  However, the FASB
delayed the effective date of ASC 820-10 for all non-financial assets and
non-financials liabilities until fiscal years beginning after November 15,
2008.  Accordingly, we adopted ASC 820-10 for our financial assets and
liabilities on September 1, 2008 and adopted ASC 820-10 for our non-financial
assets and liabilities on July 1, 2009.  The adoption did not have a
material impact on our consolidated financial statements.


36





In
December 2007, the FASB issued ASC No. 805-10 (formerly SFAS No. 141R)
“Business Combinations”.  ASC No.805-10 establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree.  The statements also
provides guidance for recognizing and measuring the goodwill acquired in the
business combination and specifies what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. ASC No. 805-10 is effective for financial statements
issued for fiscal years beginning after December 15, 2008.  Our
effective date for ASC 805-10 was July 1, 2009. The adoption of ASC
No. 805-10 did not have a material impact on our consolidated financial
statements.





In June 2008, the FASB
issued ASC 260-10 (formerly FASB Staff Position No. EITF 03-6-1), “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities”. ASC 260-10 concludes that unvested restricted share awards
that pay nonforfeitable cash dividends are participating securities and are
subject to the two-class method of computing earnings per share. Our effective
date for ASC 260-10 was July 1, 2009. The adoption of ASC 260-10 did not have a
material impact on our consolidated financial statements.





In April
2009, the FASB issued ASC No. 825-10-65-1 (formerly FAS 107-1 and APB
28-1), “Interim Disclosures
about Fair Value of Financial Instruments”.This ASC essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the ASC requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. These additional disclosures will be required
beginning with the quarter ending September 30, 2009. The adoption of ASC
No. 825-10-65-1 did not have a material impact on our consolidated
financial statements.





In
May 2009, FASB ASC 855-10 (formerly SFAS No. 165), “Subsequent Events”was
issued. ASC 855-10 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date (“subsequent
events”), but before the financial statements are issued or available to be
issued and requires disclosure of the date through which the entity has
evaluated subsequent events and the basis for that date. ASC 855-10 is effective
for interim and annual periods ending after June 15, 2009; the Company adopted
ASC 855-10 for the quarter ended June 30, 2009.  This guidance was
amended by ASU 2010-09 “Amendments to Certain Recognition and Disclosure
Requirements.” The Company evaluated events occurring subsequent to the balance
sheet date and found that during this period it did not have any subsequent
events impacting the Company’s consolidated financial statements.





In
June 2009, FASB ASC 105-10 (formerly SFAS 168), “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles”was issued. ASC 105-10 is the single official source of authoritative
U.S. GAAP, superseding all other accounting literature except that issued by the
Securities and Exchange Commission. As of July 2009, only one level of
authoritative U.S. GAAP exists. All other literature will be considered
non-authoritative. The Codification does not change U.S. GAAP; instead, it
introduces a new referencing system that is designed to be an easily accessible,
user-friendly online research system. ASC 105-10 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The Company adopted ASC 105-10 for the quarter ended September 30, 2009.
The adoption did not have a material impact on our consolidated financial
statements.





In June
2009, the FASB also issued an amendment to the accounting and disclosure
requirements for the consolidation of VIEs. FASB ASC 810-10 (formerly FIN46R),
“Consolidation - Variable
Interest Entities” requires an enterprise to perform a qualitative
analysis when determining whether or not it must consolidate a VIE. The
amendment also requires an enterprise to continuously reassess whether it must
consolidate a VIE. Additionally, the amendment requires enhanced disclosures
about an enterprise’s involvement with VIEs and any significant change in risk
exposure due to that involvement, as well as how its involvement with VIEs
impacts the enterprise’s financial statements. Finally, an enterprise will be
required to disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This amendment is effective for financial
statements issued for fiscal years beginning after November 15, 2009. Earlier
application is prohibited. The Company is currently evaluating the impact, if
any, that this amendment may have on its financial statements once
adopted.





In
January 2010, the FASB issued an amendment to the disclosure requirement related
to fair value measurements. The amendment, FASB ASC 820-10-65 requires new
disclosures related to transfers in and out of Levels 1 and 2 and activity in
Level 3 fair value measurements. A reporting entity is required to disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and describe the reasons for the transfers.
Additionally, in the reconciliation for fair value measurements in Level 3, a
reporting entity must present separately information about purchases, sales,
issuances and settlements (on a gross basis rather than a net number). The new
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. The Company
does not anticipate that our adoption of this amendment will have a material
effect on its financial position, results of operations or cash
flows.





Other new
pronouncements issued but not effective until after June 30, 2010, are not
expected to have a significant effect on the company’s consolidated financial
statements.


37





NOTE
2 – DISPOSITION OF ASSETS AND PRO FORMA RESULTS





On
December 11, 2008, the Company completed a transaction with an effective date as
of November 30, 2008 to sell all of the outstanding shares of common stock of
the following wholly-owned subsidiaries: James H Drew Corporation; Nor-Cote
International, Inc.; Fortune Wireless, Inc.; and Commercial Solutions,
Inc.  The subsidiaries were sold to related party entities owned by the
Company’s two majority shareholders, the Chairman of the Board of Directors
(“Chairman”) and the Chief Executive Officer (“CEO”).  The shares were sold
in exchange for a $10,000 reduction in the outstanding balance of the Term
Loan Note due to the Chairman, and a three year Promissory Note receivable in
the amount of $3,240 with a maturity date of November 30, 2011.  The
Promissory Note bears interest at the prime rate plus 1% and is
interest-only for the first twelve months, with $50,000 and $100,000 monthly
principal payments due beginning December 30, 2009 and December 30, 2010,
respectively.  The unpaid balance at maturity is due in a lump sum
payment.





Effective
June 30, 2009, the Company entered into an agreement with the Chairman to amend
the terms of the Promissory Note receivable. In exchange for offsetting $740 of
accrued dividends due and owing to the Chairman against the outstanding
principal balance of the Promissory Note receivable the Company extended the
maturity date of the Note to June 30, 2012 and reset the payment schedule to
interest only for the first twelve months beginning July 1, 2009, with $50,000
and $100,000 monthly principal payments due beginning July 1, 2010 and July 1
2011, respectively. All other terms of the original note remained
unchanged.





As part
of the terms of the sales transaction, the Chairman received 217,000 shares of
Series C Preferred Stock as consideration for cancellation of the Term Note
Balance of $21,700.  In addition, the Company converted 79,180 shares
of Series B Preferred Stock previously issued to and held by the Chairman to
79,180 shares of Series C Preferred Stock.  The Series C Preferred Stock
with a par value of $0.10 per share is non-redeemable, non-voting cumulative
preferred and bears annual dividends of $5 per share in years one and two
subsequent to the transaction date, $6 per share in year three subsequent to the
transaction date and $7 per share thereafter.  The dividends will be paid
on a pro-rata basis monthly.  Additionally, as part of the terms of the
sales transaction, the Company issued the Chairman 2,200,000 warrants with a
ten-year term and an exercise price of $ .40 per share.





On
September 25, 2009, the Company reached agreement with the Chairman to amend the
dividend rates on the Series C Preferred Stock with an effective date of July 1,
2009. From the effective date forward the Series C Preferred Stock will bear
annual dividends of $2 per share in years one and two subsequent to the
effective date, $5 per share in year three subsequent to the effective date, $6
per share in year four subsequent to the effective date and $7 per share
thereafter. All other terms of the Series C Preferred Shares remained
unchanged.





At the
request of the independent Directors, the Company received a fairness opinion
from an independent financial advisor concluding that the consideration received
by the Company in connection with the transaction is fair to the Company’s
shareholders as a group from a financial point of view.





The
transaction was approved by the Company’s Board of Directors on
December 10, 2008.


38


The
following is a condensed balance sheet disclosing the amount assigned to each
major asset and liability caption of the sold subsidiaries at the disposition
date:





AssetsCash
      and equivalents
                    
                    $
                    556Accounts
      receivable, net
                    
                    
                    12,927Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                    
                    
                    3,292Inventory,
      net
                    
                    
                    4,073Deferred
      tax asset
                    
                    
                    46Prepaid
      expenses and other current assets
                    
                    
                    790Property,
      plant & equipment, net
                    
                    
                    3,527Goodwill
                    
                    
                    152Other
      long term assets
                    
                    
                    13Total
      Assets
                    
                    
                    25,376LiabilitiesAccounts
      payable
                    
                    
                    4,248Accrued
      expenses
                    
                    
                    1,510Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    402Line
      of credit
                    
                    
                    5,500Other
      liabilities
                    
                    
                    476Total
      Liabilities
                    
                    
                    12,136Net
      Assets
                    
                    $
                    13,240Cash
      consideration - related party term note offset
                    
                    $
                    10,000Term
      note receivable - three year
                    
                    
                    3,240Total
      consideration
                    
                    $
                    13,240





Pro
Forma Financial Statements





The
accompanying unaudited pro forma consolidated statements of operations for the
ten months ended June 30, 2009 and year ended August 31, 2008 is presented as if
the sale had been completed as of the beginning of the periods
presented.  The unaudited pro forma consolidated statements of
operations is presented for illustrative purposes only and is not necessarily
indicative of the results of operations for the ten months ended June 30, 2009
that would have actually been reported had the sales transaction occurred at the
dates indicated, nor is it indicative of future financial position or results of
operations.  The unaudited pro forma condensed consolidated statements
of operations are based upon the respective historical financial statements of
the Company and the subsidiaries.  The pro forma data give effect to
actual operating results as if the previous acquisitions occurred as of the
beginning of the period presented.  The pro forma data give effect to
actual operating results prior to the dispositions and adjustments for the
following:





·
            To
      eliminate the impact of consolidating Fisbeck-Fortune Development, LLC
      (“FFD”), which prior to completion of the sales transaction, was
      considered a variable interest entity in conjunction with FASB ASC 810-10
      (formerly FIN46R), “Consolidation - Variable Interest Entities.” With the
      sale of the subsidiaries described in Note 2 and the cancellation of the
      lease agreement between Fortune Industries, Inc. and FFD, the primary
      beneficiary relationship between the entities ceased to
    exist.


·
            To eliminate the results of
      operations of the subsidiaries
sold.


·
            To adjust the dividends to the
      terms of the Series C Preferred shares that was issued in conjunction with
      the sales transaction.


39





For the Ten
                    Months Ended
                  
                  
                  For the Year
                    EndedJune
      30,
                  
                  
                  August
      31,2009
                  
                  
                  2008Revenues
                  
                  $
                  53,477
                  
                  
                  $
                  74,894Cost
      of Revenues
                  
                  
                  43,313
                  
                  
                  
                  61,459Gross
      Profit
                  
                  
                  10,164
                  
                  
                  
                  13,435Operating
      ExpensesSelling,
      general and administrative expenses
                  
                  
                  9,408
                  
                  
                  
                  14,667Depreciation
      and amortization
                  
                  
                  612
                  
                  
                  
                  1,267Impairment
                  
                  
                  -
                  
                  
                  
                  2,296Total
      Operating Expenses
                  
                  
                  10,020
                  
                  
                  
                  18,230Operating
      Income (Loss)
                  
                  
                  144
                  
                  
                  
                  (4,795
                  )Other
      Income
                  
                  
                  62
                  
                  
                  
                  194Income
      Before Provision for Income Taxes
                  
                  
                  206
                  
                  
                  
                  (4,601
                  )Provision
      for income taxes
                  
                  
                  (947
                  )
                  
                  
                  (45
                  )Net
      Income (Loss)
                  
                  
                  1,153
                  
                  
                  
                  (4,556
                  )Preferred
      stock dividends
                  
                  
                  1,233
                  
                  
                  
                  1,481Net
      Income (Loss) available to common shareholder
                  
                  $
                  (80
                  )
                  
                  $
                  (6,037
                  )Basicincome
      (loss) per common share
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.53
                  )Diluted
      income (loss) per common share
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.53
                  )





NOTE
3 – MEASUREMENT OF FAIR VALUE





Effective
September 1, 2008, the Company adopted ASC 820, which provides a framework for
measuring fair value under GAAP.  As defined in ASC 820, fair value is the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (exit
price).  In determining fair value in accordance with ASC 820, we utilize
market data or assumptions that we believe market participants would use in
pricing the asset or liability that maximize the use of observable inputs and
minimize the use of unobservable inputs to the extent possible, including
assumptions about risk and the risks inherent in the inputs to the valuation
technique.  Classification of the financial asset or liability within the
hierarchy is determined based on the lowest level input that is significant to
the fair value measurement.





