---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-K

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



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



|For the period from | July 1, 2011 | to | June 30, 2012 | 
|------------------- | ------------ | -- | ------------- | 



Commission file number: 1-32543



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 x
|(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, 2011, 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 $2.2 million.



The number of shares of the registrant’s Common Stock,
outstanding as of September 24, 2012 was 12,287,290. The number of shares of the registrant’s Preferred Stock, outstanding
as of September 24, 2012 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, 2011. 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 I                                                                                                           |   
|---------- | ---------------------------------------------------------------------------------------------------------------- | --
|Item 1.    | Business                                                                                                         | 4 
|           |                                                                                                                  |   
|Item 1A.   | Risk Factors                                                                                                     | 7 
|           |                                                                                                                  |   
|Item 1B.   | Unresolved Staff Comments                                                                                        | 11
|           |                                                                                                                  |   
|Item 2.    | Properties                                                                                                       | 11
|           |                                                                                                                  |   
|Item 3.    | Legal Proceedings                                                                                                | 11
|           |                                                                                                                  |   
|Item 4.    | Mine Safety Disclosures                                                                                          | 12
|           |                                                                                                                  |   
|           | PART II                                                                                                          |   
|           |                                                                                                                  |   
|Item 5.    | Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities | 12
|           |                                                                                                                  |   
|Item 6.    | Selected Financial Data                                                                                          | 13
|           |                                                                                                                  |   
|Item 7.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations                            | 13
|           |                                                                                                                  |   
|Item 7A.   | Quantitative and Qualitative Disclosures about Market Risk                                                       | 19
|           |                                                                                                                  |   
|Item 8.    | Financial Statements and Supplementary Data                                                                      | 20
|           |                                                                                                                  |   
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             | 39
|           |                                                                                                                  |   
|Item 9A.   | Controls and Procedures                                                                                          | 39
|           |                                                                                                                  |   
|Item 9B.   | Other Information                                                                                                | 40
|           |                                                                                                                  |   
|           | PART III                                                                                                         |   
|           |                                                                                                                  |   
|Item 10.   | Directors and Executive Officers of the Registrant and Corporate Governance                                      | 40
|           |                                                                                                                  |   
|Item 11.   | Executive Compensation                                                                                           | 42
|           |                                                                                                                  |   
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters                   | 45
|           |                                                                                                                  |   
|Item 13.   | Certain Relationships and Related Transactions, and Director Independence                                        | 46
|           |                                                                                                                  |   
|Item 14.   | Principal Accountant Fees and Services                                                                           | 47
|           |                                                                                                                  |   
|           | PART IV                                                                                                          |   
|           |                                                                                                                  |   
|Item 15.   | Exhibits and Financial Statement Schedules                                                                       | 48
|           |                                                                                                                  |   
|SIGNATURES | 49                                                                                                              



3







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.



Our operations are largely decentralized from the corporate
office. Autonomy is given to subsidiary entities, and there are few integrated business functions (i.e. , marketing, purchasing
and accounting ). 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 re-domesticated 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.



Operations



The Company’s operations are comprised of Professional
Employer Organizations (PEOs) which provide full-service human resources outsourcing services primarily through co-employment relationships
with their clients. These PEOs include Professional Staff Management, Inc. and related entities (“PSM”); CSM, Inc.
and related subsidiaries (“CSM”); and Employer Solutions Group, Inc. and related subsidiaries (“ESG”).



The licensed PEOs bill their clients under Professional Services
Agreements. 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 PEOs is typically a blend of a percentage of the gross
payroll and a flat fee per employee per pay period and is sufficient to allow the companies 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 PEOs are invoiced along with each periodic payroll
delivered to the client.



Through the co-employment contractual relationship, the PEOs
become the statutory employer and, as such, all payroll-related taxes are filed on these PEOs’ 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 PEOs owe and pay the various government and employment insurance vendors are based on the experience levels and
activity of the PEOs.



Customers



Customers 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 over 13,500 employees in 47 states. Management’s focus is on providing PEO services to
small and medium-sized businesses with 10 to 1,000 employees. While worksite employees are located throughout the United States,
the client operations are primarily headquartered in Utah, Colorado, Arizona, Indiana, and Tennessee.



Competition



The Company competes 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.



4







Vendor Relationships



The PEOs provide employee benefits to worksite employees under
arrangements with a variety of vendors. These PEOs provide group health insurance coverage to the customers’ worksite employees
through Humana, United Healthcare Networks and various other fully-insured policies or service contracts.



The PEOs 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 PEOs are liable for the first $250,000 of claims per accident with a $2.0 million annual corporate aggregate. Under the LUA
policy, the PEOs 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.



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



The PEOs 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”).



5







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, enables 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.  The Company’s cost of implementing the necessary changes has been passed through
to some 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.



For 2012, the Act requires a mandatory new Form W-2 reporting
requirement for informational purposes only that was optional in 2011. This change has not had an adverse impact on our client
relationships or operations and the cost to implement this requirement has been minimal.



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.



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 2013.



Employees



As of June 30, 2012, we employed approximately 96 full-time
employees. Additionally, within the PEOs, we had approximately 13,500 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.



Additional information with respect to the Company’s
businesses



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).



6







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 workers’ compensation
claim experiences.



The PEOs calculate reserves for workers’ compensation
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 our customer service agreements, 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 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 some states do not explicitly regulate PEOs, many 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.



We may face additional liabilities as a result of increases
in unemployment tax rates and taxable wage thresholds.



We record our state unemployment tax expense based on taxable
wages and tax rates assigned by each state. State unemployment tax rates and taxable wage thresholds 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 and taxable wage thresholds
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.



7







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, “Intangibles - Goodwill and Other” which
provides that goodwill and other intangible assets that have indefinite useful lives not be amortized, but instead must be assessed
at least annually for impairment, and intangible assets that have finite useful lives should continue to be amortized over their
useful lives.ASC 350also provides specific guidance for the assessment of goodwill and other
non-amortized intangible assets for impairment.ASC 350requires 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. We perform our
impairment assessment annually. 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 have entered 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.



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 are 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.



8







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 holding our letters of credit, or another financial institution, suffers liquidity issues or ceases
operations.  In such an event, we would be forced to find other sources for our letters of credit that were acceptable to
our vendors.  Also, if we attempt to obtain future financing, 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 costs, 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 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 such as the health care reform legislation, 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 could exceed the market’s competitive rates and as a result may have a material adverse effect on
our financial condition, due to possible increased client attrition or decreased client acquisition.



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.



9







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 more stringent laws that require licensing or registration of professional employer organizations. 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.



The estate of 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, 2012, our majority shareholder, Carter M. Fortune
owns 6,084,853 shares (or 50%) of our outstanding common stock. In addition to the above shares, Mr. Fortune has dispositive control
over 1,259,834 shares (or 10%) of the Company’s Common Stock held by 14 West, LLC as of June 30, 2012. Mr. Fortune passed
away on August 25, 2012 and his estate now has control of his personal shares and dispositive control over the shares held by 14
West, LLC.



As a result, the estate 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 the estate 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.



10







As we discussed in our Forms 10-Q filed on February 13, 2012
and May 14, 2012, our primary shareholder’s 296,180 shares of preferred stock and 7,344,687 shares of common stock are held
as collateral by a commercial bank for certain personal debt obligations of our majority shareholder. Future default on these obligations
by his estate could have a material adverse effect on the Company’s (a) operations, (b) capital structure and (c) corporate
governance. In addition any other future event that may cause a disruption in the estate’s ownership of its preferred stock
and common stock could also have a material adverse effect on the Company’s (a) operations, (b) capital structure and (c)
corporate governance.



In addition and since the filing of our
December 31, 2011 and March 31, 2012 Forms 10-Q on February 13, 2012 and May 14, 2012 respectively, we draw your attention to the
following matters that have arisen since that date: a) as noted above, Mr. Fortune passed away on August 25, 2012, b) the maturity
date of the aforementioned loan between Mr. Fortune and Indiana Bank and Trust Company (“the Bank”) was April 1, 2012
and was extended to August 31, 2012, c) Section 8.8 of Mr. Fortune’s loan currently includes a provision that requires his
estate to use its best efforts to sell its interest in the Company in the event his loan remained outstanding on August 31, 2012,
d) the estate was unable to pay off his loan to the Bank at August 31, 2012, and e) on January 25, 2012, a larger bank, Old National
Bank entered into an agreement to acquire the Bank’s holding company, Indiana Community Bancorp. Negotiations are currently
ongoing between the Bank and representatives of Mr. Fortune’s estate to extend the maturity date of the loan past the closing
date of the proposed merger agreement with Ide Management, Inc. If the transaction closes, the lien on Mr. Fortune’s preferred
and common stock will be released in return for a cash payment from Mr. Fortune’s estate from the proceeds of the sale of
Mr. Fortune’s stock to CEP, Inc.



The independent members of our board of
directors believe that the proposed merger described in Item 12 regarding changes in control addresses, in part, these additional
risks.



Item 1B. Unresolved Staff Comments



Not applicable.