ASC 820
establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurement) and
the lowest priority to unobservable inputs (Level 3 measurement).  The
three levels of the fair value hierarchy defined by SFAS No. 157 are as
follows:





Level 1
            Quoted prices are available in
      active markets for identical assets or liabilities as of the reporting
      date.  Active markets are those in which transactions for the asset
      or liability occur in sufficient frequency and volume to provide pricing
      information on an ongoing
basis.





Level 2
            Financial instruments lacking
      unadjusted, quoted prices from active market exchanges, including
      over-the-counter traded financial instruments. The prices for the
      financial instruments are determined using prices for recently traded
      financial instruments with similar underlying terms as well as directly or
      indirectly observable inputs, such as interest rates and yield curves that
      are observable at commonly quoted
  intervals.


40





Level 3
            Financial instruments that are
      not actively traded on a market exchange. This category includes
      situations where there is little, if any, market activity for the
      financial instrument. The prices are determined using significant
      unobservable inputs or valuation
  techniques.





As of
June 30, 2010 and 2009, we did not have any financial assets utilizing Level 1.
Financial assets utilizing Level 2 inputs consist of cash held in certificates
of deposit with various financial institutions.  The fair value
measurement of these items is determined by using prices for recently traded
CD’s with similar interest rates. The fair value for the Level 2 financial
instruments was $1,745 and $1,485 as of June 30, 2010 and 2009, respectively.
Financial liabilities utilizing Level 3 inputs included put options related to
common stock issued in conjunction with the purchase of ESG (See Note 5 for
further detail). The fair value measurement of this Level 3 item has been
estimated using the stated contractual put price of $3.75 per share. The fair
value for the Level 3 financial instruments was $247 and $814 as of June 30,
2010 and 2009, respectively.





NOTE
4 – VARIABLE INTEREST ENTITY





In
December 2003, the FASB issued ASC 810-10. ASC 810-10 requires a variable
interest entity (VIE) to be consolidated by a company, if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or is entitled to receive a majority of the entity's residual
returns, or both. ASC 810-10 also requires disclosures about variable interest
entities that a company is not required to consolidate, but in which it has a
significant variable interest.





Effective
November 30, 2008, the Company terminated its building lease for its corporate
facilities with Fisbeck-Fortune Development, LLC.  No early
termination penalties were incurred by the Company.  In addition, the
Company sold its JH Drew and Nor-Cote subsidiaries which were leasing the
remainder of the facilities from Fisbeck-Fortune Development,
LLC.  Refer to Note 2 for further details.  The termination
of the lease and the sale of the subsidiaries provided for a triggering event
under ASC 810-10.  As a result, effective November 30, 2008, the
Company is no longer considered the primary beneficiary of the variable interest
entity and is not required to consolidate Fisbeck-Fortune Development as of this
date.





For the
year ended August 31, 2008, the consolidation of the VIE included income of
$1,095 comprising of $1,725 in rental income, offset by a $354 charge to
interest expense, a $193 charge to depreciation expense, $36 in administrative
and other miscellaneous expenses, and a $47 loss on disposal of property, plant
and equipment. For the year ended August 31, 2007, the consolidation of the
VIE included income of $724 comprising of $1,493 in rental income, offset by a
$522 charge to interest expense, a $198 charge to depreciation expense, and $49
in administrative and other miscellaneous expenses.





NOTE
5 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE





Accounts
receivable and contracts receivable are summarized as follows:





June
      30,
                  
                  
                  June
      30,2010
                  
                  
                  2009Accounts
      receivable
                  
                  $
                  2,276
                  
                  
                  $
                  2,759Less
      allowance for doubtful accounts and sales returns
                  
                  
                  (29
                  )
                  
                  
                  (137
                  )$
                  2,247
                  
                  
                  $
                  2,622





NOTE
6 - PROPERTY AND EQUIPMENT





Property,
plant and equipment, including capital leases, are comprised of the
following:





June
      30,
                  
                  
                  June
      30,2010
                  
                  
                  2009Office
      equipment
                  
                  $
                  2,520
                  
                  
                  $
                  2,565Vehicles
                  
                  
                  190
                  
                  
                  
                  292Leasehold
      improvements
                  
                  
                  98
                  
                  
                  
                  1002,808
                  
                  
                  
                  2,957Less
      accumulated depreciation
                  
                  
                  (2,353
                  )
                  
                  
                  (2,193
                  )$
                  455
                  
                  
                  $
                  764





The
provision for depreciation expense was $364 for the year ended June 30, 2010.
The provision for depreciation amounted to $616, of which $167 is included in
cost of revenues, and $2,053, of which $894 is included in cost of revenues the
fiscal periods ended June 30, 2009 and August 31, 2008, respectively. The
Company did not recognize any gain or loss on the disposal of assets during the
year ended June 30, 2010. Losses on disposal of assets totaling  $20
and $350 was recorded for the fiscal periods ended June 30, 2009 and August 31,
2008 , respectively, related to various building, office equipment, and vehicle
disposals.


41





NOTE
7 - GOODWILL AND OTHER INTANGIBLE ASSETS





The
changes in the carrying amount of goodwill, as recorded under ASC 350, are
summarized as follows:





Business
                  Solutions
                
                
                Transportation
                  Infrastructure
                
                
                Ultraviolet
                  Technologies
                
                
                Electronics
                  Integration
                
                
                Segment TotalsGoodwill
      at August 31, 2008
                
                $
                12,339
                
                
                $
                152
                
                
                $
                0
                
                
                $
                0
                
                
                $
                12,491Goodwill
      disposition – due to sale
                
                
                -
                
                
                
                (152
                )
                
                
                -
                
                
                
                -
                
                
                
                (152
                )Goodwill
      at June 30, 2009
                
                $
                12,339
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                12,339Goodwill
      disposition - due to sale
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Goodwill
      at June 30, 2010
                
                $
                12,339
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                12,339





The total
amount of goodwill that is deductible for tax purposes is $6,918 and $7,667
at June 30, 2010 and 2009.





The
Company recognized impairment on certain goodwill within its Ultraviolet
Technologies segment of $4,694 and its Electronics Integration segment of $1,276
for the year ended August 31, 2008 based upon losses incurred within operating
units and significant downsizing of personnel and operations





The
following table sets forth the gross carrying amount and accumulated
amortization of the Company's other intangible assets:





June 30, 2010Gross
                    Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Net
                    Book
                    Value
                  
                  
                  Amortization
                    Period (in
                    years)Customer
      relationships
                  
                  $
                  4,063
                  
                  
                  $
                  1,796
                  
                  
                  $
                  2,267
                  
                  
                  
                  10Tradename
      (not subject to amortization)
                  
                  
                  590
                  
                  
                  
                  
                  
                  
                  
                  590Total
                  
                  $
                  4,653
                  
                  
                  $
                  1,796
                  
                  
                  $
                  2,857





June 30, 2009Gross
                    Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Net
                    Book
                    Value
                  
                  
                  Amortization
                    Period (in
                    years)Customer
      relationships
                  
                  $
                  4,063
                  
                  
                  $
                  1,390
                  
                  
                  $
                  2,673
                  
                  
                  
                  10Tradename
      (not subject to amortization)
                  
                  
                  590
                  
                  
                  
                  -
                  
                  
                  
                  590Total
                  
                  $
                  4,653
                  
                  
                  $
                  1,390
                  
                  
                  $
                  3,263





Intangible
asset amortization expense is $406, $417, and $1,662, for the fiscal
periods ended June 30, 2010 and 2009 and August 31, 2008, respectively. These
amounts include loan origination fee amortization of $0, $78, and $542 for the
fiscal years ended June 30, 2010 and 2009 and August 31, 2008.





In fiscal
year 2008, the Company recognized impairment on certain other intangible assets
in its Business Solutions segment of $2,297.  Management determined
the assets were impaired based upon (a) violation of non-compete agreements with
certain terminated employees and (b) substantial change in the customer mix and
number of worksite employees within the Business Solutions
segment.  The Company also recognized impairment on other intangible
assets in its Ultraviolet Technologies segment of $473.  Management
determined the assets were impaired based upon the annual impairment testing
performed as of August 31, 2008.


42





Amortization
expense on intangible assets currently owned by the Company at June 30, 2010 for
each of the next five fiscal years is as follows:





2011
                  
                  $
                  4062012
                  
                  
                  4062013
                  
                  
                  4062014
                  
                  
                  3802015
                  
                  
                  3402016
      and thereafter
                  
                  
                  329Total
                  
                  $
                  2,267





NOTE
8 - DEBT ARRANGEMENTS





The
Company’s debt obligations consisted of the following:




June
      30,
                      
                      
                      June
      30,2010
                      
                      
                      2009Notes payableTerm
      note due October 28, 2009.  Interest is at Prime Rate plus
      2%.  The note is secured by assets owned by the
      shareholders.
                      
                      $
                      -
                      
                      
                      $
                      250Term
      note due in monthly principal installments of $42, plus interest at 4.5%
      through April 2010. The loan is secured by all of the assets of the
      Company and is personally guaranteed by the Company’s chairman and
      majority shareholder.
                      
                      
                      917
                      
                      
                      
                      -Capital leasesNote
      due in monthly installments of $2 including interest at 5.0% through
      November 2010. The loan is secured by equipment.
                      
                      
                      11
                      
                      
                      
                      36Total
      debt obligations
                      
                      
                      928
                      
                      
                      
                      286Less
      current maturities
                      
                      
                      (511
                      )
                      
                      
                      (275
                      )Long-term
      portion of outstanding debt
                      
                      $
                      417
                      
                      
                      $
                      11





Principal
payments due on long-term debt outstanding at June 30, 2010 are approximately as
follows:





2011
                
                $
                5112012
                
                
                417$
                928





Term
Notes





Effective
May 29, 2009, the Company entered into a $250 term loan note with a bank. The
term loan note matured on October 28, 2009 and incurred interest at the Prime
Rate plus 2.0%. The note was collateralized by certain assets of the Company’s
majority shareholders. The loan required the Company to maintain a minimum debt
service coverage ratio of 1.25 to 1.0 among other covenants. In January 2010,
the Company was held harmless on the note and was released from the obligation
by the bank.  The amount forgiven of $250 is included in the Company’s
Consolidated Statement of Operations as other income for the year ended June 30,
2010.





In May
2010, the Company entered into a $1.0 million term note with a bank. The term
loan matures on April 30, 2012 and bears interest at the fixed rate of 4.5%. The
note is amortized equally over a 24 month period and therefore requires monthly
principal payments of $42. The note is collateralized by substantially all the
assets of the Company and is personally guaranteed by the Company’s chairman and
majority shareholder. The loan requires the Company to maintain a minimum cash
flow coverage ratio of 1.2 to 1.0 and minimum a current ratio of 1.0 at June 30,
2010, escalating to 1.15 and 1.20 at December 31, 2010 and June 30, 2011,
respectively.


43





NOTE
9 - RETIREMENT PLAN





The
Company maintains a profit-sharing plan that covers all employees who meet the
eligibility requirements set forth in the plan. Company contributions are made
at management’s discretion and are allocated based upon each participant’s
eligible compensation.  The plan includes a 401(k) savings plan
whereby employees can contribute and defer taxes on compensation contributed to
the plan.  The Company is not required to contribute to the plan but
may make a discretionary contribution.





NOTE
10 - INCOME TAXES





The
reconciliation for the 2010, 2009 and 2008 income tax expense (benefit) computed
at the U.S. Federal statutory tax rate to the Company's effective income rate is
as follows (in percentages):





June
      30,
                    
                    
                    June
      30,
                    
                    
                    August
      31,2010
                    
                    
                    2009
                    
                    
                    2008Tax
      at U.S. Federal statutory rate
                    
                    
                    0
                    
                    
                    
                    34.0
                    
                    
                    
                    34.0State
      and local taxes, net of federal benefit
                    
                    
                    5.6
                    
                    
                    
                    5.6
                    
                    
                    
                    5.6Change
      in valuation allowance
                    
                    
                    (27.6
                    )
                    
                    
                    (223.6
                    )
                    
                    
                    (39.6
                    )(22.0
                    )
                    
                    
                    (184.0
                    )
                    
                    
                    (0.00
                    )





Significant
components of the provision for income tax expense (benefit) from continuing
operations are as follows:





Year Ended
                          
                          
                          Ten Months
                            Ended
                          
                          
                          Year EndedJune 30, 2010
                          
                          
                          June 30, 2009
                          
                          
                          August 31, 2008Current:Federal
                          
                          $
                          0
                          
                          
                          $
                          119
                          
                          
                          $
                          (3,116
                          )State
                          
                          
                          68
                          
                          
                          
                          19
                          
                          
                          
                          (514
                          )68
                          
                          
                          
                          138
                          
                          
                          
                          (3,630
                          )Deferred:Federal
                          
                          
                          270
                          
                          
                          
                          (155
                          )
                          
                          
                          (378
                          )State
                          
                          
                          (23
                          )
                          
                          
                          (23
                          )
                          
                          
                          (109
                          )247
                          
                          
                          
                          (178
                          )
                          
                          
                          (487
                          )Increase
      (decrease) in valuation allowance
                          
                          
                          (577
                          )
                          
                          
                          (904
                          )
                          
                          
                          4,196Net
      income tax (benefit)
                          
                          $
                          (262
                          )
                          
                          $
                          (944
                          )
                          
                          $
                          79





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial statement purposes and
the amounts used for income tax purposes. The significant components of the
Company's deferred tax asset are as follows:





June
      30,
                  
                  
                  June
      30,2010
                  
                  
                  2009Current:Allowances
      for doubtful accounts and inventory
                  
                  $
                  10
                  
                  
                  $
                  189Amortization
      of intangible assets
                  
                  
                  317
                  
                  
                  
                  317Accrued
      liabilities and other
                  
                  
                  1,423
                  
                  
                  
                  1,244Noncurrent:Amortization
      of intangible assets
                  
                  
                  3,244
                  
                  
                  
                  3,575Depreciation
                  
                  
                  (75
                  )
                  
                  
                  (33
                  )Net
      operating losses and other carryforwards
                  
                  
                  4,850
                  
                  
                  
                  4,8039,769
                  
                  
                  
                  10,095Valuation
      allowance
                  
                  
                  (7,019
                  )
                  
                  
                  (7,596
                  )Total
      deferred tax assets
                  
                  $
                  2,750
                  
                  
                  $
                  2,500





ASC 740
requires a valuation allowance to reduce the deferred tax assets reported if, at
June 30, 2010, the Company had federal tax operating loss based on the weight of
the evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.  After consideration of the
evidence, both positive and negative, management has determined that a $7,019
and $7,596 valuation allowance at June 30, 2010 and 2009 is necessary to reduce
the deferred tax assets to the amount that will more likely than not be
realized. The change in the valuation allowance is $577 and $904 for the fiscal
years ended June 30, 2010 and 2009, respectively.  The Company has
federal net operating loss carryforwards of approximately $13.9 and $12.1
million at June 30, 2010 and 2009 which expire between 2020 and 2024. The state
tax operating loss carryforwards are approximately $11.3 and $9.9 million as of
June 30, 2010 and 2009, respectively.  The difference between federal
and state net operating loss carryforwards represents a change in business venue
in a prior period.  The Company's capital loss carryforward is
approximately $55, which expires during the fiscal year ending June 30, 2011 and
2013.


44





The
Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. As of June 30, 2010 and 2009, the Company made no provisions
for interest or penalties related to uncertain tax positions. The tax years 2006
through 2009 remain open to examination by the Internal Revenue Service of the
United States.





NOTE
11 - DISCONTINUED OPERATIONS





Effective
November 30, 2008, the Company ceased its operations in Kingston Sales
Corporation and Telecom Technology Corporation, which were part of the
Electronics Integration segment.  The results of the above are
reported in discontinued operations in the accompanying consolidated balance
sheets, statements of operations, and statements of cash flows as of, and for
the year and ten months ending June 30, 2010 and 2009.  The segment
results in Note 22 for the ten months ending June 30, 2009 reflect the
reclassification of the discontinued operations.  Revenues from
discontinued operations were $30 and $992 for the year ended and ten months
ended June 30, 2010 and 2009.  The net losses from discontinued
operations were $19 and $74 for the year ended June 30, 2010 and ten months
ended June 30, 2009.





NOTE
12 – EQUITY INCENTIVE PLANS AND OTHER STOCK COMPENSATION





Restricted
Share Units





Effective
April 13, 2006, the Company’s shareholders approved the 2006 Equity Incentive
Plan. Under terms of the 2006 Equity Incentive Plan, the Company may grant
options, restricted share units and other stock-based awards to its management
personnel as well as other individuals for up to 1.0 million shares of
common stock. During the fiscal periods ended June 30, 2010 and 2009
142,117 and 708,800 restricted share units, respectively, were issued under this
plan.





NOTE
13 - SHAREHOLDERS’ EQUITY





Common
Stock





The
following are the details of the Company's common stock as of June 30, 2010 and
2009:





Number
      of SharesAuthorized
                
                
                Issued
                
                
                Outstanding
                
                
                AmountJune
      30, 2010Common
      stock, $0.10 par value
                
                
                150,000,000
                
                
                
                12,300,486
                
                
                
                12,224,290
                
                
                $
                1,206June
      30, 2009Common
      stock, $0.10 par value
                
                
                150,000,000
                
                
                
                12,158,369
                
                
                
                12,082,173
                
                
                $
                1,187





There
were 142,117 shares issued during the year ended June 30, 2010. These shares
were issued upon board approval as compensation during the current fiscal
year.





At June
30, 2010 the Company had 286,363 outstanding warrants issued as part of the
Laurus transaction and 2,200,000 warrants outstanding to the Chairman of the
Company as a result of the Disposition of assets described in Note
2.





Preferred
Stock





The
following are the details of the Company's non-voting preferred stock as of June
30, 2010 and 2009:





Number
      of SharesAuthorized
                
                
                Issued
                
                
                Outstanding
                
                
                AmountJune
      30, 2010Preferred
      stock, Series A $0.10 par value
                
                
                1,000,000
                
                
                
                66,180
                
                
                
                -
                
                
                $
                -Preferred
      stock, Series B $0.10 par value
                
                
                1,000,000
                
                
                
                79,180
                
                
                
                -
                
                
                
                -Preferred
      stock, Series C $0.10 par value
                
                
                1,000,000
                
                
                
                296,180
                
                
                
                296,180
                
                
                $
                29,618June
      30, 2009Preferred
      stock, Series A $0.10 par value
                
                
                1,000,000
                
                
                
                66,180
                
                
                
                -
                
                
                $
                -Preferred
      stock, Series B $0.10 par value
                
                
                1,000,000
                
                
                
                79,180
                
                
                
                -
                
                
                
                -Preferred
      stock, Series C $0.10 par value
                
                
                1,000,000
                
                
                
                296,180
                
                
                
                296,180
                
                
                $
                29,618


45





The
shares issued are single class and pay on a monthly basis an annual cash
dividend of $5 per share in years ending November 30, 2009 and 2010, $6 per
share in the year ending November 30, 2011 and $7 per share thereafter.
Dividends of $398, $198 and $546 were paid for the fiscal periods ended June 30,
2010 and 2009 and August 31, 2008, respectively.





Effective
July 1, 2009, the Series C Preferred Stock annual dividend was modified to $2
per share in the years ending June 30, 2010 and 2011, $5 per share in the year
ending June 30, 2012, $6 per share in the year ending June 30, 2013 and $7 per
share thereafter.





Treasury
Stock





During
the fiscal year ended June 30, 2010, the Company purchased 48,263 shares of its
common stock at a cost of $3.75 per share as contractually obligated pursuant to
put options outstanding from the purchase of ESG (and related entities) in March
2007. There were a total of 217,143 shares eligible to be put to the Company per
the terms of the purchase agreement. Substantially, all of the shares were put
to the Company on March 1, 2010. The Company negotiated with the two of the put
holders which held an aggregate of 168,880 of the puts for extended payment
terms on the contractual obligation. The remaining contractual obligation of
$248 is included in current liabilities at June 30, 2010. This contractual
obligation will be paid out in monthly payments through December 31, 2010. These
shares are held as collateral by the put holders until the final payment is made
on December 31, 2010, and therefore have not been included in treasury stock at
the current fiscal year end.





NOTE
14 - ACCUMULATED OTHER COMPREHENSIVE INCOME





Significant
components of accumulated other comprehensive income is as follows:





Foreign
                    Currency
                    Adjustments
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    IncomeBalance
      at August 31, 2008
                  
                  
                  192
                  
                  
                  
                  192Period
      change
                  
                  
                  (192
                  )
                  
                  
                  (192
                  )Balance
      at June 30, 2009
                  
                  
                  -
                  
                  
                  
                  -Period
      change
                  
                  
                  -
                  
                  
                  
                  -Balance
      at June 30, 2010
                  
                  $
                  -
                  
                  
                  $
                  -





The net
tax effect of the unrealized gain (loss) after consideration of the valuation
allowance is insignificant and is not included in deferred tax assets or
accumulated other comprehensive income (loss).





NOTE
15 - PER SHARE DATA





The
following presents the computation of basic income (loss) per share and diluted
income (loss) per share:




Year Ended
                    
                    
                    Ten Months
                      Ended
                    
                    
                    Year EndedJune 30,
                    
                    
                    June 30,
                    
                    
                    August 31,2010
                    
                    
                    2009
                    
                    
                    2008Net
      Income (Loss) Available to Common Shareholders
                    
                    $
                    828
                    
                    
                    $
                    446
                    
                    
                    $
                    (19,581
                    )Basic
      Income (Loss) from Continuing Operations
                    
                    $
                    0.07
                    
                    
                    $
                    0.05
                    
                    
                    $
                    (1.72
                    )Basic
      Income (Loss) from Discontinued Operations
                    
                    
                    -
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.00Basic
      Income (Loss) per Common Share
                    
                    $
                    0.07
                    
                    
                    $
                    0.04
                    
                    
                    $
                    (1.72
                    )Basic
      Weighted Average Shares Outstanding
                    
                    
                    12,177,741
                    
                    
                    
                    11,853.96
                    
                    
                    
                    11,391,130Diluted
      Income (Loss) from Continuing Operations
                    
                    $
                    0.06
                    
                    
                    $
                    0.04
                    
                    
                    $
                    (.72
                    )Diluted
      Income (Loss) from Discontinued Operations
                    
                    
                    -
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.00Diluted
      Income (Loss) per Common Share
                    
                    $
                    0.06
                    
                    
                    $
                    0.03
                    
                    
                    $
                    (1.72
                    )Diluted
      Weighted Average Shares Outstanding
                    
                    
                    14,687,904
                    
                    
                    
                    13,824,520
                    
                    
                    
                    11,719,806




46





NOTE
16 - OPERATING LEASE COMMITMENTS





Property
Lease Commitments





Segment
              
              Location(s)
              
              DescriptionBusiness
      Solutions
              
              Richmond,
      IN (1); Brentwood, TN (2); Provo, UT (3); Tucson, AZ (4); Loveland, CO
      (5)
              
              OfficesCorporate
              
              Indianapolis,
      IN (6)
              
              Offices





(1)
            The lease on this property is
      with the former Chief Operating Officer of the Company.  The
      operating lease agreement provides for monthly base rent of $2 through
      August 31, 2010, with nominal annual increases. This lease was renewed for
      a one-year period through August
2011.





(2)
            The Company maintains an
      operating lease agreement that provides for monthly base rent of $12
      through January 31, 2014. In addition to an escalating base monthly rent,
      the agreement requires the Company to pay any increase in operating costs,
      real estate taxes, or utilities over the base
  year.





(3)
            The Company maintains an
      operating lease agreement that provides for monthly base rent of $26
      through January 31, 2012 and is increased 5% annually.  The
      lessee pays most expenses related to repairs, maintenance, property taxes,
      and insurance.  The lessor is required to carry minimal amounts
      of insurance.The
      Company’s ESG subsidiary is entered into a lease agreement for an office
      building in Provo, Utah which is leased from a limited liability company
      in whichESG’sformerPresidentis a member of the limited
      liability company.





(4)
            The Company maintains an
      operating lease agreement that provides for monthly base rent of $4
      through February 2015 and is increased 4% annually. The lessee has the
      right to terminate the lease at its election after a three year period
      with minimum penalty. The lessor pays most expenses related to repairs,
      maintenance, property taxes, and insurance.  The lessor is
      required to carry minimal amounts of
  insurance.





(5)
            The
      Company maintains an operating lease agreement that provides for monthly
      base rent of $2 through January 31, 2014.  The lessee pays most
      expenses related to repairs, maintenance, property taxes, and
      insurance.  The lessor is required to carry minimal amounts of
      insurance.





(6)
            The
      Company maintains an operating lease agreement with a limited liability
      Company that is owned by the majority shareholders.  The
      operating lease agreement provides for monthly base rent of $10 through
      August 2013, adjusted annually to fair market value.  The
      agreement also includes a one-year renewal
  option.





Rent
expense under these agreements amounted to $740, $793 and $2,643 for the fiscal
periods ending June 30, 2010, June 30, 2009 and August 31, 2008.