Item 2. Properties



As of June 30, 2012, we maintained the following operating facilities:



|Segment            |  | Location(s)      |  | Description       |  | Owned / Leased |  | Approximate
        Square
        Footage
|------------------ |  | ---------------- |  | ----------------- |  | -------------- |  | ------------------------------------------
|                   |  |                  |  |                   |  |                |  |                                           
|Corporate          |  | Indianapolis, IN |  | Corporate offices |  | Leased (1)     |  | 10,500                                    
|                   |  |                  |  |                   |  |                |  |                                           
|Business Solutions |  | Richmond, IN     |  | Offices           |  | Leased (2)     |  | 10,000                                    
|                   |  | Brentwood, TN    |  | Offices           |  | Leased         |  | 10,000                                    
|                   |  | Provo, UT        |  | Offices           |  | Leased (3)     |  | 13,000                                    
|                   |  | Tucson, AZ       |  | Offices           |  | Leased         |  | 2,700                                     
|                   |  | Loveland, CO     |  | Offices           |  | Leased         |  | 1,400                                     
|                   |  | Phoenix, AZ      |  | Offices           |  | Leased         |  | 1,000                                     
|                   |  | Indianapolis, IN |  | Offices           |  | Leased         |  | 2,300                                     



| | (1) | The leases on these properties are with an entity owned by the estate of 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.



11







On April 9, 2012, a putative class action
complaint captioned Mark Haagen, individually v. Tena Mayberry, Carter M. Fortune, Paul J. Hayes, David A. Berry, Richard F. Suja,
Fortune Industries, Inc., CEP, Inc., and CEP Merger Sub, Inc. was filed in the Superior Court of Indiana, Marion County Circuit,
on behalf of an alleged class of the Company’s shareholders. In each case, the plaintiffs allege that members of the Board
breached their fiduciary duties to the Company's stockholders in connection with the proposed Merger (see Item 5, Other Information
below) and that the Company aided and abetted the directors' breaches of fiduciary duties. The complaint claims that the proposed
Merger between the Company and Merger Sub involves an unfair price, an inadequate sales process, self-dealing and unreasonable
deal protection devices. The complaints sought injunctive relief, including to enjoin or rescind the Merger, and an award of other
unspecified attorneys’ and other fees and costs, in addition to other relief. On August 16, 2012 a Stipulation of Dismissal
with Prejudice was filed in the Superior Court of Indiana, Marion County Circuit whereby both the plaintiff and defendant stipulated
to the dismissal of this complaint.



Item 4. Mine Safety Disclosures



Not applicable.



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 December 31, 2011, there were 255 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 |      |  | Low |  
|-------------------------------- |  | ---- | ---- |  | --- | -
|Fiscal Year Ending June 30, 2012 |  |      |      |  |     |  
|Fourth Quarter                   |  | $    | 0.30 |  |     | $
|Third Quarter                    |  |      | 0.89 |  |     |  
|Second Quarter                   |  |      | 0.58 |  |     |  
|First Quarter                    |  |      | 0.79 |  |     |  
|                                 |  |      |      |  |     |  
|Fiscal Year Ending June 30, 2011 |  |      |      |  |     |  
|Fourth Quarter                   |  | $    | 0.90 |  |     | $
|Third Quarter                    |  |      | 0.80 |  |     |  
|Second Quarter                   |  |      | 0.62 |  |     |  
|First Quarter                    |  |      | 0.44 |  |     |  



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, 2012.



12







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.



|                                                   |  |                                               |        |  |                 |   |        |                       |  |   | Ten Months |   |  |      |       
|-------------------------------------------------- |  | --------------------------------------------- | ------ |  | --------------- | - | ------ | --------------------- |  | - | ---------- | - |  | ---- | ------
|                                                   |  | Year Ended June 30,                           |        |  | Ending June
30, |   |        | Year Ended
August 31, | 
|                                                   |  | 2012                                          |        |  | 2011            |   |        | 2010                  |  |   | 2009       |   |  | 2008 |       
|                                                   |  | (Dollars in thousands, except per share data) |       
|Total Revenues                                     |  | $                                             | 60,891 |  |                 | $ | 64,335 |                       |  | $ | 60,694     |   |  | $    | 72,906
|                                                   |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Net Income (Loss) from Continuing Operations       |  |                                               | 2,338  |  |                 |   | 1,859  |                       |  |   | 1,190      |   |  |      | 1,458 
|Net Income (Loss) from Discontinued Operations     |  |                                               | 0      |  |                 |   | (8     | )                     |  |   | (19        | ) |  |      | (74   
|Net Income (Loss)                                  |  |                                               | 2,283  |  |                 |   | 1,851  |                       |  |   | 1,171      |   |  |      | 1,384 
|                                                   |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Net Income (Loss) Available to Common Shareholders |  |                                               | 926    |  |                 |   | 1,283  |                       |  |   | 579        |   |  |      | 446   
|                                                   |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Basic Income (Loss) per share:                     |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Income (Loss) from Continuing Operations           |  | $                                             | 0.08   |  |                 | $ | 0.10   |                       |  | $ | 0.05       |   |  | $    | 0.05  
|Net Income (Loss) from Discontinued Operations     |  | $                                             | 0.00   |  |                 | $ | 0.00   |                       |  | $ | 0.00       |   |  | $    | (0.01 
|Net Income (Loss)                                  |  | $                                             | 0.08   |  |                 | $ | 0.10   |                       |  | $ | 0.05       |   |  | $    | 0.04  
|                                                   |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Diluted Income (Loss) per share:                   |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Income (Loss) from Continuing Operations           |  | $                                             | 0.06   |  |                 | $ | 0.09   |                       |  | $ | 0.04       |   |  | $    | 0.04  
|Net Income (Loss) from Discontinued Operations     |  | $                                             | 0.00   |  |                 | $ | 0.00   |                       |  | $ | 0.00       |   |  | $    | (0.01 
|Net Income (Loss)                                  |  | $                                             | 0.06   |  |                 | $ | 0.09   |                       |  | $ | 0.04       |   |  | $    | 0.03  
|                                                   |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Weighted Average Shares Outstanding:               |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Basic                                              |  |                                               | 12,279 |  |                 |   | 12,251 |                       |  |   | 12,178     |   |  |      | 11,854
|Diluted                                            |  |                                               | 14,600 |  |                 |   | 14,559 |                       |  |   | 14,688     |   |  |      | 13,825
|                                                   |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Consolidated Balance Sheet Data:                   |  |                                               |        |  |                 |   |        |                       |  |   |            |   |  |      |       
|Cash and Equivalents                               |  | $                                             | 5,312  |  |                 | $ | 6,036  |                       |  | $ | 2,324      |   |  | $    | 1,686 
|Working Capital                                    |  |                                               | 4,094  |  |                 |   | 2,631  |                       |  |   | 1,212      |   |  |      | (1,009
|Goodwill and Intangibles, net                      |  |                                               | 14,423 |  |                 |   | 14,789 |                       |  |   | 15,196     |   |  |      | 15,602
|Total Assets                                       |  |                                               | 28,662 |  |                 |   | 29,797 |                       |  |   | 29,341     |   |  |      | 30,513
|Long Term Obligations and Preferred Stock          |  |                                               | 27,757 |  |                 |   | 27,713 |                       |  |   | 30,471     |   |  |      | 29,629
|Shareholders' Equity                               |  |                                               | 19,348 |  |                 |   | 18,413 |                       |  |   | 19,609     |   |  |      | 18,685



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



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. marketing, purchasing and
accounting). 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 re-domesticated to the state of Indiana in May 2005.



13







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 nine fiscal periods, we have completed four key
PEO acquisitions. 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 PEO service offerings. In October 2003 we acquired PSM, a PEO located in Indianapolis, Indiana. This
acquisition allowed us to gain entry into the PEO market.



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 in the past. 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 our reserves for workers' compensation claims.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | § | The estate of ourmajority shareholder effectively owns 60%
of the outstanding Common Stock and 100% of the outstanding Preferred Stock of the Company. As a result, it 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 its 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 fully insured high deductible workers’ compensation insurance plans, and economic conditions.



Results of Operations



Results of operations for the fiscal periods ended June 30,
2012, 2011 and 2010, are as follows:



|                                            |  | Revenue for the Year Ended June 30, |        |  | Operating income for Year Ended June 30, |  
|------------------------------------------- |  | ----------------------------------- | ------ |  | ---------------------------------------- | -
|                                            |  | 2012                                |        |  | 2011                                     |  
|                                            |  | (Dollars in thousands)              |        |  |                                          |  
|Business Solutions                          |  | $                                   | 60,891 |  |                                          | $
|Holding Company                             |  |                                     | 0      |  |                                          |  
|Segment Totals                              |  | $                                   | 60,891 |  |                                          | $
|                                            |  |                                     |        |  |                                          |  
|Net Income Available to Common Shareholders |  |                                     |        |  |                                          | $



Fiscal year ended June 30, 2012 versus June 30, 2011



Net income allocable to common stock shareholders was $0.9
million, or $0.06 per diluted share on revenues of $60.9 million for the year ended June 30, 2012 compared with net income of
$1.3 million, or $0.09 per diluted share on revenues of $64.3 million for the year ended June 30, 2011. The decrease in revenue
is due to the loss of two large clients as of December 31, 2011 with approximately 1,200 worksite employees. The increase in operating
income is primarily due to an increase in the profitability of the benefit administration and agency commissions programs. The
decrease in net income available to common shareholders is due to the increase in dividend expense related to the preferred stock
of $0.8 million.



14







Fiscal year ended June 30, 2011 versus June 30, 2010



Net income allocable to common stock shareholders was $1.3 million,
or $0.09 per diluted share on revenue of $64.3 million for the year ended June 30, 2011 as compared with net income of $0.06 million,
or $0.04 per diluted share on revenue of $60.7 million for the year ended June 30, 2010. The increase in revenue is due to an overall
increase in worksite employees and billings. 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 company’s operations.