Future
minimum commitments under these agreements at June 30, 2010 are approximately as
follows:





Facilities
                    
                    
                    Equipment2011
                    
                    $
                    733
                    
                    
                    $
                    92012
                    
                    
                    610
                    
                    
                    
                    52013
                    
                    
                    370
                    
                    
                    
                    52014
                    
                    
                    144
                    
                    
                    
                    12015
                    
                    
                    36
                    
                    
                    
                    -$
                    1,893
                    
                    
                    $
                    20


47





NOTE
17 - RELATED PARTY TRANSACTIONS





The
following is a summary of related party amounts included in the consolidated
balance sheets at June 30, 2010 and 2009, respectively:





June
      30,
                  
                  
                  June
      30,2010
                  
                  
                  2009Assets:Long-term
      note receivable
                  
                  $
                  2,536
                  
                  
                  $
                  2,546





The note
receivable represents a loan with a business owned by the Company’s majority
shareholders in connection with the disposition of the assets.  Refer
to Note 2 for further details.  The loan expires on November 30, 2011
and bears interest at the Prime Rate plus 1%.  Beginning on December
30, 2008 and each month thereafter, interest will be paid.  Commencing
on December 30, 2009, monthly principal payments of $50 are due and commencing
on December 30, 2010, monthly principal payments of $100 are due. Effective June
30, 2009, the Company entered into an agreement with the Chairman/majority
shareholders to amend the terms of the Promissory Note receivable. In exchange
for offsetting $740 of accrued dividends due and owing to the Chairman against
the outstanding principal balance of the Promissory Note receivable the Company
extended the maturity date of the Note to June 30, 2012 and reset the payment
schedule to interest only for the first twelve months beginning July 1, 2009,
with $50,000 and $100,000 monthly principal payments due beginning July 1, 2010
and July 1 2011, respectively. All other terms of the original note remained
unchanged.





The
following is a summary of related party amounts included in the consolidated
statements of operations for the fiscal periods ending June 30, 2010 and 2009,
August 31, 2008, respectively:





June
      30,
                  
                  
                  June 30,
                  
                  
                  August
      31,2010
                  
                  
                  2009
                  
                  
                  2008Revenues:Business
      Solutions (1)
                  
                  $
                  720
                  
                  
                  $
                  461
                  
                  
                  $
                  -Electronics
      Integration (10)
                  
                  
                  30
                  
                  
                  
                  5
                  
                  
                  
                  15Total
                  
                  $
                  750
                  
                  
                  $
                  466
                  
                  
                  $
                  15Expenses:Business
      Solutions (2)
                  
                  $
                  394
                  
                  
                  $
                  356
                  
                  
                  $
                  412Wireless
      Infrastructure (3) (4)
                  
                  
                  -
                  
                  
                  
                  39
                  
                  
                  
                  204Transportation
      Infrastructure (5)
                  
                  
                  -
                  
                  
                  
                  75
                  
                  
                  
                  300Ultraviolet
      Technologies (6)
                  
                  
                  -
                  
                  
                  
                  21
                  
                  
                  
                  84Electronics
      Integration (3)
                  
                  
                  -
                  
                  
                  
                  44
                  
                  
                  
                  156Holding
      Company (7) (8) (9) (11)
                  
                  
                  120
                  
                  
                  
                  410
                  
                  
                  
                  1,564Total
                  
                  $
                  514
                  
                  
                  $
                  945
                  
                  
                  $
                  2,720





(1)
            During
      the fiscal years ended June 30, 2010 and 2009, the Company’s CSM and PSM
      subsidiaries performed $720 and $461 worth of services for businesses
      owned by the Company’s majority
shareholder.


(2)
            The
      Company’s PSM subsidiary holds a lease for an office building in Richmond,
      IN from a former Chief Operating Officer of the Company. The lease is for
      a period of five years and expires in August 2010. The lease was renewed
      for a one year period ending August 2011. The agreement provides for base
      rent of $2 per month with nominal annual increases. Rent and related
      expense of $29, $39, and $45 were recognized for the fiscal periods ended
      June 30, 2010 and 2009 and August 31, 2008, respectively. The
      Company’s ESG subsidiary is entered into a lease agreement for an office
      building in Provo, Utah which is leased from a limited liability company
      in which ESG’s former President is a member of the limited liability
      company. The lease is due to expire January 31, 2012. Rent and
      related expense of $340, $267 and $307 were recognized for the fiscal
      periods ended June 30, 2010 and 2009 and August 31, 2008,
      respectively.  The Company’s ESG subsidiary held a lease for an
      office building in Tucson, AZ from a Company owned by a former employee.
      Rent and related expenses of $25, $50, and $60 were recognized for the
      fiscal periods ended June 30, 2010 and 2009 and August 31, 2008,
      respectively. The lease expired in January
2010.


(3)
            The
      Company maintained an operating lease agreement for the rental of a
      building with a limited liability company owned by the Company’s two
      majority shareholders.  A majority of the Company’s subsidiaries
      maintain offices and or warehouse space in the facility. The lease
      agreement includes a ten-year term with one option to extend the lease
      term for a one-year period.   The agreement provides for a
      monthly base rent of $28 per month.  The base rent shall be
      adjusted annually to fair market value. In addition, the Company shall pay
      certain expenses including taxes, assessments, maintenance and
      repairs.  Rent and related expenses of $0, $83, and $348 were
      recognized for the fiscal periods ended June 30, 2010 and 2009 and August
      31, 2008, respectively. The lease was terminated on November 30,
      2008.


(4)
            The
      Company’s Fortune Wireless subsidiary maintains an operating lease
      agreement for rental of a building with a limited liability company
      consolidated by the Company as a variable interest entity and owned by the
      Company’s two majority shareholders. The operating lease agreement
      provides for monthly base rent of $4 through April 30, 2011, adjusted
      annually to fair market value. Rent and related expenses of $11 and
      $46 were recognized for the years ended August 31, 2008 and 2007,
      respectively. The lease was terminated on November 30,
      2008.


48


(5)
            The
      Company’s JH Drew subsidiary maintains an operating lease agreement for
      rental of three buildings located in Indiana, Tennessee and Missouri with
      a limited liability company owned by the Company’s two majority
      shareholders. The lease agreement includes a five year term with one
      option to extend the lease term for a one year period and provides for
      base rent of $25 per month. The base rent shall be adjusted annually to
      fair market value. In addition the Company shall pay certain expenses
      including taxes, assessments, maintenance and repairs. Rent and
      related expenses of $0, $75, and $300 were recognized for the fiscal
      periods ended June 30, 2010 and 2009 and August 31, 2008,
      respectively. The lease was terminated on November 30,
      2008.


(6)
            The
      Company’s Nor-Cote subsidiary maintains an operating lease agreement for
      rental of a building with a limited liability company owned by the
      Company’s two majority shareholders. The agreement provides for
      monthly base rent of $7 and expires in August 2009. The base rent shall be
      adjusted annually to fair market value. The Agreement also includes one
      renewal option, which allows the Company to extend the lease term for an
      additional year. Rent and related expenses of $0, $21 and $84 were
      recognized for the fiscal periods ended June 30, 2010 and 2009 and August
      31, 2008, respectively. The lease was terminated on November 30,
      2008.


(7)
            The
      Company maintains an operating lease agreement for the rental of a
      building with a limited liability company owned by the Company’s majority
      shareholder. The lease agreement includes a ten year term with one
      option to extend the lease term for a one year period. The agreement
      provides for a monthly base rent of $88 per month. The base rent shall be
      adjusted annually to fair market value. In addition the Company shall pay
      certain expenses including taxes, assessments, maintenance and
      repairs. Rent and related expenses of $0, $263, and $976 were
      recognized for the fiscal periods ended June 30, 2010 and 2009 and August
      31, 2008, respectively. The lease was terminated on November 30,
      2008.


(8)
            The
      Company entered into various unsecured line of credit agreements with its
      majority shareholder.  Interest expense recognized on these
      agreements amounted to $0, $7 and $438 for the fiscal periods ending June
      30, 2010 and 2009 and August 31, 2008, respectively. There were no
      outstanding credit agreements in place as of June 30,
  2010.


(9)
            Guarantee
      fees approved by the Company’s Board of Directors were paid during the
      fiscal periods ending June 30, 2009 and August 31, 2008 to the Company’s
      Chief Executive Officer in the amount of $100 and $150. The fees were
      associated with the Chief Executive Officer providing personal guarantees
      for a substantial portion of the Company’s debt
      obligations.  The Guarantee fees were discontinued during the
      2009 fiscal year and therefore there were no such fees incurred or paid in
      the fiscal year ended June 30,
2010.


(10)
            The
      Company’s discontinued electronics integration operations sold inventory
      as part of its liquidation of the discontinued operations to a company
      owned by the majority shareholder.


(11)
            The
      Company maintains an operating lease agreement for the rental of a
      building with a limited liability company owned by the Company’s majority
      shareholder.   The lease agreement runs through August
      2013. The agreement provides for a monthly base rent of $10 per
      month.  The base rent shall be adjusted annually to fair market
      value.   Rent and related expenses of $120, $40 and $0 were
      recognized for the fiscal periods ending June 30, 2010 and 2009 and August
      31, 2008, respectively.





Other
Related Party Transactions





Over the
last several fiscal years, the Company’s majority shareholders entered into
various put/call option agreements (“option agreements”) with the Company’s
common stock. Option agreements with these shareholders were included in
the acquisitions of Nor-Cote, PSM, and CSM.  The put/ call options
ranged in price from $1 to $4 per common share.  During fiscal year
2008, the majority shareholders acquired 102,843 shares of the Company’s commons
stock related to option agreements with CSM for approximately
$1,062.  During fiscal 2007, the majority shareholders acquired
2,489,000 shares of the Company’s common stock related to option agreements with
Nor-Cote and PSM for approximately $12,050.





In
conjunction with the acquisition of PEM, the Company’s majority shareholder
individually entered into an agreement in which the sellers may put 258,824
shares issued at closing to the majority shareholders during the thirty (30) day
period that began on February 1, 2009.





On
September 25, 2009, the Board of Directors approved the Chairman’s request to
utilize approximately $8.15 million of the Company’s capital loss carryforward
for individual tax purposes related to the Chairman’s personal loss on
indebtedness associated with the sales transaction as described in Note 2. 
The transaction had no effect on assets, liabilities, shareholders’ equity and
net income as the Company had established that the capital loss carryforwards
presented no material value to the Company and therefore have not been included
in the calculation of deferred tax assets.


49





NOTE
18 - SIGNIFICANT ESTIMATES





Significant
estimates have been made by management with respect to the realizability of the
Company’s deferred tax assets. Actual results could differ from these estimates
making it reasonably possible that a change in these estimates could occur in
the near term. The net increase (decrease) in the valuation allowance for
deferred income tax assets was $(577), $(904) and $4,196 for the fiscal years
ended June 30, 2010 and 2009 and August 31, 2008, respectively. The
valuation allowance relates primarily to net operating loss carryforwards, tax
credit carryforwards, and net deductible temporary differences. The Company
evaluates a variety of factors in determining the amount of the deferred income
tax assets to be recognized pursuant to ASC 740, including the number of years
the Company’s operating loss and tax credits can be carried forward, the
existence of taxable temporary differences, the Company’s earnings history and
the Company’s near-term earnings expectations. At June 30, 2010, management
believes it is more likely than not that a significant portion of net deferred
income tax assets will not be realized in the next few years.





Company
subsidiaries in the Business Solutions Segment establish reserves for workers’
compensation and health insurance claims by estimating unpaid losses and loss
expenses with respect to claims occurring on or before the balance sheet date.
Such estimates include provisions for reported claims and provisions for
incurred-but-not-reported claims. The estimates of unpaid losses are established
and continually reviewed by the Company using a variety of statistical and
analytical techniques. Reserve estimates reflect past claims experience,
currently known factors and trends and estimates of future claim
trends.





Irrespective
of the techniques used, estimation error is inherent in the process of
establishing unpaid loss reserves as of any given date. Uncertainties in
projecting ultimate claim amounts are enhanced by the time lag between when a
claim actually occurs and when it becomes reported and settled. These policies
contain aggregate limits of indemnification, so the risks of additional claims
under the contracts are limited. For the reasons previously discussed, the
amounts of the reserves established as of a given balance sheet date and the
subsequent actual losses and loss expenses paid will likely differ, perhaps by a
material amount. There is no guaranty that the recorded reserves will prove to
be adequate. Changes in unpaid loss estimates arising from the review process
are charged or credited, as applicable, to earnings in the period of the
change.





NOTE
19 - CONCENTRATION OF CREDIT RISK





The
Company’s financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, including marketable
securities, and accounts receivables. The Company places its cash and cash
equivalents with several regional and national banking institutions. At times,
such amounts may be in excess of the FDIC insured limit. The Company routinely
assesses the financial strength of its customers and, as a consequence, believes
that its accounts receivable credit risk exposure is limited.




The
Company has one customer that accounted for approximately 12% of net revenues
for the year ended June 30, 2010.





NOTE
20 - COMMITMENTS AND CONTINGENCIES





Litigation





The
Company is involved in various legal proceedings. The Company believes it has
adequate legal defenses with respect to each of the suits and intends to
vigorously defend against these actions. However, it is reasonably possible that
these cases could result in outcomes unfavorable to the Company. While the
Company currently believes that the amounts of the ultimate potential loss would
not be material to the Company’s financial position, the outcome of litigation
is inherently difficult to predict. In the event of an adverse outcome, the
ultimate potential loss could have a material effect on the financial position
or reported results of operations in a particular quarter.





Regulatory
Matters




The
Company’s employer and health care operations are subject to numerous federal,
state and local laws related to employment, taxes and benefit plan matters.
Generally, these rules affect all companies in the United States. However,
the rules that govern professional employer organizations (“PEO”)
constitute an evolving area due to uncertainties resulting from the
non-traditional employment relationship among the PEO, the client and the client
employees. Many federal and state laws relating to tax and employment matters
were enacted before the widespread existence of PEO’s and do not specifically
address the obligations and responsibilities of these PEO relationships. If the
Internal Revenue Service concludes that PEO’s are not “employers” of certain
client employees for purposes of the Internal Revenue Code of 1986, as amended,
its cafeteria plan may lose its favorable tax status, the Company may no longer
be able to assume the client’s federal employment tax withholding obligations,
and certain defined employee benefit plans maintained by the Company may be
denied the ability to deliver benefits on a tax-favored basis as
intended.





Restricted
Cash





Certain
states and vendors require the Company to post letters of credit to ensure
payment of taxes or payments to the Company’s vendors under workers’
compensation contracts and to guarantee performance under the Company’s
contracts. Such letters of credit are generally issued by a bank or similar
financial institution. The letter of credit commits the issuer to pay specified
amounts to the holder of the letter of credit if the holder demonstrates that
the Company has failed to perform specified actions. If this were to occur, the
Company would be required to reimburse the issuer of the letter of credit.
Depending on the circumstances of such a reimbursement, the Company may also
have to record a charge to earnings for the reimbursement. The Company does not
believe that it is likely that any claims will be made under a letter of credit
in the foreseeable future.  As of June 30, 2010 and 2009, the Company
had approximately $2.8 and $3.1 million in restricted cash primarily to secure
obligations under its workers compensation contracts in the Business Solutions
segment.


50





NOTE
21 – QUARTERLY FINANCIAL DATA (UNAUDITED)





The
following table presents the unaudited consolidated operating results by quarter
for the fiscal periods ended June 30, 2010 and 2009:


For the Three Months EndedSeptember 30,
                
                
                December 31,
                
                
                March 31,
                
                
                June 30,2010:Revenues
                
                $
                14,829
                
                
                $
                14,985
                
                
                $
                15,319
                
                
                $
                15,561Gross
      Profit
                
                
                3,401
                
                
                
                3,186
                
                
                
                2,635
                
                
                
                3,404Net
      income (loss) available to common shareholders
                
                
                660
                
                
                
                186
                
                
                
                (176
                )
                
                
                158Basic
      earnings (loss) per share – continuing operations
                
                
                0.05
                
                
                
                0.02
                
                
                
                (0.01
                )
                
                
                0.01Basic
      earnings (loss) per share – discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Basic
      earnings (loss) per share
                
                
                0.05
                
                
                
                0.02
                
                
                
                (0.01
                )
                
                
                0.01Diluted
      earnings (loss) per share – continuing operations
                
                
                0.05
                
                
                
                0.01
                
                
                
                (0.01
                )
                
                
                0.01Diluted
      earnings per share – discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Diluted
      earnings (loss) per share
                
                
                0.05
                
                
                
                0.01
                
                
                
                (0.01
                )
                
                
                0.01




For the Three Months Ended
                    
                    
                    For the One
                      Month Ended*November 30,
                    
                    
                    February 28,
                    
                    
                    May 31,
                    
                    
                    June 30,2009:Revenues
                    
                    $
                    36,165
                    
                    
                    $
                    16,428
                    
                    
                    $
                    15,393
                    
                    
                    $
                    4,920Gross
      Profit
                    
                    
                    7,112
                    
                    
                    
                    3,309
                    
                    
                    
                    3,093
                    
                    
                    
                    362Net
      income available to common shareholders
                    
                    
                    44
                    
                    
                    
                    15
                    
                    
                    
                    10
                    
                    
                    
                    377Basic
      earnings per share – continuing operations
                    
                    
                    0.01
                    
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.04Basic
      earnings per share – discontinued operations
                    
                    
                    (0.01
                    )
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.00Basic
      earnings per share
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.04Diluted
      earnings per share – continuing operations
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.03Diluted
      earnings per share – discontinued operations
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.00Diluted
      earnings per share
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.00
                    
                    
                    
                    0.03




*Fourth quarter ending June
30, 2009 was a one month quarter due to the Company changing its fiscal year end
from August 31 to June 30.





NOTE
22 - SEGMENT INFORMATION





As of
November 30, 2008, Management determined that the Company operates in only one
business segment and therefore no segment information is presented for the
fiscal year ended June 30, 2010.





Effective
November 30, 2008, the Company sold or discontinued operations in its Wireless
Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and
Electronics Integration segments.  As a result, the Company currently
has one reportable business segment, Business Solutions.  Prior to
December 1, 2008, the Company was organized into five reportable business
segments;  Business Solutions, Wireless Infrastructure, Transportation
Infrastructure, Ultraviolet Technologies, and Electronics
Integration.  The Company’s reportable business segments are organized
in a manner that reflects how management reviews and evaluates those business
activities.  Certain businesses have been grouped together for segment
reporting based upon similar products or product lines, marketing, selling and
distribution characteristics.  The segments are organized as
follows:


51





Segment & Entity
            
            Business ActivityBusiness
      SolutionsProfessional
      Staff Management, Inc. and related entities; CSM, Inc. and
      subsidiaries; Precision Employee Management, LLC; and Employer
      Solutions Group, Inc. and related entities
            
            Provider
      of outsourced human resource servicesWireless
      InfrastructureFortune
      Wireless, Inc.; Magtech Services, Inc.; Cornerstone Wireless Construction
      Services, Inc.; James Westbrook & Associates, LLC
            
            Provider
      of turnkey development services for deployment of wireless
      networksTransportation
      InfrastructureJames
      H. Drew Corp. and subsidiaries
            
            Installer
      of fiber optic, smart highway systems, traffic signals, street signs, high
      mast and ornamental lighting, guardrail, wireless communications, and
      fabrications of structural steelUltraviolet
      TechnologiesNor-Cote
      International, Inc. and subsidiaries
            
            Manufacturer
      of UV curable screen printing ink productsElectronics
      IntegrationKingston
      Sales Corporation; Commercial Solutions, Inc.; Telecom Technology
      Corp.
            
            Distributor
      and installer of home and commercial
electronics





The
following tables report data by segment and exclude revenues from transactions
with other operating segments:





Business
                    
                    
                    Wireless
                    
                    
                    Transportation
                    
                    
                    Ultraviolet
                    
                    
                    Electronics
                    
                    
                    HoldingSolutions(1)
                    
                    
                    Infrastructure
                    
                    
                    Infrastructure
                    
                    
                    Technologies
                    
                    
                    Integration
                    
                    
                    Company
                    
                    
                    TotalsTen
      months ended June 30, 2009Revenue
                    
                    $
                    53,482
                    
                    
                    $
                    3,312
                    
                    
                    $
                    12,090
                    
                    
                    $
                    2,771
                    
                    
                    $
                    1,251
                    
                    
                    $
                    -
                    
                    
                    $
                    72,906Cost
      of revenue
                    
                    
                    43,317
                    
                    
                    
                    2,458
                    
                    
                    
                    10,747
                    
                    
                    
                    1,596
                    
                    
                    
                    912
                    
                    
                    
                    -
                    
                    
                    
                    59,030Gross
      profit
                    
                    
                    10,165
                    
                    
                    
                    854
                    
                    
                    
                    1,343
                    
                    
                    
                    1,175
                    
                    
                    
                    339
                    
                    
                    
                    -
                    
                    
                    
                    13,876Operating
      expensesSelling,
      general and administrative
                    
                    
                    9,251
                    
                    
                    
                    650
                    
                    
                    
                    781
                    
                    
                    
                    1,320
                    
                    
                    
                    238
                    
                    
                    
                    358
                    
                    
                    
                    12,598Depreciation
      and amortization
                    
                    
                    548
                    
                    
                    
                    11
                    
                    
                    
                    5
                    
                    
                    
                    59
                    
                    
                    
                    1
                    
                    
                    
                    242
                    
                    
                    
                    866Total
      operating expenses
                    
                    
                    9,799
                    
                    
                    
                    661
                    
                    
                    
                    786
                    
                    
                    
                    1,379
                    
                    
                    
                    239
                    
                    
                    
                    600
                    
                    
                    
                    13,464Segment
      operating income (loss)
                    
                    $
                    366
                    
                    
                    $
                    193
                    
                    
                    $
                    557
                    
                    
                    $
                    (204
                    )
                    
                    $
                    100
                    
                    
                    $
                    (600
                    )
                    
                    $
                    412





(1)       Gross
billings of $456,813 less worksite employee payroll costs of
$403,331.





Business
                    
                    
                    Wireless
                    
                    
                    Transportation
                    
                    
                    Ultraviolet
                    
                    
                    Electronics
                    
                    
                    OperatingSolutions(1)
                    
                    
                    Infrastructure
                    
                    
                    Infrastructure
                    
                    
                    Technologies
                    
                    
                    Integration
                    
                    
                    TotalYear
      ended August 31, 2008Revenue
                    
                    $
                    74,894
                    
                    
                    $
                    15,683
                    
                    
                    $
                    43,757
                    
                    
                    $
                    11,965
                    
                    
                    $
                    12,094
                    
                    
                    $
                    158,393Cost
      of revenue
                    
                    
                    61,459
                    
                    
                    
                    11,991
                    
                    
                    
                    39,005
                    
                    
                    
                    6,904
                    
                    
                    
                    11,119
                    
                    
                    
                    130,478Gross
      profit
                    
                    
                    13,435
                    
                    
                    
                    3,692
                    
                    
                    
                    4,752
                    
                    
                    
                    5,061
                    
                    
                    
                    975
                    
                    
                    
                    27,915Operating
      expensesSelling,
      general and administrative
                    
                    
                    14,079
                    
                    
                    
                    4,177
                    
                    
                    
                    3,861
                    
                    
                    
                    4,956
                    
                    
                    
                    2,300
                    
                    
                    
                    29,373Depreciation
      and amortization
                    
                    
                    1,267
                    
                    
                    
                    153
                    
                    
                    
                    24
                    
                    
                    
                    322
                    
                    
                    
                    47
                    
                    
                    
                    1,813Impairment
                    
                    
                    2,296
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,168
                    
                    
                    
                    1,276
                    
                    
                    
                    8,740Total
      operating expenses
                    
                    
                    17,642
                    
                    
                    
                    4,330
                    
                    
                    
                    3,885
                    
                    
                    
                    10,446
                    
                    
                    
                    3,623
                    
                    
                    
                    39,926Segment
      operating income (loss)
                    
                    $
                    (4,207
                    )
                    
                    $
                    (638
                    )
                    
                    $
                    867
                    
                    
                    $
                    (5,385
                    )
                    
                    $
                    (2,648
                    )
                    
                    $
                    (12,011
                    )





Holding
                    
                    
                    Consolidated
                    
                    
                    VIECompany
                    
                    
                    VIE
                    
                    
                    Elimination
                    
                    
                    TotalsYear
      ended August 31, 2008 (Continued)Revenue
                    
                    $
                    -
                    
                    
                    $
                    1,725
                    
                    
                    $
                    (1,719
                    )
                    
                    $
                    158,399Cost
      of revenue
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    130,478Gross
      profit
                    
                    
                    -
                    
                    
                    
                    1,725
                    
                    
                    
                    (1,719
                    )
                    
                    
                    27,921Operating
      expensesSelling,
      general and administrative
                    
                    
                    3,411
                    
                    
                    
                    37
                    
                    
                    
                    (1,719
                    )
                    
                    
                    31,102Depreciation
      and amortization
                    
                    
                    776
                    
                    
                    
                    193
                    
                    
                    
                    -
                    
                    
                    
                    2,782Impairment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,740Total
      operating expenses
                    
                    
                    4,187
                    
                    
                    
                    230
                    
                    
                    
                    (1,719
                    )
                    
                    
                    42,624Segment
      operating income (loss)
                    
                    $
                    (4,187
                    )
                    
                    $
                    1,495
                    
                    
                    $
                    -
                    
                    
                    $
                    (14,703
                    )





(1) Gross
billings of $610,453 less worksite employee payroll costs of
$535,559.