Results by segment are described in further details as follows:



Business Solutions



Business Solutions segment operating results for the fiscal
years ended June 30, 2012, 2011 and 2010 are as follows:



|                              |  | For The Year Ended June 30, |       
|----------------------------- |  | --------------------------- | ------
|                              |  | 2012                        |       
|                              |  | (Dollars in thousands)      |       
|Revenues                      |  | $                           | 60,891
|Cost of revenues              |  |                             | 47,793
|Gross profit                  |  |                             | 13,098
|                              |  |                             |       
|Operating expenses            |  |                             |       
|Selling, general and admin    |  |                             | 10,229
|Depreciation and amortization |  |                             | 531   
|Total operating expenses      |  |                             | 10,760
|                              |  |                             |       
|Segment operating income      |  | $                           | 2,338 



Revenues



Revenues for the year ended June 30, 2012 were $60.9 million,
compared to $64.3 million for the year ended June 30, 2011, a decrease of $3.4 million, or 5.3%. Revenues decreased primarily due
to the loss of two large clients effective December 31, 2011 with approximately 1,200 worksite employees.



Revenues for the year ended June 30, 2011 were $64.3 million,
compared to $60.7 million for the year ended June 30, 2010, an increase of $3.6 million, or 5.9%. Revenue increased primarily due
to an overall increase in worksite employees and billings.



Gross Profit



Gross profit for the year ended June 30, 2012 was $13.1 million,
representing 21.5% of revenue compared to $12.8 million, representing 20% of revenue, an increase of $0.3 million, or 2.3%. Despite
the decrease in revenue, gross profit increased due to increased profitability in the benefit administration and agency commissions
programs.



Gross profit for the year ended June 30, 2011 was $12.8 million,
representing 20% of revenue, compared to $12.6 million, representing 21% of revenues for the year ended June 30, 2010. Gross profit
did not change significantly.



Operating Income



Operating income for the year ended June 30, 2012 was $2.3 million,
compared to operating income of $1.8 million for the year ended June 30, 2011, an increase of $0.5 million or 28%. Despite the
decrease in revenue, operating income increased due to increased profitability in the benefit administration and agency commissions
programs which increased gross profit by $0.3 million and continued reduction in selling, general and administration costs of $0.12
million and a decrease in depreciation and amortization expense of $0.08 million.



Operating income for the year ended June 30, 2011 was $1.8 million,
compared to operating income of $0.8 million for the year ended June 30, 2010, an increase of $1.0 million, or 125%. Operating
income increased due to the continued reduction of losses on the health care plan and continued efficiency improvements and expense
reductions in all aspects of the company’s operations.



Holding Company



Interest Expense



Interest expense was $0.01 million for the year ended
June 30, 2012, compared to $0.04 million for the year ended June 30, 2011. Interest expense decreased due to the reduction in
the outstanding principal balance of the Company’s term note which was paid in full in April, 2012.



15







Interest expense was $0.04 million for the year ended June 30,
2011, compared to $0.1 million for the year ended June 30, 2010. Interest expense decreased due to the reduction in the outstanding
principal balance of the Company’s term note.



Income Taxes



There was $0.1 million of income tax expense for each of the
years ended June 30, 2012 and June 30, 2011, 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 $5.3 million valuation allowance
at June 30, 2012 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 are cash and equivalents
generated from the profitability of our operations. We had $5.3 million and $6.0 million of cash and equivalents at June 30, 2012
and 2011, respectively.



We had working capital of $4.1 million at June 30, 2012 compared
with $2.6 million at June 30, 2011. 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, restricted cash and net accounts receivable.



The Company is required to collateralize its obligations under
its workers’ compensation plans and for certain states’ compliance requirements. The Company uses its cash and cash
equivalents to collateralize these obligations. Restricted cash was approximately $2.4 million at both June 30, 2012 and June
30, 2011.



Total debt was $0.0 million and $0.4 million at June 30, 2012
and 2011, respectively. The decrease in debt was due to the pay off of the $1.0 million term note put in place in 2010. In addition,
the Company entered into a $2.0 million revolving line of credit agreement on April 15, 2011, which is used to cover a letter
of credit to one of our major vendors. There were no draws on the line of credit at June 30, 2012.



Cash Flows



Net cash provided by operating activities was $1.2 million,
$5.0 million and $0.8 million for the years ended June 30, 2012, 2011 and 2010 respectively.



Net cash used in investing activities was $0.0 million, $0.0
million and $0.1 million for the years ended June 30, 2012, 2011 and 2010 respectively.



Net cash used in financing activities was $1.9 million, $1.3
million and $0.1 million for the years ended June 30, 2012, 2011 and 2010 respectively.



Contractual Obligations and Commercial Commitments



The following table summarizes our contractual obligations as
of June 30, 2012:



|                    |  | Payments Due By |                       
|------------------- |  | --------------- | ----------------------
|                    |  |                 | Total                 
|                    |  |                 |                       
|                    |  |                 | (Dollars in thousands)
|                    |  |                 |                       
|Operating Lease (1) |  | $               | 1,200                 



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



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 liabilities associated with guaranties and letter
of credit obligations.



16







Guaranties



A significant portion of our debt and letters of credit are
personally guaranteed by the estate of the Company’s Chairman.  Future changes to these guarantees would affect
financing capacity of the Company.  As of June 30, 2012 and 2011, the Chairman of the Board had personally guaranteed Company
debt and obligations under irrevocable letter of credit arrangements in the amount of $2.15 million.   The Company did
not pay any guarantee fees during the years ended June 30, 2010, 2011 and 2012.



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, 2012,
we had approximately $2.4 million in restricted cash primarily to secure obligations under our PEO contracts.



Majority Shareholder



As of June 30, 2012, our Chairman of the Board, Mr. Carter M.
Fortune effectively owned and controlled 7,344,687 shares (or 60%) 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, 2012. 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. Mr. Fortune passed away on August 25, 2012 at which point his ownership interests in the Company transitioned to
his estate.



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 reserves, the potential impairment of long-lived
assets and income taxes, 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



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. 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 accordanceFASB ASC 605-45, “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 underASC 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.



17







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.



Valuation of Accounts Receivable Reserves



Collectability of accounts receivable is evaluated for each
subsidiary based on the current economic conditions. Other factors include analysis of historical bad debts, projected losses,
and current past due accounts. The Company’s accounts receivable reserves increased by $0.01 million at June 30, 2012 compared
to June 30, 2011 and decreased $0.02 million at June 30, 2011 compared to June 30, 2010.



Goodwill and Other Intangible Assets



Material goodwill 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. Per review of these qualitative factors, the Company determined that goodwill and other
intangible assets were not impaired at June 30, 2012 and June 30, 2011.



Impairment of Long-Lived Assets



The Company evaluates the recoverability
of its long-lived assets in accordance with FASB ASC 360, “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 reporting unit discounted cash flows to the asset reporting unit 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 loss carry forwards. 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. For this purpose, management
considered evidence, both positive and negative, regarding various uncertainties identified as risk factors to the Company. Recent
events, including significant turmoil within the domestic and foreign financial markets, healthcare legislation and increasing
unemployment tax rates and taxable wage thresholds, more than likely are expected to contribute to atypical customer attrition
and decreased gross profits. Additionally, since the divesture of certain segments in fiscal 2009 unrelated to the Company’s
current focus of full service human resources, the Company has had positive results for the last four fiscal periods for financial
reporting purposes, including the current period. However, the Company has not evidenced a similar trend for income tax reporting
purposes, experiencing net operating losses in four of prior six fiscal periods, with the current and 2011 fiscal years as the
exception. These taxable losses are primarily the result of permanent timing differences related to the amortization of certain
intangible assets for income tax purposes through 2022. The Company’s deferred tax assets and liabilities are susceptible
to erratic changes due to the inherent unpredictable nature of the Company’s insurance claim liabilities and sensitivity
to unemployment and wage volatility. Changes in the economy and federal and state legislature, both favorable and unfavorable,
will impact management’s assumptions and estimates in future periods.



18







As of June 30, 2012, management has determined that a 87% valuation
allowance against the Company’s $4.3 million component of deferred tax assets generated by the net operating loss carry forward
of $10.8 million is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. This
represents a decrease from the prior fiscal year’s 90% allowance as the Company experienced positive taxable earnings in
the current year for the second time in six years. As a result, management elected to limit the valuation allowance release to
13% as the Company has not established a significant historical trend of taxable earnings. As of June 30, 2012, management has
also determined that a $1.3 million valuation allowance against the Company’s $3.5 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. This 38% valuation allowance represents a decrease from the prior fiscal year’s 40%
due to the aforementioned earnings trend. The Company released $0.9 million of the valuation allowance in fiscal 2012 due to the
positive earnings in the Company’s operations and projected earnings for 2013 and 2014.



As of June 30, 2011, management had determined that a 90% valuation
allowance against the Company’s $5.1 million component of deferred tax assets generated by the net operating loss carry forward
of $12.3 million was necessary to reduce the deferred tax assets to the amount that would more likely than not be realized. This
represented a decrease from the prior fiscal year’s 100% allowance as the Company experienced positive taxable earnings in
the 2011 fiscal year for the first time in five years. As a result, management elected to limit the valuation allowance release
to 10% as the Company had not established a significant historical trend of taxable earnings. As of June 30, 2011, management had
also determined that a $1.6 million valuation allowance against the Company’s $3.9 million of deferred tax assets generated
by book versus tax differences of certain assets and liabilities was necessary to reduce the deferred tax assets to the amount
that would more likely than not be realized. This 40% valuation allowance represented a decrease from the prior fiscal year’s
45% due to the aforementioned earnings trend. The Company released $0.8 million of the valuation allowance in fiscal 2011 due to
the positive earnings in the Company’s operations and projected earnings in fiscal 2012 and 2013.