52





Business
                  
                  
                  Electronics
                  
                  
                  HoldingSolutions
                  
                  
                  Integration
                  
                  
                  Company
                  
                  
                  TotalsAs
      of June 30, 2009 (Audited)Current
      AssetsCash
      and equivalents
                  
                  $
                  1,472
                  
                  
                  $
                  -
                  
                  
                  $
                  64
                  
                  
                  $
                  1,536Restricted
      cash
                  
                  
                  3,292
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3292Accounts
      receivable, net
                  
                  
                  2,619
                  
                  
                  
                  -
                  
                  
                  
                  3
                  
                  
                  
                  2,622Inventory,
      net
                  
                  
                  13
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13Deferred
      tax asset
                  
                  
                  1,250
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,250Prepaid
      expenses and other current assets
                  
                  
                  1,493
                  
                  
                  
                  -
                  
                  
                  
                  (10
                  )
                  
                  
                  1,483Assets
      of discontinued operations, net
                  
                  
                  -
                  
                  
                  
                  112
                  
                  
                  
                  -
                  
                  
                  
                  112Total
      Current Assets
                  
                  
                  10,139
                  
                  
                  
                  112
                  
                  
                  
                  57
                  
                  
                  
                  10,308Other
      AssetsProperty,
      plant & equipment, net
                  
                  
                  489
                  
                  
                  
                  -
                  
                  
                  
                  275
                  
                  
                  
                  764Deferred
      tax asset
                  
                  
                  1,250
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,250Goodwill
                  
                  
                  12,339
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,339Other
      intangible assets, net
                  
                  
                  3,263
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,263Term
      note receivable-related party
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,546
                  
                  
                  
                  2,546Other
      long term assets
                  
                  
                  22
                  
                  
                  
                  -
                  
                  
                  
                  21
                  
                  
                  
                  43Total
      Other Assets
                  
                  
                  17,363
                  
                  
                  
                  -
                  
                  
                  
                  2,842
                  
                  
                  
                  20,205Total
      Assets
                  
                  $
                  27,502
                  
                  
                  $
                  112
                  
                  
                  
                  2,899
                  
                  
                  
                  30,513





Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure





None





Item 9A. Controls and
Procedures





The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports the Company file
pursuant to the Securities Exchange Act of 1934 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 the Company’s
management, including its Chief Executive Officer and Chief Financial Officer as
appropriate, to allow timely decisions regarding required disclosure. The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer recognizes that, because the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events and also
is subject to other inherent limitations, disclosure controls and procedures, no
matter how well designed and operated, can provide only reasonable, and not
absolute, assurance of achieving the desired objectives.





Under the
supervision and with the participation of the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer the
Company has evaluated the effectiveness of the Company’s disclosure controls and
procedures as of June 30, 2010. Based on this evaluation, the Chief Executive
Officer, Chief Financial Officer conclude that as of June 30, 2010 the Company’s
Disclosure Controls are effective to provide reasonable assurance that
information relating to the Company that is required to be disclosed by us in
the reports we file or submit, is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.





It should
be noted that any control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system’s
objectives will be met.





Item 9B. Other
Information





None


53


PART III





Item 10. Directors and Executive Officers of
the Companyand
Corporate Governance





Directors of the
Company





The
following table sets forth the name and age of each Director, indicating all
positions and offices with us currently held by each Director.





Name
              
              Principle
      Position and Role (Age)
              
              Director
      SinceCarter
      M. Fortune
              
              Treasurer,
      Chairman of the Board (69)
              
              2002P.
      Andy Rayl
              
              Director,
      Chief Operating Officer (38)
              
              2005David
      A. Berry
              
              Independent
      Director, Audit Committee Member (57)
              
              2002Patrick
      Ludwig
              
              Independent
      Director (45)
              
              2008





Set forth
below are descriptions of the backgrounds and principal occupations of each of
our Directors, and the period during which each has served as a Director. Each
Director serves for a term of one year or until such time as that director is
replaced pursuant to the Company’s By-Laws.





Carter M.
Fortune was appointed Chief Executive Officer and Chairman of the Board of the
Company as of January 2002. Mr. Fortune resigned as Chief Executive Officer on
May 27, 2005 and was appointed Treasurer and remained Chairman of the
Board.  Mr. Fortune has a Bachelor of Business Administration degree in
marketing from the University of Cincinnati. He began his professional career at
a leading national food brands company where after five years he had ascended to
the position of Regional Marketing Manager. Mr. Fortune was then hired as
Director of Marketing for a leading insurance and actuarial services provider
where he served for three years. Mr. Fortune then began a period of about
fifteen years where he was the owner and operator of a chain of retail stores.
Concurrently Mr. Fortune began investing in, owning and operating numerous
commercial and residential real estate developments; he continues to pursue such
ventures.





P. Andy
Rayl was elected to the Company’s Board on May 17, 2005. Mr. Rayl also served as
Chairman of the Company’s Audit Committee until May 8, 2008 when he was
appointed as Chief Operating Officer. Mr. Rayl has served as the Chief Financial
Officer and Director of Operations for Technuity, Inc. (“Technuity”) since
October 2002 through May 2008. From October 2000 to October 2002, he served as
Controller and Vice President of Finance of Technuity. Technuity was a virtual
manufacturer of battery products and related accessories. From 1999 through
November 2007, Technuity experienced significant growth in the consumer
electronics retail channel and along with winning distinction as an Ernst &
Young Entrepreneur of the Year in 2002, was also named one of the ten fastest
growing private companies in Indiana in both 2002 and 2004. Mr. Rayl also served
as Chief Financial Officer of Batteries.com, LLC (“Batteries.com”) from December
2004 through November 2007. Batteries.com was a retailer of battery products and
accessories to the general public via the internet. Prior to joining Technuity,
Mr. Rayl was employed as a Certified Public Accountant by Ernst & Young, LLP
where he specialized in providing auditing and assurance services for fast
growing private and public start-up companies. Mr. Rayl graduated with honors
with a Bachelor of Science degree in accounting from Indiana
University.





David A.
Berry was elected to the Fortune Industries Board of Directors on November 1,
2002. He serves as head of the company’s Audit Committee. Mr. Berry began his
professional career by starting his own underground and aerial utility
construction company in 1978, which he had grown into a national company with
operations from Maine to California. He sold the company in 1984. Mr. Berry then
started OSP Engineering (OSP), an outside and inside plant telecommunications
engineering company, designing telephone, cable TV and electrical systems for
AT&T, Indiana Bell Telephone and Indiana Bell Communications. Mr. Berry
again grew the OSP into a regional company, with customers thought the Midwest,
which he sold in 1990. Mr. Berry was one of the founding members of Citimark
Communications, a shared tenant services telephone company; he sold his interest
to his partners and form Shared Telcom Services (STS) in 1995. Mr. Berry grew
STS (via acquisition) into the third largest regional Competitive Local Exchange
Carrier (CLEC) behind Ameritech and AT&T. He then sold the company in 2000
to a large national Utility. Mr. Berry has been retired since 2001 and is
currently an independent consultant pursuing multiple business
ventures.





Patrick
Ludwig was appointed to the Company's Board on November 17, 2008.  Mr.
Ludwig retired as President of Kenra, LTD, an Indianapolis-based hair care
products company, in 2009.  He had been with Kenra since 1995.  Prior
to Kenra, Mr. Ludwig worked for a Minnesota-based hair care distributor. 
Mr. Ludwig graduated from Arizona State University with a Bachelor of Science
degree in History.





Executive
Officers of the Company





The
executive officers of the Company are as follows:





Name
              
              Age
              
              PositionTena
      Mayberry
              
              46
              
              Chief
      Executive Officer and PresidentP.
      Andy Rayl
              
              38
              
              Chief
      Operating OfficerRandy
      Butler
              
              50
              
              Chief
      Financial Officer


54





Each
executive officer serves, in accordance with the by-laws of the Company, until
the annual meeting of the Board of Directors.





Tena
Mayberry was elected President of the Company on April 13, 2009, and Chief
Executive Officer of the Company on January 15, 2010, replacing John F. Fisbeck
who resigned and the Company’s Chief Executive Officer on January 15,
2010.  Ms. Mayberry was named president of Century II, a subsidiary of
the Company, in 2007, after serving four years as Chief Operating Officer, two
years as a senior vice president, and four years as vice
president.  Prior to joining Century II, Ms. Mayberry served in
management positions with Contract Sales Managers, Kroger Co. and Norrell
Temporary Services.  Ms. Mayberry graduated from Tennessee
Technological University with a Bachelor of Science degree in marketing and
business management.





P. Andy
Rayl became Chief Operating Officer on May 8, 2008.  Mr. Rayl’s
biographical information is set forth above.





Randy
Butler became Chief Financial Officer on April 2, 2009, replacing Garth Allred
who resigned as the Company’s Chief Financial Officer on April 2,
2009.  Prior to his election as the Company’s Chief Financial Officer,
Mr. Butler joined Century II, a subsidiary of the Company on May 1, 2006 as the
Controller, and assumed responsibility for all the financial functions of PSM,
Inc. another subsidiary of the Company in May 2008.  Prior to Century
II, Mr. Butler was the Controller for PFIC Corporation, a broker-dealer for
Union Planters Bank, where he was responsible for all the accounting and
financial operations for the Financial Services Division of Union Planters
Bank.  Mr. Butler graduated with honors from the University of
Tennessee with a Bachelor of Science degree in accounting.





SECTION
16(a) BENEFICIAL OWNERSHIP COMPLIANCE





Section
16(a) of the Exchange Act requires the Company’s officers and Directors, and
persons who own more than ten percent of a registered class of the Company’s
equity securities, to file an initial report of ownership of such securities on
Form 3 and changes in ownership of such securities on Form 4 or 5 with the SEC.
Such officers, Directors and ten percent shareholders are required to furnish
the Company with copies of all Section 16(a) forms they file with the
SEC.





Based
solely on its review of the copies of such forms received by it, or written
representations from certain such reporting persons that no Form 5’s were
required for such persons, the Company believes that, for the fiscal period
ended June 30, 2010, its officers, Directors and ten percent shareholders
complied with all applicable Section 16(a) filing requirements.





CODE
OF ETHICS





The
Company has adopted a code of ethics (the “Code of Ethics”) that applies to the
Company’s principal executive officer, principal financial officer, and
employees. A copy of the Company’s Code of Ethics can be viewed on the
Company’s website at www.ffi.net or obtained free of charge by sending a written
request to the attention of the Company’s Chief Financial Officer, Randy Butler,
at 6402 Corporate Drive, Indianapolis, Indiana 46278.





SHAREHOLDER
PROPOSALS





Any of
our shareholders wishing to have a proposal considered for inclusion in our 2011
proxy solicitation materials must set forth such proposal in writing to be
received at our corporate office no later than December 1, 2010. In addition,
any shareholder wishing to nominate a candidate for Director or propose other
business at the Annual Meeting must generally give us written notice on or
before December 1, 2010, and the notice must provide certain specific
information as pursuant to Rule 14a-8 of the rules promulgated under the
Exchange Act must comply with the advance notice provisions and other
requirements of our bylaws, which are on file with the SEC and may be obtained
from our corporate office upon request. Our Board will review any shareholder
proposals that are filed as required and will determine whether such proposals
meet applicable criteria for inclusion in our 2011 proxy solicitation materials
or consideration at the 2011 Annual Meeting. In addition, we retain discretion
to vote proxies on matters of which we are not properly notified at our
principal executive offices on or before the close of business on
January 2, 2011, and also retain that authority under certain other
circumstances. These procedures remain unchanged from those last reported in the
Company’s Schedule 14A, except for the notice dates set forth
above.





THE
AUDIT COMMITTEE





The
Company maintains an Audit Committee that is currently composed of one member,
David A. Berry, who is not an officer or employee of the Company or any parent
or subsidiary of the Company. Further, Mr. Berry does not have any other
material relationship with the Company that would interfere with his exercise of
independent judgment. The Board has determined that Mr. Berry is "independent"
and "financially sophisticated" as such terms are defined by the NYSE
Amex.





The
Company’s Board has determined that David Berry qualifies as an "audit committee
financial expert" as defined by Item 401(h) of Regulation S-K adopted pursuant
to the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  Mr. Berry has years of experience in reading, interpreting and
analyzing financial statements in his roles as more fully described in the above
biographical information. Mr. Berry also qualifies as "independent" as that term
is used in Item 7(d) (3) (IV) of Schedule 14A of the Exchange
Act.