Workmen’s Compensation Reserves



The Company recognizes significant reserves in relation to its
fully insured high deductible workers’ compensation programs based on (a) the amount of past claims incurred and (b) the
estimated time lag to report and pay such claims. 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 reserve recognized for unpaid workers’ compensation benefits on the Company’s
consolidated balance sheet is $1.3 million (for which approximately $2.1 million of cash is restricted on the Company’s Consolidated
Balance Sheet) for the year ended June 30, 2012.



New Accounting Pronouncements



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



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, 2012 was $5.3 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, 2012. We
do not currently utilize any derivative financial instruments to hedge interest rate risks.



19







Item 8. Financial Statements and Supplementary Data



FORTUNE INDUSTRIES, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





|Report of Independent Registered Public Accounting Firm                                                 |  | 21
|------------------------------------------------------------------------------------------------------- |  | --
|                                                                                                        |  |   
|Consolidated Balance Sheets as of June 30, 2012 and 2011                                                |  | 22
|                                                                                                        |  |   
|Consolidated Statements of Operations for the fiscal years ended June 30, 2012, 2011 and 2010           |  | 24
|                                                                                                        |  |   
|Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 30, 2012, 2011 and 2010 |  | 25
|                                                                                                        |  |   
|Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2012, 2011 and 2010           |  | 26
|                                                                                                        |  |   
|Notes to Consolidated Financial Statements                                                              |  | 28



20











Report of Independent Registered Public
Accounting Firm



Board of Directors and Shareholders

Fortune Industries, Inc. and Subsidiaries

Indianapolis, Indiana



We have audited the accompanying
consolidated balance sheets of Fortune Industries, Inc. and Subsidiaries (the “Company”) as of June 30, 2012 and 2011,
and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three
fiscal years ended June 30, 2012, 2011 and 2010. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements 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 audit 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.
Our audits included 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 opinion. 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
at June 30, 2012 and 2011, and the results of its operations and its cash flows for each of the three fiscal years ended June 30,
2012, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.





/s/ SOMERSET CPAs, P.C.





Indianapolis, Indiana

September 28, 2012







21







FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)



|                                            |  | June 30, |        |  | June 30, |  
|------------------------------------------- |  | -------- | ------ |  | -------- | -
|                                            |  | 2012     |        |  | 2011     |  
|                                            |  |          |        |  |          |  
|ASSETS                                      |  |          |        |  |          |  
|                                            |  |          |        |  |          |  
|CURRENT ASSETS                              |  |          |        |  |          |  
|Cash and equivalents (Note 1)               |  | $        | 5,312  |  |          | $
|Restricted cash (Note 1)                    |  |          | 2,397  |  |          |  
|Accounts receivable, net (Note 1)           |  |          | 3,092  |  |          |  
|Deferred tax asset (Note 6)                 |  |          | 1,500  |  |          |  
|Prepaid expenses and other current assets   |  |          | 483    |  |          |  
|                                            |  |          |        |  |          |  
|Total Current Assets                        |  |          | 12,784 |  |          |  
|                                            |  |          |        |  |          |  
|OTHER ASSETS                                |  |          |        |  |          |  
|Property, plant and equipment, net (Note 2) |  |          | 139    |  |          |  
|Deferred tax asset (Note 6)                 |  |          | 1,250  |  |          |  
|Goodwill (Note 3)                           |  |          | 12,379 |  |          |  
|Other intangible assets, net (Note 3)       |  |          | 2,044  |  |          |  
|Other long-term assets                      |  |          | 66     |  |          |  
|                                            |  |          |        |  |          |  
|Total Other Assets                          |  |          | 15,878 |  |          |  
|                                            |  |          |        |  |          |  
|TOTAL ASSETS                                |  | $        | 28,662 |  |          | $



See Accompanying Notes to the Consolidated Financial Statements



22







FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(DOLLARS IN THOUSANDS)





|                                                                                                  |  | June 30, |         |   | June 30, |  
|------------------------------------------------------------------------------------------------- |  | -------- | ------- | - | -------- | -
|                                                                                                  |  | 2012     |         |   | 2011     |  
|                                                                                                  |  |          |         |   |          |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                              |  |          |         |   |          |  
|                                                                                                  |  |          |         |   |          |  
|CURRENT LIABILITIES                                                                               |  |          |         |   |          |  
|Current maturities of long-term debt (Note 4)                                                     |  | $        | 0       |   |          | $
|Accounts payable                                                                                  |  |          | 881     |   |          |  
|Workers' compensation reserves                                                                    |  |          | 632     |   |          |  
|Customer deposits                                                                                 |  |          | 92      |   |          |  
|Accrued expenses                                                                                  |  |          | 7,085   |   |          |  
|Other current liabilities                                                                         |  |          | 0       |   |          |  
|                                                                                                  |  |          |         |   |          |  
|Total Current Liabilities                                                                         |  |          | 8,690   |   |          |  
|                                                                                                  |  |          |         |   |          |  
|LONG-TERM LIABILITIES                                                                             |  |          |         |   |          |  
|Workers' compensation reserves                                                                    |  |          | 624     |   |          |  
|                                                                                                  |  |          |         |   |          |  
|Total Liabilities                                                                                 |  |          | 9,314   |   |          |  
|                                                                                                  |  |          |         |   |          |  
|SHAREHOLDERS' EQUITY (NOTE 8)                                                                     |  |          |         |   |          |  
|Common stock, $0.10 par value; 150,000,000 authorized;                                            |  |          |         |   |          |  
|12,287,290 and 12,270,790 issued and outstanding at June 30, 2012 and June 30, 2011, respectively |  |          | 1,226   |   |          |  
|Series C preferred stock, $0.10 par value; 1,000,000 authorized;                                  |  |          |         |   |          |  
|296,180 issued and outstanding at June 30, 2012 and June 30, 2011                                 |  |          | 27,133  |   |          |  
|Treasury stock, at cost, 214,444 shares at June 30, 2012 and June 30, 2011                        |  |          | (809    | ) |          |  
|Additional paid-in capital and warrants outstanding                                               |  |          | 20,383  |   |          |  
|Accumulated deficit                                                                               |  |          | (28,585 | ) |          |  
|                                                                                                  |  |          |         |   |          |  
|Total Shareholders' Equity                                                                        |  |          | 19,348  |   |          |  
|                                                                                                  |  |          |         |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                        |  | $        | 28,662  |   |          | $



See Accompanying Notes to the Consolidated Financial Statements



23







FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)



|                                                      |  | Year Ended |            |   | Year
Ended |   |            | Year
Ended | 
|----------------------------------------------------- |  | ---------- | ---------- | - | ---------- | - | ---------- | ---------- | 
|                                                      |  | June 30,   |            |   | June 30,   |   |            | June 30,   | 
|                                                      |  | 2012       |            |   | 2011       |   |            | 2010       | 
|                                                      |  |            |            |   |            |   |            |            | 
|REVENUES                                              |  | $          | 60,891     |   |            | $ | 64,335     |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|COST OF REVENUES                                      |  |            | 47,793     |   |            |   | 51,527     |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|GROSS PROFIT                                          |  |            | 13,098     |   |            |   | 12,808     |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|OPERATING EXPENSES                                    |  |            |            |   |            |   |            |            | 
|Selling, general and administrative expenses          |  |            | 10,229     |   |            |   | 10,346     |            | 
|Depreciation and amortization                         |  |            | 531        |   |            |   | 613        |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|Total Operating Expenses                              |  |            | 10,760     |   |            |   | 10,959     |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|OPERATING INCOME                                      |  |            | 2,338      |   |            |   | 1,849      |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|OTHER INCOME (EXPENSE)                                |  |            |            |   |            |   |            |            | 
|Interest income                                       |  |            | 22         |   |            |   | 113        |            | 
|Interest expense                                      |  |            | (10        | ) |            |   | (41        | )          | 
|Other income                                          |  |            | 0          |   |            |   | 3          |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|Total Other Income (Expense)                          |  |            | 12         |   |            |   | 75         |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|INCOME BEFORE PROVISION FOR INCOME TAXES              |  |            | 2,350      |   |            |   | 1,924      |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|Provision for income taxes (Note 6)                   |  |            | 67         |   |            |   | 65         |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|NET INCOME FROM CONTINUING OPERATIONS                 |  |            | 2,283      |   |            |   | 1,859      |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|DISCONTINUED OPERATIONS                               |  |            |            |   |            |   |            |            | 
|Loss from discontinued operations                     |  |            | 0          |   |            |   | (8         | )          | 
|                                                      |  |            |            |   |            |   |            |            | 
|NET INCOME                                            |  |            | 2,283      |   |            |   | 1,851      |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|Preferred stock dividends                             |  |            | 1,357      |   |            |   | 568        |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|NET INCOME AVAILABLE TO COMMON SHAREHOLDERS           |  | $          | 926        |   |            | $ | 1,283      |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|Basic Income Per Common Share-Continuing Operations   |  | $          | 0.08       |   |            | $ | 0.10       |            | 
|Basic Loss Per Common Share-Discontinued Operations   |  |            | 0          |   |            |   | 0          |            | 
|BASIC INCOME PER COMMON SHARE                         |  | $          | 0.08       |   |            | $ | 0.10       |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|Basic Weighted Average Shares Outstanding             |  |            | 12,278,710 |   |            |   | 12,251,329 |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|Diluted Income Per Common Share-Continuing Operations |  | $          | 0.06       |   |            | $ | 0.09       |            | 
|Diluted Loss Per Common Share-Discontinued Operations |  |            | 0          |   |            |   | 0          |            | 
|DILUTED INCOME PER COMMON SHARE                       |  | $          | 0.06       |   |            | $ | 0.09       |            | 
|                                                      |  |            |            |   |            |   |            |            | 
|Diluted Weighted Average Shares Outstanding           |  |            | 14,599,710 |   |            |   | 14,558,965 |            | 