55





Effective
December 2009, Mr. Rick Snow resigned from the Company’s Board of Directors and
Audit Committee. Mr. Snow’s resignation was not due to a disagreement with the
Company on any matter relating to the Company’s operations, policies or
practices.





Effective
May 2010, Ms. Julia Reed resigned from the Company’s Board of Directors and
Audit Committee. Ms. Reed’s resignation was not due to a disagreement with the
Company on any matter relating to the Company’s operations, policies or
practices. As a result of Ms. Reed’s resignation, the Company does not meet the
minimum audit committee requirements of the NYSE Amex guidelines. Therefore by
letter dated July 2, 2010 the Company was notified by the NYSE Amex that it is
not in compliance with Section 803(B)(2)(c) of the NYSE Amex Company Guide, in
that the Company’s audit committee is not comprised of at least two independent
directors. Pursuant to Section 803(B)(6) of the Company Guide, the Company has
until the earlier of its next annual shareholders’ meeting or one year from the
occurrence of the event that caused the failure to comply with the requirement
to regain compliance. The Company is currently interviewing potential candidates
for the position of independent director and audit committee member and expects
to have this position filled by the required timeframe.





Item 11. Executive
Compensation





COMPENSATION
DISCUSSION AND ANALYSIS





Overview





The
Company’s Board of Directors believes that the success of the Company is largely
based on the performance and skills of its executive officers. Therefore, when
determining executive compensation, the Company’s Board of Directors focuses on
the concepts of rewarding executive performance and retaining and attracting top
executive talent. The Company’s principal objectives with respect to
executive compensation are to encourage strong executive leadership and on
providing value to the Company’s stockholders.





The
Company, due to its status as a “Controlled Company’ under the regulations of
the NYSE Amex, is not required to have separate nominating or compensation
committees and does not have such committees. The Company’s full Board of
Directors regularly meets to analyze whether the compensation for the Company’s
executive officers is aligned with the Company’s objectives for executive
compensation. In the event the compensation of Ms. Mayberry and Mr.
Rayl are under consideration then, because Mr. Rayl is also a Company
Director as well as Chief Operating Officer, they are excluded from those
discussions. Currently, the Company’s only executive officers are its Chief
Executive Officer, Chief Financial Officer, and Chief Operating
Officer.





Determination
of Compensation





The
Company’s Board of Directors relies on its independent judgment in determining
the compensation to be paid to the Company’s executive officers. In reaching its
decisions with respect to executive compensation, the Board of Directors
evaluates the executive’s past performance, the executive’s inherent value to
the Company and takes into account the compensation paid to executive officers
by comparable companies. The Board of Directors’ goal is to align executive
officer compensation with the value that those executive officers provide to the
Company.





Elements
of Compensation





The
Company’s compensation program consists of base salary, cash bonuses,
discretionary stock awards and other benefits.





The base
salary for the Company’s Chief Executive Officer, Chief Financial Officer, and
Chief Operating Officer is determined based upon the responsibilities of the
executive officer, the executive officer’s general contributions to the Company,
and the skills, expertise and leadership qualities that the executive officer
brings to the Company. As noted above, the base salaries for the Company’s Chief
Executive Officer, Chief Financial Officer, and Chief Operating Officer are
reviewed on a regular basis.





The
Company’s Board of Directors maintains the discretion to pay cash bonuses to the
Company’s named executive officers based on their evaluation of the executive
officer. However, the Company prefers to pay executive compensation through an
annual salary rather than through bonuses.





The
Company’s Board of Directors also maintains the discretion to award stock to
executive officers based upon the Company’s compensation strategy. Although the
Company has made stock awards to executive officers in the past and may do so in
the future, because the Company prefers to pay executive officers through
salary, such stock awards are not common.


56





Chief
Executive Officer Compensation





The
Company’s Board of Directors considered a variety of factors when determining
the compensation to be paid to the Company’s Chief Executive Officer, Mr.
Fisbeck, during the fiscal period ended June 30, 2010. Among the factors
considered by the Board of Directors was Mr. Fisbeck’s performance, the scope of
his responsibilities to the Company, and his leadership value and skills. At the
start of fiscal year 2010, Mr. Fisbeck was paid a base salary of $300,000.
 Effective January 15, 2010, the Board of Director’s accepted Mr. Fisbeck’s
resignation as Chief Executive Officer of the Company.





Tena
Mayberry who accepted the position as Chief Executive Officer of the Company on
January 15, 2010 in addition to her role as President.  Ms. Mayberry
was paid $180,000 in salary during the fiscal year ended June 30, 2010 pursuant
to her employment contract.  The Board of Directors based Ms.
Mayberry’s compensation on her record of performance for other companies and for
the skills and expertise that she offered the Company. The Board of Directors
also considered salaries paid to comparable executives by peer
companies.





Chief
Financial Officer Compensation





Randy
Butler was paid $130,000 in salary during the fiscal period ended June 30, 2010
pursuant to his employment agreement.  The Board of Directors based Mr.
Butler’s compensation on his record of performance for other companies and for
the skills and expertise that he offered the Company. The Board of Directors
also considered salaries paid to comparable executives by peer
companies.





Chief
Operating Officer Compensation





P. Andy
Rayl was paid $105,000 in salary during the fiscal period ended June 30, 2010.
The Board of Directors based Mr. Rayl’s compensation on his record of
performance for other companies and for the skills and expertise that he offered
the Company. The Board of Directors also considered salaries paid to comparable
executives by peer companies.





Compensation
for Named Executives





The
following table sets forth certain information concerning the compensation paid
or accrued by the Company for services rendered during the Company’s past three
fiscal periods ended June 30, 2010 and 2009 and August 31, 2008 by our Chief
Executive Officer, Chief Financial Officer, and Chief Operating
Officer. The Company had no other executive officers during fiscal
2010.





EXECUTIVE
COMPENSATION TABLE




Fiscal
      PeriodEndedJune
      30, 2010
                                                                    and
      2009 and
                                                                  
                                                                  Annual
      Salary
                                                                  
                                                                  
                                                                  Annual
      Bonus
                                                                  
                                                                  
                                                                  Stock
                                                                  
                                                                  
                                                                  OtherName
      and Principal Position
                                                                  
                                                                  August 31, 2008
                                                                  
                                                                  Compensation
                                                                  
                                                                  
                                                                  Compensation
                                                                  
                                                                  
                                                                  Awards
                                                                  
                                                                  
                                                                  Compensation
                                                                  
                                                                  
                                                                  TotalJohn
      F. Fisbeck, CEO (1)
                                                                  
                                                                  2010
                                                                  
                                                                  $
                                                                  180,000
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  180,0002009
                                                                  
                                                                  $
                                                                  300,000
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  50,000
                                                                  
                                                                  
                                                                  $
                                                                  150,400
                                                                  (2)
                                                                  
                                                                  $
                                                                  500,4002008
                                                                  
                                                                  $
                                                                  600,000
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  150,400
                                                                  (2)
                                                                  
                                                                  $
                                                                  750,400P.
      Andy Rayl, COO (3)
                                                                  
                                                                  2010
                                                                  
                                                                  $
                                                                  105,000
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  105,0002009
                                                                  
                                                                  $
                                                                  95,000
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  50,000
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  145,0002008
                                                                  
                                                                  $
                                                                  58,731
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  58,731Garth
      D. Allred, CFO (4)
                                                                  
                                                                  2010
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -2009
                                                                  
                                                                  $
                                                                  102,974
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  102,9742008
                                                                  
                                                                  $
                                                                  170,000
                                                                  
                                                                  
                                                                  $
                                                                  65,000
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  235,000Tena
      Mayberry, CEO  (5)
                                                                  
                                                                  2010
                                                                  
                                                                  $
                                                                  180,000
                                                                  
                                                                  
                                                                  $
                                                                  20,000
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  200,0002009
                                                                  
                                                                  $
                                                                  41,538
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  41,5382008
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -Randy
      Butler, CFO (6)
                                                                  
                                                                  2010
                                                                  
                                                                  $
                                                                  130,000
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  130,0002009
                                                                  
                                                                  $
                                                                  30,000
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  30,0002008
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -


(1)
            John
      Fisbeck’s term as the Company’s CEO ended on January 15, 2010, when he
      resigned from the Company.




(2)
              Mr.
      Fisbeck received guarantee fees in connection with his personal guarantees
      for Company debt benefiting the
Company.




(3)
            P.
      Andy Rayl began his term as the Company’s COO on May 8,
      2008.




(4)
              Garth
      Allred was employed as the Company’s CFO from September 14, 2007 to April
      2, 2009.




(5)
            Tena
      Mayberry began her term as the Company’s President on April 13, 2009 and
      as the Company’s CEO on January 1,
2010.


57





(6)
            Randy
      Butler began his term as the Company’s Chief Financial Officer on April 2,
      2009.





Grant
of Plan Based Awards





In
exchange for modifying their employment agreements and agreeing to salary
reductions effective January 2009, the Company issued 200,000 shares of common
stock each to the CEO and COO. No other plan-based awards were made to the named
executive officers during the fiscal period ended June 30, 2010 and
2009.





Outstanding
Equity Awards





There was
no outstanding equity awards for the named executive officers as of the end of
the fiscal period ended June 30, 2010.





Option
Exercises and Vested Stock





There
were no option/SAR exercises during the fiscal period ended June 30, 2010 by any
of the named executive officers and there are currently no outstanding
unexercised options or SARs held by any of the named executive
officers.





Pension
Benefits





None of
the named executive officers held any pension benefits as of the end of the
fiscal period ended June 30, 2010.





Non-Qualified
Deferred Compensation Plans





None of
the named executive officers was the beneficiary of any non-qualified deferred
compensation plan during the fiscal period ended June 30, 2010.





Compensation
of Directors





The
following table sets forth the compensation paid to all Directors of the Company
during the fiscal period ended June 30, 2010. The table does not include
compensation paid to John Fisbeck in his role as CEO or P. Andy Rayl in his role
as COO. This compensation is set forth above in the Executive Compensation
Table:





DIRECTOR
COMPENSATION TABLE





Fees
      Earned or
                      
                      
                      All
      OtherName
                      
                      paid
      in Cash
                      
                      
                      Compensation
                      
                      
                      TotalCarter
      M. Fortune
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -P.
      Andy Rayl
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -David
      A. Berry
                      
                      $
                      12,000
                      
                      
                      $
                      -
                      
                      
                      $
                      12,000John
      F. Fisbeck
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Rick
      Snow
                      
                      $
                      4,000
                      
                      
                      $
                      -
                      
                      
                      $
                      4,000Julia
      Reed
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Patrick
      Ludwig
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -





Pursuant
to the Company’s policies, Directors who are also employees of the Company
receive no compensation for their service as directors. The Company determines
the compensation paid to its directors based upon its goals of maintaining
active and well-qualified directors and based upon its evaluation of the
reasonable compensation for the services rendered by its non-employee
directors.





Compensation
Committee Interlocks and Insider Participation





There
were no compensation committee interlocks or insider participation during the
fiscal period ended June 30, 2010.





Compensation
Committee Report





The Board
of Directors has reviewed and discussed the Compensation Discussion and Analysis
set forth above and based upon this review and discussions the Board of
Directors has recommended inclusion of that Compensation Discussion and Analysis
in this Annual Report on Form 10-K.





Carter M.
Fortune


P. Andy
Rayl


58


David A.
Berry


Patrick
Ludwig





Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters





Shares
Authorized for Issuance under Equity Compensation Plans





The
following information presents a summary of the Company’s equity compensation
plans as of June 30, 2010:





Plan Category
                  
                  Number of
                    securities to
                    be issued upon
                    exercise
                    of outstanding
                    options,
                    warrants and
                    rights
                  
                  
                  Weighted-
                    average
                    exercise price of
                    outstanding
                    options,
                    warrants and
                    rights
                  
                  
                  Number of
                    securities
                    remaining
                    available for
                    future
                    issuanceEquity
      Compensation Plan Approved by Shareholders (1)
                  
                  
                  965,567
                  
                  
                  $
                  0.00
                  
                  
                  
                  34,433Total
                  
                  
                  965,567
                  
                  
                  $
                  0.00
                  
                  
                  
                  34,433





(1)
            Includes
      the 2006 Equity Incentive Plan




SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS





Security
Ownership of Certain Beneficial Owners





The
following table sets forth information as of June 30, 2010 with respect to the
only persons or groups known to the Company who may be deemed to beneficially
own more than five percent of the Company’s voting securities (i.e. Common
Stock).