See Accompanying Notes to the Consolidated Financial Statements



24







FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY

(DOLLARS IN THOUSANDS)



|                                                                   |  |        |       |  |           |   |        |          |  |   | Additional      |   |  |             |        |  |               |  
|------------------------------------------------------------------ |  | ------ | ----- |  | --------- | - | ------ | -------- |  | - | --------------- | - |  | ----------- | ------ |  | ------------- | -
|                                                                   |  |        |       |  |           |   |        |          |  |   | Paid-in Capital |   |  |             |        |  | Total         |  
|                                                                   |  | Common |       |  | Preferred |   |        | Treasury |  |   | and Warrants    |   |  | Accumulated |        |  | Shareholders’ |  
|                                                                   |  | Stock  |       |  | Stock     |   |        | Stock    |  |   | Outstanding     |   |  | Deficit     |        |  | Equity        |  
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|BALANCE AT JUNE 30, 2009                                           |  | $      | 1,187 |  |           | $ | 29,618 |          |  | $ | -               |   |  | $           | 19,253 |  |               | $
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|Issuance of 142,117 shares of common stock for compensation        |  |        | 14    |  |           |   | -      |          |  |   | -               |   |  |             | 81     |  |               |  
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|Purchase of 48,263 shares of common stock for treasury at cost     |  |        | 5     |  |           |   | -      |          |  |   | (186            | ) |  |             | 181    |  |               |  
|Capital contribution by majority shareholder                       |  |        | -     |  |           |   | -      |          |  |   | -               |   |  |             | 250    |  |               |  
|Net income                                                         |  |        | -     |  |           |   | -      |          |  |   | -               |   |  |             | -      |  |               |  
|Preferred stock dividends                                          |  |        | -     |  |           |   | -      |          |  |   | -               |   |  |             | -      |  |               |  
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|BALANCE AT JUNE 30, 2010                                           |  | $      | 1,206 |  |           | $ | 29,618 |          |  | $ | (186            | ) |  | $           | 19,765 |  |               | $
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|Issuance of 46,500 shares of common stock for compensation         |  |        | 1     |  |           |   | -      |          |  |   | -               |   |  |             | 5      |  |               |  
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|Purchase of 166,181 shares of common stock for treasury at cost    |  |        | 17    |  |           |   | -      |          |  |   | (623            | ) |  |             | 606    |  |               |  
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|Offset of term note receivable against outstanding preferred stock |  |        | -     |  |           |   | (2,485 | )        |  |   | -               |   |  |             | -      |  |               |  
|Net income                                                         |  |        | -     |  |           |   | -      |          |  |   | -               |   |  |             | -      |  |               |  
|Preferred stock dividends                                          |  |        | -     |  |           |   | -      |          |  |   | -               |   |  |             | -      |  |               |  
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|BALANCE AT JUNE 30, 2011                                           |  | $      | 1,224 |  |           | $ | 27,133 |          |  | $ | (809            | ) |  | $           | 20,376 |  |               | $
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|Issuance of 16,500 shares of common stock for compensation         |  |        | 2     |  |           |   | -      |          |  |   | -               |   |  |             | 7      |  |               |  
|Net income                                                         |  |        | -     |  |           |   | -      |          |  |   | -               |   |  |             | -      |  |               |  
|Preferred stock dividends                                          |  |        | -     |  |           |   | -      |          |  |   | -               |   |  |             | -      |  |               |  
|                                                                   |  |        |       |  |           |   |        |          |  |   |                 |   |  |             |        |  |               |  
|BALANCE AT JUNE 30, 2012                                           |  | $      | 1,226 |  |           | $ | 27,133 |          |  | $ | (809            | ) |  | $           | 20,383 |  |               | $



See Accompanying Notes to the Consolidated Financial Statements



25







FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)



|                                                                                  |  | For the Year Ended |       
|--------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                  |  | June 30,           |       
|                                                                                  |  | 2012               |       
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                    |       
|Net Income                                                                        |  | $                  | 2,283 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                    |       
|Depreciation and amortization                                                     |  |                    | 531   
|Provision for losses on accounts receivable                                       |  |                    | 15    
|Stock based compensation                                                          |  |                    | 9     
|Deferred income taxes                                                             |  |                    | -     
|Changes in certain operating assets and liabilities:                              |  |                    |       
|Restricted cash                                                                   |  |                    | (3    
|Accounts receivable                                                               |  |                    | (468  
|Prepaid assets and other current assets                                           |  |                    | 383   
|Assets of discontinued operations                                                 |  |                    | -     
|Other long-term assets                                                            |  |                    | (28   
|Accounts payable                                                                  |  |                    | 384   
|Health and workers' compensation reserves                                         |  |                    | (269  
|Customer deposits                                                                 |  |                    | (2,419
|Accrued expenses and other current liabilities                                    |  |                    | 818   
|Net Cash Provided by Operating Activities                                         |  |                    | 1,236 
|                                                                                  |  |                    |       
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                    |       
|Capital expenditures                                                              |  |                    | (19   
|Proceeds from sale of assets                                                      |  |                    | -     
|Net Cash Used in Investing Activities                                             |  |                    | (19   
|                                                                                  |  |                    |       
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                    |       
|Payments on term debt                                                             |  |                    | (417  
|Proceeds from term debt                                                           |  |                    | -     
|Repurchase of common stock for treasury                                           |  |                    | -     
|Dividends paid on preferred stock                                                 |  |                    | (1,524
|Net Cash Used in Financing Activities                                             |  |                    | (1,941
|                                                                                  |  |                    |       
|NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                   |  |                    | (724  
|                                                                                  |  |                    |       
|CASH AND EQUIVALENTS                                                              |  |                    |       
|Beginning of Year                                                                 |  |                    | 6,036 
|                                                                                  |  |                    |       
|End of Year                                                                       |  | $                  | 5,312 



See Accompanying Notes to the Consolidated Financial
Statements



26







FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)





|                                                                |  | For the Year Ended |   
|--------------------------------------------------------------- |  | ------------------ | --
|                                                                |  | June 30,           |   
|                                                                |  | 2012               |   
|SUPPLEMENTAL DISCLOSURES                                        |  |                    |   
|Interest paid                                                   |  | $                  | 10
|                                                                |  |                    |   
|Income taxes paid                                               |  | $                  | 67
|                                                                |  |                    |   
|See Accompanying Notes to the Consolidated Financial Statements |  |                    |   



27







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.



Principles of Consolidation: The accompanying consolidated
financial statements include the accounts of Fortune Industries, Inc. and its wholly owned subsidiaries. All significant inter-company
accounts and transactions of the Company have been eliminated.



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.



Revenue and Cost Recognition: Professional Staff Management,
Inc. and related entities (“PSM”); CSM, Inc. and subsidiaries (“CSM”); and Employer Solutions Group, Inc.
and subsidiaries (“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.



The PEOs report revenue in accordance
withFinancial Accounting Standards Board (“FASB”) ASC 605-45, “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 underASC 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 gross to net revenue reconciliation is as follows:



|                             |  | June 30, |         |  | June 30, |   |         | June 30, | 
|---------------------------- |  | -------- | ------- |  | -------- | - | ------- | -------- | 
|                             |  | 2012     |         |  | 2011     |   |         | 2010     | 
|                             |  |          |         |  |          |   |         |          | 
|Gross billings               |  | $        | 501,597 |  |          | $ | 522,880 |          | 
|Less worksite employee costs |  |          | 440,706 |  |          |   | 458,545 |          | 
|Net revenue                  |  | $        | 60,891  |  |          | $ | 64,335  |          | 



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.



28







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.



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 for letters of credit issued to collateralize the Company’s obligations under its workers’ compensation
program and certain general insurance coverage. At June 30, 2012, the Company had $2.4 million in total restricted cash. Of this,
$2.1 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. The Company provides allowances for estimated doubtful accounts 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. Management had established an allowance for doubtful accounts of $0.01 million as of June
30, 2012. 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.



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 10 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 underFASB ASC 350,
“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.



The Company has not recognized impairment charges in the past
4 fiscal years. Triggering events would include a) a substantial change in the customer mix and number of worksite employees, b)
losses incurred within certain operating units, c) significant downsizing of personnel and operations, or d) restructuring of management.
Per review of these qualitative factors, the Company determined that goodwill and other indefinite-lived assets are not impaired
at June 30, 2012.



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.



Stock-based Compensation:The
Company accounts for stock-based compensation under the provisions ofFASB ASC 718, “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.



Earnings per Common Share:Income
per common share has been computed in accordance withFASB ASC 260, “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 ofFASB ASC 740, “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 are included
as a component of income tax expense.





29













Advertising Costs: Advertising costs including marketing,
advertising, publicity, promotion and other distribution costs, are expensed as incurred and totaled $100, $114 and $99, for the
fiscal periods ended June 30, 2012, 2011 and 2010, 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.



The Company issued 2,200,000 warrants to the Chairman of the
Board effective November 30, 2008. The warrants have a ten-year term and an exercise price of $0.40 per share. Upon utilization
of the valuation models described above, it was determined that the warrants had no value at the time of issuance.



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, 2012, 2011 and 2010.



Workers’ Compensation: The Company’s PSM
and CSM subsidiaries maintain fully insured high deductible 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 2011, the FASB issued ASU 2011-08, “Testing
Goodwill for Impairment”. The objective of this ASU is to simplify how an entity tests goodwill for impairment. The
new guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step
quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless
the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its
carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal
years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests
performed as of a date before September 15, 2011, if a public entity’s financial statements for the most recent annual or
interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.



In July 2012, the FASB issued ASU 2012-02, “Testing
Indefinite-Lived Intangible Assets for Impairment”. The objective of this ASU is to simplify how an entity tests indefinite-lived
intangibles for impairment. The new guidance will allow an entity to first assess qualitative factors to determine whether it
is necessary to perform the quantitative indefinite-lived intangible assets impairment test. An entity no longer will be required
to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more
likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and
interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including
for annual and interim goodwill impairment tests performed as of a date before July 27, 2012, if a public entity’s financial
statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been
made available for issuance.



Other new pronouncements issued but not effective until after
June 30, 2012, are not expected to have a significant effect on the Company’s consolidated financial statements.



NOTE 2 - PROPERTY AND EQUIPMENT



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



|                              |  | June 30, |        |   | June 30, |  
|----------------------------- |  | -------- | ------ | - | -------- | -
|                              |  | 2012     |        |   | 2011     |  
|                              |  |          |        |   |          |  
|Office equipment              |  | $        | 1,921  |   |          | $
|Vehicles                      |  |          | 3      |   |          |  
|Leasehold improvements        |  |          | 14     |   |          |  
|                              |  |          | 1,938  |   |          |  
|                              |  |          |        |   |          |  
|Less accumulated depreciation |  |          | (1,799 | ) |          |  
|                              |  | $        | 139    |   |          | $



30







The provision for depreciation expense was $125, $216 and $364
for the years ended June 30, 2012, 2011 and 2010, respectively. The Company did not recognize any gain or loss on the disposal
of assets during the years ended June 30, 2012, 2011 or 2010.



NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS



There have been no significant changes in the carrying amount
of goodwill during the fiscal periods ended June 30, 2012, 2011 and 2010. The total amount of goodwill that is deductible for
tax purposes is $5,538, $6,149 and $6,918 at June 30, 2012, 2011 and 2010, respectively.



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



|                                        |  | June 30, 2012                 |      
|--------------------------------------- |  | ----------------------------- | -----
|                                        |  | Gross
    Carrying
    Amount |      
|                                        |  |                               |      
|Customer relationships                  |  | $                             | 4,063
|Tradename (not subject to amortization) |  |                               | 590  
|Total                                   |  | $                             | 4,653



|                                        |  | June 30, 2011                  |      
|--------------------------------------- |  | ------------------------------ | -----
|                                        |  | Gross
    Carrying 
    Amount |      
|                                        |  |                                |      
|Customer relationships                  |  | $                              | 4,063
|Tradename (not subject to amortization) |  |                                | 590  
|Total                                   |  | $                              | 4,653



Intangible asset amortization expense is $406 for each of the
fiscal periods ended June 30, 2012, 2011 and 2010.



Amortization expense on intangible assets at June 30, 2012
for each of the next five fiscal years is as follows:



|2013                |  | $ | 406   | 
|------------------- |  | - | ----- | 
|2014                |  |   | 380   | 
|2015                |  |   | 329   | 
|2016                |  |   | 203   | 
|2017 and thereafter |  |   | 726   | 
|Total               |  | $ | 2,044 | 



NOTE 4 - DEBT ARRANGEMENTS



The Company’s debt obligations consisted of the following:



|                                                                                                                                                                                                                                                     |  | June 30, |   |  | June 30, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | - |  | -------- | -
|                                                                                                                                                                                                                                                     |  | 2012     |   |  | 2011     |  
|Notes payable                                                                                                                                                                                                                                        |  |          |   |  |          |  
|                                                                                                                                                                                                                                                     |  |          |   |  |          |  
|Term note due in monthly principal installments of $42, plus
    interest at 4.5% through April 2012. The loan was secured by all of the assets of the Company and was personally guaranteed
    by the Company’s chairman and majority shareholder. |  | $        | - |  |          | $
|                                                                                                                                                                                                                                                     |  |          |   |  |          |  
|Total debt obligations                                                                                                                                                                                                                               |  |          | - |  |          |  
|                                                                                                                                                                                                                                                     |  |          |   |  |          |  
|Less current maturities                                                                                                                                                                                                                              |  |          | - |  |          |  
|                                                                                                                                                                                                                                                     |  |          |   |  |          |  
|Long-term portion of outstanding debt                                                                                                                                                                                                                |  | $        | - |  |          | $



31







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 Statements of Changes in Shareholders’ Equity as additional paid-in capital.



In May 2010, the Company entered into a $1.0 million term note
with a bank. The term loan matured on April 30, 2012 and bore interest at the fixed rate of 4.5%. The note amortized equally over
a 24 month period and required monthly principal payments of $42. The note was collateralized by substantially all the assets
of the Company and was personally guaranteed by the Company’s chairman and majority shareholder. The loan required the Company
to maintain a minimum cash flow coverage ratio of 1.2 to 1.0 and a minimum 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.



Line of Credit



Effective April 15, 2011, the Company entered into a $2.0 million
revolving line of credit agreement with a bank. The line of credit matures February 28, 2013 and bears interest at the Prime Rate
plus 0.75%. The note is collateralized by substantially all the assets of the Company. The loan requires the Company to maintain
a maximum total senior liabilities to adjusted tangible capital ratio of 1.5 to 1.0 and a minimum operating cash flow to fixed
charge ratio of 1.25 to 1.0. There were no draws on the line of credit at June 30, 2012.



NOTE 5 - RETIREMENT PLAN



The Company maintains 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 6 - INCOME TAXES



The reconciliation for the 2012, 2011 and 2010 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, |  |       | June 30, | 
|--------------------------------------------- |  | -------- | ----- | - | -------- |  | ----- | -------- | 
|                                              |  | 2012     |       |   | 2011     |  |       | 2010     | 
|                                              |  |          |       |   |          |  |       |          | 
|Tax at U.S. Federal statutory rate            |  |          | 34.0  |   |          |  | 34.0  |          | 
|State and local taxes, net of federal benefit |  |          | 5.6   |   |          |  | 5.6   |          | 
|Change in valuation allowance                 |  |          | (36.7 | ) |          |  | (36.2 | )        | 
|                                              |  |          | 2.9   |   |          |  | 3.4   |          | 



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



|                                |  | Year Ended    |      |   | Year Ended    |   |      | Year Ended    | 
|------------------------------- |  | ------------- | ---- | - | ------------- | - | ---- | ------------- | 
|                                |  | June 30, 2012 |      |   | June 30, 2011 |   |      | June 30, 2010 | 
|Current:                        |  |               |      |   |               |   |      |               | 
|Federal                         |  | $             | 564  |   |               | $ | 429  |               | 
|State                           |  |               | 93   |   |               |   | 71   |               | 
|                                |  |               | 657  |   |               |   | 500  |               | 
|Deferred:                       |  |               |      |   |               |   |      |               | 
|Federal                         |  |               | 298  |   |               |   | 288  |               | 
|State                           |  |               | 49   |   |               |   | 48   |               | 
|                                |  |               | 347  |   |               |   | 336  |               | 
|                                |  |               |      |   |               |   |      |               | 
|Decrease in valuation allowance |  |               | (937 | ) |               |   | (771 | )             | 
|                                |  |               |      |   |               |   |      |               | 
|Net income tax (benefit)        |  | $             | 65   |   |               | $ | 65   |               | 



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:



32







|                                             |  | June 30, |        |   | June 30, |  
|-------------------------------------------- |  | -------- | ------ | - | -------- | -
|                                             |  | 2012     |        |   | 2011     |  
|                                             |  |          |        |   |          |  
|Current:                                     |  |          |        |   |          |  
|                                             |  |          |        |   |          |  
|Amortization of intangible assets            |  | $        | 314    |   |          | $
|Accrued liabilities and other                |  |          | 869    |   |          |  
|Net operating losses and other carryforwards |  |          | 317    |   |          |  
|Noncurrent:                                  |  |          |        |   |          |  
|Amortization of intangible assets            |  |          | 2,627  |   |          |  
|Depreciation                                 |  |          | (27    | ) |          |  
|Net operating losses and other carryforwards |  |          | 3,961  |   |          |  
|                                             |  |          | 8,061  |   |          |  
|Valuation allowance                          |  |          | (5,311 | ) |          |  
|Total deferred tax assets                    |  | $        | 2,750  |   |          | $



ASC 740 requires a valuation allowance to reduce the deferred
tax assets reported, if at June 30, 2012, the Company had federal tax operating losses 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.



This evidence includes consideration of various uncertainties
that management has identified as risk factors to the Company. Recent events, including significant turmoil within the domestic
and foreign financial markets, healthcare legislation and increasing unemployment tax rates and taxable wage thresholds, more
than likely are expected to contribute to atypical custom attrition and decreased gross profits. Additionally, since the divesture
of certain segments in fiscal 2009 unrelated to the Company’s current focus of full service human resources, the Company
has had positive results for the last four fiscal periods for financial reporting purposes. However, the Company has not evidenced
a similar trend for income tax reporting purposes, experiencing net operating losses in four of prior six fiscal periods, with
the current and 2011 fiscal years as the exception. These taxable losses are primarily the result of permanent timing differences
related to the amortization of certain intangible assets for income tax purposes through 2022. The Company’s deferred tax
assets and liabilities are susceptible to erratic changes due to the inherent unpredictable nature of the Company’s insurance
claim liabilities and sensitivity to unemployment and wage volatility. Changes in the economy and federal and state legislature,
both favorable and unfavorable, will impact management’s assumptions and estimates in future periods.