Title of Class
                            
                            Name and Address of Beneficial Owner
                            
                            Amount and Nature of Beneficial
                              Ownership (1)
                            
                            
                            Percent of
                              ClassCommon
      Stock
                            
                            Carter
      M. Fortune
                              6402
      Corporate Drive
                              Indianapolis,
      IN  46278
                            
                            
                            7,344,687
                            (2)
                            
                            
                            60
                            %Common
      Stock
                            
                            John
      F. Fisbeck
                              6402
      Corporate Drive
                              Indianapolis,
      IN 46278
                            
                            
                            1,128,700
                            
                            
                            
                            9
                            %





(1)
            As
      used in this table, "beneficial ownership" of securities means the sole or
      shared power to vote, or to direct the voting of, such securities, or the
      sole or shared investment power with respect to such securities, including
      the power to dispose of, or to direct the disposition of, such securities.
      In addition, for purposes of this table, a person is deemed to have
      "beneficial ownership" of any security that such person had the right to
      acquire within 60 days after June 30, 2010. "Beneficial ownership" also
      includes that ownership of shares that may be imputed to any control group
      of the Company.


(2)
            As
      the sole member of 14 West, LLC, Carter M. Fortune has sole voting
      and dispositive power over 1,259,834 (10.3%) shares of the Company’s
      Common Stock held by that entity, therefore 1,259,834 shares are included
      within the beneficial holdings of Mr. Fortune in the above
      table.





Security
Ownership of Management





The
following table sets forth information as of June 30, 2010 with respect to (i)
each current Director, (ii) all individuals currently serving as the Company’s
executive officers (as defined in Item 402(a)(3) of Regulation S-K) as of the
above date, and (iii) all current Directors and all such executive officers as a
group. Unless otherwise noted, each holder has sole voting and investment power
with respect to the shares of the listed securities. An asterisk (*) indicates
beneficial ownership of less than one percent.


59





Title of Class
                      
                      Name and Address of Beneficial Owner
                      
                      Amount and Nature of Beneficial
                        Ownership (1)
                      
                      
                      Percent of
                        ClassCommon
      Stock
                      
                      Carter
      M. Fortune
                        6402
      Corporate Drive
                        Indianapolis,
      IN 46278
                      
                      
                      7,344,687
                      (2)
                      
                      
                      60
                      %Common
      Stock
                      
                      David
      A. Berry
                        6402
      Corporate Drive
                        Indianapolis,
      IN 46278
                      
                      
                      10,000
                      
                      
                      
                      *Common
      Stock
                      
                      Tena
      Mayberry
                        6402
      Corporate Drive
                        Indianapolis,
      IN 46278
                      
                      
                      20,000
                      
                      
                      
                      *Common
      Stock
                      
                      Randy
      Butler
                        6402
      Corporate Drive
                        Indianapolis,
      IN 46278
                      
                      
                      10,000
                      
                      
                      
                      *Common
      Stock
                      
                      P.
      Andy Rayl
                        6402
      Corporate Drive
                        Indianapolis,
      IN 46278
                      
                      
                      173,295
                      
                      
                      
                      1
                      %Common
      Stock
                      
                      Patrick
      Ludwig
                        6402
      Corporate Drive
                        Indianapolis,
      IN  46278
                      
                      
                      20,000
                      
                      
                      
                      *Common
      Stock
                      
                      All
      current executive officers and Directors as a group
                      
                      
                      7,577,982
                      
                      
                      
                      62
                      %





(1)
            As
      used in this table, "beneficial ownership" of securities means the sole or
      shared power to vote, or to direct the voting of, such securities, or the
      sole or shared investment power with respect to such securities, including
      the power to dispose of, or to direct the disposition of, such securities.
      In addition, for purposes of this table, a person is deemed to have
      "beneficial ownership" of any security that such person had the right to
      acquire within 60 days after June 30,
2010.


(2)
            As
      the sole member of 14 West, LLC, Carter M. Fortune has sole voting
      and dispositive power over 1,259,834 (10.3%) shares of the Company’s
      Common Stock held by that entity, therefore 1,259,834 shares are included
      within the beneficial holdings of Mr. Fortune in the above
      table.





CHANGES
IN CONTROL





The
Company knows of no arrangements the operation of which may at a subsequent date
result in a change of control.





Our
majority shareholder has pledged his ownership holdings in the Company up as
collateral on certain personal debt obligations. If our majority shareholder
were to default on these debt obligations and the collateral is called upon by
the lending institution, it could result in a potential change in control of the
Company if the default may not be cured by the majority shareholder through some
other means.





Item 13. Certain Relationships and Related
Transactions, and
Director Independence





The
Company holds various operating leases for the rental of properties with
Fisbeck-Fortune Development, LLC, a Company owned by its majority shareholder,
the Chairman of the Board. The Company pays certain expenses including taxes,
assessments, maintenance and repairs under terms of the leases. Rent expense of
$120 was recognized in fiscal period 2010 under these agreements.





The
Company’s PSM subsidiary holds one lease for the rental of a property in
Richmond, IN from Harlan M. Schafir, the Company’s former COO and Director. The
lease is for five-year terms with options to extend terms. The leases
provide for base rent of $2,000 per month with nominal annual increases. Rent
and related expense of $29 was recognized in fiscal period 2010 under these
agreements.





The
Company’s ESG subsidiary holds a lease for an office building in Utah with a
limited liability company in which ESG’s former President is a
member.


60





Effective
November 30, 2008, the Company approved a transaction to sell all of the
outstanding shares of common stock of its wholly owned subsidiaries, James H
Drew Corporation, Nor-Cote International, Inc., Fortune Wireless, Inc. and
Commercial Solutions, Inc. The subsidiaries were sold to related party entities
owned by the Company’s majority shareholders in exchange for a $10,000,000
reduction in the outstanding balance of the term loan note due to the majority
shareholder and a three year Term Loan Receivable in the amount of
$3,500,000.  The Term Loan Receivable bears interest at prime plus 1%
and is interest only for the first twelve months, with $50,000 and $100,000
monthly principal payments due in years two and three, respectively. The unpaid
balance at maturity is due in lump sum payment.





As part
of the terms of the sales transaction, the majority shareholder received 217,000
shares of Series C Preferred Stock in consideration for cancellation of the
outstanding principal balance of the term note payable of $21.7 million. In
addition, the Company converted 79,180 shares of Series B Preferred Stock
previously issued to and held by the majority shareholder to 79,180 shares of
Series C Preferred Stock. The Series C Preferred Stock is non-redeemable,
non-voting cumulative preferred and bears annual dividends of $5 per share in
years one and two subsequent to the transaction date, $6 per share in year three
subsequent to the transaction date and $7 per share thereafter. Effective July
1, 2009, the Series C Preferred Stock annual dividend was modified to $2 per
share in the years ending June 30, 2010 and 2011, $5 per share in the year
ending June 30, 2012, $6 per share in the year ending June 30, 2013 and $7 per
share thereafter.





As part
of the terms of the sales transaction, the Company issued the majority
shareholder 2.2 million warrants with a ten year term and an exercise price of $
..40 per share.





Item 14. Principal Accountant Fees and
Services.





Our
financial statements for the fiscal period ended June 30, 2010 were certified by
Somerset CPA’s, P.C. (“Somerset”). The following table sets forth the
aggregate fees billed to the Company by Somerset:





Fiscal
      2010
                  
                  
                  Fiscal
      2009Audit
      Fees
                  
                  $
                  285,000
                  
                  
                  $
                  400,000Audit
      Related Fees
                  
                  
                  105,000
                  
                  
                  
                  100,000Tax
      Fees
                  
                  
                  260,000
                  
                  
                  
                  195,000All
      Other Fees
                  
                  
                  -
                  
                  
                  
                  -$
                  650,000
                  
                  
                  $
                  695,000





Audit
Fees: The aggregate fees billed in each of the fiscal periods ended June 30,
2010 and 2009 2008 for professional services rendered by the principal
accountant for the audit of the Company’s annual financial statements and review
of the financial statements included in the Company’s Forms 10-K and 10-Q or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal periods. These
fees also include five statutory audits for certain wholly owned subsidiaries of
the Company.





Audit
Related Fees: The aggregate fees billed in each of the fiscal periods ended June
30, 2010 and 2009 for professional services rendered by the principal accountant
for audit related fees including, primarily, consultations on various accounting
and reporting matters.





Tax Fees:
The aggregate fees billed in each of the fiscal periods ended June 30, 2010 and
2009 for professional services rendered by the principal accountant for tax
compliance Federal and State advice.





All Other
Fees: For the fiscal periods ended June 30, 2010 and 2009, the Company was not
billed any additional fees for services by Somerset other than the services
covered under the captions "Audit Fees", "Audit Related Fees" and "Tax Fees"
above.





All
services listed were pre-approved by the Audit Committee and all auditing
services were performed by Somerset employees. The Audit Committee has
considered whether the services described above are compatible with maintaining
the independent accountant's independence and has determined that such services
have not adversely affected Somerset’s independence.





POLICIES
RELATED TO PRINCIPAL ACCOUNTANT FEES AND SERVICES





The Audit
Committee has pre-approval policies and procedures, pursuant to which the Audit
Committee approves the audit and permissible non-audit services provided by
Somerset. The Audit Committee’s pre-approval policy is as follows: consistent
with the Audit Committee’s responsibility for engaging our independent auditors,
all audit and permitted non-audit services require pre-approval by the Audit
Committee, some such services require specific approvals, whereas other services
are granted general pre-approval. All requests or applications for services to
be provided by the independent registered public accounting firm that do not
require specific approval by the Audit Committee will be submitted to the Chief
Financial Officer and must include a detailed description of the services to be
rendered. The Chief Financial Officer will determine whether such services are
included within the list of services that have received the general pre-approval
of the Audit Committee. The Audit Committee will be informed on a timely basis
of any such services rendered by the independent auditor. Requests or
applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the independent
auditor and the Chief Financial Officer, and must include a joint statement as
to whether, in their view, the request or application is consistent with the
Securities and Exchange Commission‘s (“SEC’s”) rules on auditor independence.
The Chief Financial Officer will immediately report any breach of this policy
that comes to the attention of the Chief Financial Officer or any member of
management to the chairman of the Audit Committee. Pursuant to these procedures,
the Audit Committee approved the foregoing audit and permissible non-audit
services provided by Somerset in fiscal 2010.


61




PART IV





Item 15. Exhibits and Financial Statement
Schedules.





The
following financial statements, schedules and exhibits are filed as part of this
Report:





(1)
            Financial
      Statements. Reference is made to the Index to Consolidated Financial
      Statements on page 26 of this
Report.





(2)
            All
      schedules are omitted because they are not applicable or the required
      information is shown in the financial statements or the notes to the
      financial statements.





(3)
            List
      of Exhibits.





Exhibit
              No.
            
            Description2.1
            
            Agreement
      and Plan of Share Exchange entered into April 13, 2007
  (1)3.1
            
            Second
      Amended and Restated Articles of Incorporation (2)3.2
            
            Second
      Amended and Restated Code of Bylaws (3)10.1
            
            Term
      Loan Note (4)21.1
            
            List
      of subsidiaries (5)23.1
            
            Consent
      of Independent Registered Public Accounting Firm (5)31.1
            
            Certificate
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002 by Tena Mayberry. (5)31.2
            
            Certificate
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002 by Randy Butler. (5)32.1
            
            Certificate
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 by Tena Mayberry. (5)32.2
            
            Certificate
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 by Randy Butler.
  (5)





Notes to
Exhibits:





1.
            This
      exhibit is incorporated by reference from the Company’s Current Report on
      Form 8-K, dated April 19, 2007.





2.
            This
      exhibit is incorporated by reference from the Company’s Annual Report on
      Form 10-K, dated September 28,
2009.





3.
            This
      exhibit is incorporated by reference from the Company’s Current Report on
      Form 8-K, dated December 27, 2006.





4.
            This
      exhibit is incorporated by reference from the Company’s Current Report on
      Form 8-K, dated June 5, 2008.





5.
            Attached
      hereto.





SIGNATURES





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





FORTUNE
      INDUSTRIES, INC.Date:  September
      28, 2010
            By:
            /s/
      Tena MayberryTena
      Mayberry,Chief
      Executive OfficerDate:  September
      28, 2010
            By:
            /s/
      Randy ButlerRandy
      ButlerChief
      Financial Officer


62





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





Date:  September
      28, 2010
            
            /s/
      Carter M. FortuneCarter
      M. Fortune, Chairman of the BoardDate:  September
      28, 2010
            
            /s/
      P. Andy RaylP.
      Andy Rayl, Director, Chief Operating OfficerDate:   September
      28, 2010
            
            /s/
      David A. BerryDavid
      A. Berry, DirectorDate:   September
      28, 2010
            
            /s/Patrick
      LudwigPatrick
      Ludwig, Director


63