After consideration of the evidence, both positive and negative,
management has determined that a $5,311 and $6,248 valuation allowance at June 30, 2012 and 2011, respectively, 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 $937 and $771 for the fiscal years ended June 30, 2012 and 2011, respectively. The Company has federal net operating loss carryforwards
of approximately $10.8 and $12.3 million at June 30, 2012 and 2011, respectively, which expire between 2021 and 2030. The Company
has state net operating loss carryforwards of approximately $11.0 and $12.6 million at June 30, 2012 and 2011, respectively.



The Company recognizes interest and penalties related to uncertain
tax positions in income tax expense. As of June 30, 2012, 2011 and 2010, the Company made no provisions for interest or penalties
related to uncertain tax positions. The tax years beginning July 1, 2008 through July 1, 2011 remain open to examination by the
Internal Revenue Service of the United States.



NOTE 7 – 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, 2012, 2011 and 2010, 16,500, 46,500 and 142,117 restricted share units,
respectively, were issued under this plan.



33







NOTE 8 - SHAREHOLDERS’ EQUITY



Common Stock



The following are the details of the Company's common stock
as of June 30, 2012 and 2011:



|                              |  | Number of Shares |            
|----------------------------- |  | ---------------- | -----------
|                              |  | Authorized       |            
|                              |  |                  |            
|June 30, 2012                 |  |                  |            
|Common stock, $0.10 par value |  |                  | 150,000,000
|                              |  |                  |            
|June 30, 2011                 |  |                  |            
|Common stock, $0.10 par value |  |                  | 150,000,000



There were 16,500 shares issued during the year ended June
30, 2012. These shares were issued upon board approval as compensation during the current fiscal year.



There were 46,500 shares issued during the year ended June
30, 2011. These shares were issued upon board approval as compensation during the 2011 fiscal year.



At June 30, 2012, the Company had 2,200,000 warrants outstanding
to the Chairman of the Company.



Preferred Stock



The following are the details of the Company's non-voting preferred
stock as of June 30, 2012 and 2011:



|                                          |  | Number of Shares |          
|----------------------------------------- |  | ---------------- | ---------
|                                          |  | Authorized       |          
|June 30, 2012                             |  |                  |          
|Preferred stock, Series A $0.10 par value |  |                  | 1,000,000
|Preferred stock, Series B $0.10 par value |  |                  | 1,000,000
|Preferred stock, Series C $0.10 par value |  |                  | 1,000,000
|                                          |  |                  |          
|June 30, 2011                             |  |                  |          
|Preferred stock, Series A $0.10 par value |  |                  | 1,000,000
|Preferred stock, Series B $0.10 par value |  |                  | 1,000,000
|Preferred stock, Series C $0.10 par value |  |                  | 1,000,000



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.



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.



Effective December 31, 2010, the Company revised its estimate
regarding the collectability of its $2.5 million term note receivable with a related party. Based on this change in estimate,
the Company reclassified the note receivable as a reduction to its outstanding preferred stock as prescribed by a security agreement
between the Company and the related party. Under terms of this security agreement and in the event of default of the term note
receivable, the Company obtains the right to equal value of the preferred stock as defined including but not limited to title,
interest and dividends. The Company has no intention to convert the note receivable in the foreseeable future.



Dividends of $1,357, $568 and $398 were declared for the fiscal
periods ended June 30, 2012, 2011 and 2010, respectively.



Treasury Stock



During the fiscal year ended June 30, 2011, the Company purchased
166,181 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 in March 2007.



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 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
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 was included in current liabilities at June 30, 2010. This contractual obligation
was paid out in monthly payments through December 31, 2010. These shares were held as collateral by the put holders until the
final payment was made on December 31, 2010, and therefore have not been included in treasury stock at June 30, 2010.



34







NOTE 9 - PER SHARE DATA



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



|                                            |  | Year Ended |            |  | Year Ended |   |            | Year Ended | 
|------------------------------------------- |  | ---------- | ---------- |  | ---------- | - | ---------- | ---------- | 
|                                            |  | June 30,   |            |  | June 30,   |   |            | June 30,   | 
|                                            |  | 2012       |            |  | 2011       |   |            | 2010       | 
|                                            |  |            |            |  |            |   |            |            | 
|Net Income Available to Common Shareholders |  | $          | 926        |  |            | $ | 1,283      |            | 
|                                            |  |            |            |  |            |   |            |            | 
|Basic Income from Continuing Operations     |  | $          | 0.08       |  |            | $ | 0.10       |            | 
|                                            |  |            |            |  |            |   |            |            | 
|Basic Loss from Discontinued Operations     |  |            | -          |  |            |   | -          |            | 
|                                            |  |            |            |  |            |   |            |            | 
|Basic Income per Common Share               |  | $          | 0.08       |  |            | $ | 0.10       |            | 
|                                            |  |            |            |  |            |   |            |            | 
|Basic Weighted Average Shares Outstanding   |  |            | 12,278,710 |  |            |   | 12,251,329 |            | 
|                                            |  |            |            |  |            |   |            |            | 
|Diluted Income from Continuing Operations   |  | $          | 0.06       |  |            | $ | 0.09       |            | 
|                                            |  |            |            |  |            |   |            |            | 
|Diluted Loss from Discontinued Operations   |  |            | -          |  |            |   | -          |            | 
|                                            |  |            |            |  |            |   |            |            | 
|Diluted Income per Common Share             |  | $          | 0.06       |  |            | $ | 0.09       |            | 
|                                            |  |            |            |  |            |   |            |            | 
|Diluted Weighted Average Shares Outstanding |  |            | 14,599,710 |  |            |   | 14,558,965 |            | 



NOTE 10 - OPERATING LEASE COMMITMENTS



Property Lease Commitments



|Segment            |  | Location(s)                                                                                                                     |  | Description
|------------------ |  | ------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|Business Solutions |  | Richmond, IN (1); Brentwood, TN (2); Provo, UT (3); Tucson, AZ (4); Loveland, CO (5); Phoenix, AZ (6); Indianapolis, IN
    (8) |  | Offices    
|Corporate          |  | Indianapolis, IN (7)                                                                                                            |  | Offices    



| | (1) | The
                                                                                                 lease on this property was with
                                                                                                 the former Chief Operating Officer
                                                                                                 of the Company. The operating
                                                                                                 lease agreement provides for
                                                                                                 monthly base rent of $1.6 through
                                                                                                 August 31, 2011, and $1.3 through
                                                                                                 August 31, 2012. This lease was
                                                                                                 not renewed and operations were
                                                                                                 moved to Brentwood, TN.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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
                                                                                                 lease on this property is with
                                                                                                 the former President of ESG.
                                                                                                 The operating lease agreement
                                                                                                 provides for monthly base rent
                                                                                                 of $30 through May 30, 2011,
                                                                                                 $29 through January 31, 2012,
                                                                                                 and $18 through January 31, 2013,
                                                                                                 then increased 4% annually through
                                                                                                 January 31, 2015. The lessee
                                                                                                 pays most expenses related to
                                                                                                 repairs, maintenance, property
                                                                                                 taxes, and insurance. The lessor
                                                                                                 is required to carry minimal
                                                                                                 amounts of insurance.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35







| | (5) | The Company maintains an operating lease agreement that provides
                                                            for monthly base rent of $2 through January 31, 2014. In addition
                                                            to an escalating base monthly rent, the agreement requires the Company
                                                            to pay 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 that provides
                                                            for monthly base rent of $3 through September 30, 2015. In addition
                                                            to an escalating base monthly rent, the agreement requires the Company
                                                            to pay most expenses related to repairs, maintenance, property taxes,
                                                            and insurance.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | The Company maintains an operating lease agreement with a limited
                                                            liability company that is owned by the majority shareholder. The operating
                                                            lease agreement provides for monthly base rent of $5 through August
                                                            2013, adjusted annually to fair market value. The lease was terminated
                                                            April 1, 2012.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | The Company maintains an operating lease agreement that provides
                                                            for monthly base rent of $1.5 through February, 2015. In addition
                                                            to an adjustable base monthly rent, the agreement requires the Company
                                                            to pay most expenses related to repairs, maintenance, property taxes
                                                            and insurance. The lessor is required to carry minimal amounts of
                                                            insurance.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Rent expense under these agreements amounted to $612, $671
and $740 for the fiscal periods ending June 30, 2012, 2011 and 2010.



Future minimum commitments under these agreements at June 30,
2012 are approximately as follows:



|     |  | Facilities |      
|---- |  | ---------- | -----
|2013 |  |            | 512  
|2014 |  |            | 447  
|2015 |  |            | 232  
|2016 |  |            | 9    
|     |  | $          | 1,200



NOTE 11 - RELATED PARTY TRANSACTIONS



We have a long term note receivable which represents a loan
with a business owned by the Company’s majority shareholder in connection with the disposition of certain assets effective
November 30, 2008.  The loan expired on November 30, 2011 and bore interest at the Prime Rate plus 1%.  Effective
June 30, 2009, the Company entered into an agreement with the Chairman/majority shareholder 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 and $100 monthly principal payments due
beginning July 1, 2010 and July 1 2011, respectively. As of the date of this filing, the promissory note was still outstanding
and the Board is considering an additional extension.



Effective December 31, 2010, the Company revised its estimate
regarding the collectability of the term note receivable.  Based on this change in estimate, the Company reclassified
the note receivable as a reduction to its outstanding preferred stock as prescribed by a Security Agreement between the Company
and the related party.  Under terms of this Security Agreement and in the event of default of the term note receivable,
the Company obtains the right to equal value of the preferred stock as defined including but not limited to title, interest and
dividends.  As of June 30, 2012 and the date of this filing, the Company has no intention to convert the note receivable
in the foreseeable future.



The following is a summary of related party amounts included
in the Consolidated Statements of Operations for the fiscal periods ending June 30, 2012, 2011 and 2010, respectively:



|                              |  | June 30, |     |  | June  30, |   |     | June  30, | 
|----------------------------- |  | -------- | --- |  | --------- | - | --- | --------- | 
|                              |  | 2012     |     |  | 2011      |   |     | 2010      | 
|Revenues:                     |  |          |     |  |           |   |     |           | 
|Continuing Operations (1)     |  | $        | 391 |  |           | $ | 573 |           | 
|Discontinued Operations (3)   |  |          | -   |  |           |   | -   |           | 
|Total                         |  | $        | 391 |  |           | $ | 573 |           | 
|                              |  |          |     |  |           |   |     |           | 
|Expenses:                     |  |          |     |  |           |   |     |           | 
|Continuing Operations (2) (4) |  | $        | 45  |  |           | $ | 90  |           | 



36







| | (1) | During the fiscal years ended June 30, 2012, 2011 and 2010, the Company’s
                                                       CSM and PSM subsidiaries performed $391, $573 and $720 worth of services
                                                       for businesses owned by the Company’s majority shareholder.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The Company’s
                                                       PSM and ESG subsidiaries held leases for office buildings in Richmond,
                                                       Indiana, Provo, Utah and Tucson, Arizona from companies owned by former
                                                       officers of the Company. Rent expense of $394 was recognized for the fiscal
                                                       period ending June 30, 2010.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | 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.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | The Company maintained an operating lease agreement for the rental
                                                       of a building with a limited liability company owned by the Company’s
                                                       majority shareholder.  The lease was terminated April 1, 2012. The
                                                       agreement provided for a monthly base rent of $5 per month.  Rent
                                                       and related expenses of $45, $90 and $120 were recognized for the fiscal
                                                       periods ending June 30, 2012, 2011 and 2010, respectively.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 12 - 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 decrease in the valuation allowance for deferred
income tax assets was $937, $771, and $577 for the fiscal years ended June 30, 2012, 2011 and 2010, 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, 2012, 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 establish reserves for workers’
compensation 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 13 - CONCENTRATION OF CREDIT RISK



The Company’s financial instruments that are exposed
to concentrations of credit risk consist primarily of cash and cash equivalents 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.



NOTE 14 - 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.



37







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, 2012 and 2011, the Company had approximately $2.4
million in restricted cash primarily to secure obligations under its workers’ compensation contracts.



NOTE 15 – QUARTERLY FINANCIAL DATA (UNAUDITED)



The following table presents the unaudited consolidated operating
results by quarter for the fiscal periods ended June 30, 2012 and 2011:



|                                                   |  | For the Three Months Ended |       
|-------------------------------------------------- |  | -------------------------- | ------
|                                                   |  | September 30,              |       
|2012:                                              |  |                            |       
|Revenues                                           |  | $                          | 15,795
|Gross Profit                                       |  |                            | 3,252 
|Net income available to common shareholders        |  |                            | 392   
|Basic earnings per share – continuing operations   |  |                            | 0.03  
|Basic earnings per share                           |  |                            | 0.03  
|Diluted earnings per share – continuing operations |  |                            | 0.03  
|Diluted earnings per share                         |  |                            | 0.03  



|                                                   |  | For the Three Months Ended |       
|-------------------------------------------------- |  | -------------------------- | ------
|                                                   |  | September 30,              |       
|2011:                                              |  |                            |       
|Revenues                                           |  | $                          | 15,571
|Gross Profit                                       |  |                            | 3,198 
|Net income available to common shareholders        |  |                            | 302   
|Basic earnings per share – continuing operations   |  |                            | 0.02  
|Basic earnings per share                           |  |                            | 0.02  
|Diluted earnings per share – continuing operations |  |                            | 0.02  
|Diluted earnings per share                         |  |                            | 0.02  



NOTE 16 – SUBSEQUENT EVENTS



Management has evaluated subsequent events through the date
on which the financial statements were issued.



On September 20, 2012, the Company
announcedthat it has reached an agreement in principal to restructure its current merger agreement by planning to enter
into an amended merger agreement with Ide Management Group, LLC (“Ide”), a skilled nursing facility management group
headquartered in Greenfield, Indiana (the “Amended Agreement”). The Amended Agreement is subject to final documentation,
completion of due diligence, regulatory compliance and other normal contingencies. Once completed, a revised Proxy Statement and
the Amended Agreement will be filed with the SEC for review. Further, the Amended Agreement will result in the Company remaining
registered with the Securities and Exchange Commission, and it is anticipated that it will continue to be publicly traded. Current
shareholders of the Company will continue to own their Company shares.



In connection with the Amended Agreement, the Company will
exchange all of its professional employer organization (“PEO”) subsidiaries for all of the common and preferred shares
owned by the late Carter M. Fortune and by CEP, Inc., a Tennessee corporation which had previously entered into a merger agreement
with the Company to acquire all the Company’s PEO operations. As a result of the revised transaction structure, the Company
will cease being in the PEO business and through its newly acquired Ide subsidiaries, will operate a chain of over 20 skilled
nursing facilities located in Indiana, Illinois, Iowa and Wisconsin.



38







The Amended Agreement provides that Ide will merge with a to-be
formed subsidiary of the Company, and become a wholly-owned subsidiary of the Company. Mark Ide, the sole member of Ide, will
receive sufficient shares of the Company in exchange for full ownership of Ide. As a result, Mr. Ide will own a substantial majority
of the Company shares. In addition, Ide will pay the Company three hundred thousand dollars ($300,000) as part of the transaction,
which has been deposited into an escrow account with an independent third-party bank. The terms and conditions of the escrow agreement
and the revised merger transaction are more fully described in the Company’s Form 8-K filed on September 20, 2012.





Mr. Fortune has pledged his ownership holdings in the Company
as collateral on certain personal debt obligations. Mr. Fortune passed away on August 25, 2012. If Mr. Fortune’s shares in
the Company are not sold through the aforementioned transaction, or by some other similar transaction, and if his estate 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 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure



None



Item 9A. Controls and Procedures



Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management,
including our President/Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”), as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, our President/Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June
30, 2012.



Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision
and with the participation of our management, including the President/Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of our internal control over financial reporting as of June 30, 2012. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework.



Based upon this assessment, we determined that our internal
control over financial reporting as of June 30, 2012 was effective.



This Annual Report does not include an attestation report of
our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject
to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit
the company to provide only management's report.



Changes in Internal Controls



There were no changes to our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Inherent Limitations on Effectiveness of Controls



Our management, including our President/Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent
all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs. Our disclosure controls
and procedures and our internal controls over financial reporting have been designed to provide reasonable assurance of achieving
their objectives. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, have been detected.



39







Item 9B. Other Information



None



PART III



Item 10. Directors and Executive Officers of the Company
and 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 Since
|----------------- |  | ------------------------------------------------- |  | --------------
|                  |  |                                                   |  |               
|Carter M. Fortune |  | Chairman of the Board (Deceased August 25, 2012)  |  | 2002          
|David A. Berry    |  | Independent Director, Audit Committee Member (59) |  | 2002          
|Richard F. Suja   |  | Independent Director, Audit Committee Member (57) |  | 2011          
|Paul J. Hayes     |  | Director (Resigned August 30, 2012)               |  | 2011          



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. Mr. Fortune was
the sole owner of Fisbeck-Fortune Development, LLC, 14 West, LLC and Fortune Group, Inc., none of which is a parent, subsidiary
or other affiliate of the Company. In addition, Mr. Fortune was the majority shareholder of the Company. Mr. Fortune passed away
on August 25, 2012.



David A. Berry was elected to the Fortune Industries’
Board of Directors on November 1, 2002. Mr. Berry serves as the chairman 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 formed 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. In addition to his vast experience in growing and
managing businesses, Mr. Berry has personally been involved in the sale of multiple companies. His financial acumen developed
over years of starting, growing and selling businesses is a valuable asset to the board and the audit committee. Mr. Berry has
been retired since 2001 and is currently an independent consultant pursuing multiple business ventures.



Richard F. Suja was elected to the Fortune Industries’
Board of Directors on February 21, 2011. Mr. Suja serves on the Company’s Audit Committee. Mr. Suja is a Senior Advisor
at Colliers International, where he specializes in industrial building, land and investment acquisitions and dispositions, build-to-suit,
lease negotiations and corporate property portfolio representations. He has over 22 years of commercial real estate experience,
specializing in industrial building, land and investment acquisitions and dispositions, build-to-suits, lease negotiations, and
corporate property portfolio management, and he has a strong understanding of financial statements and various investment strategies.
Mr. Suja has sold or leased over 13.2 million square feet of industrial, research and site development space, totaling more than
$600 million in transaction volume. His clientele is located throughout the United States and in Canada, and is concentrated in
central Indiana. Prior to joining Colliers International, Mr. Suja worked for Summit Realty, Cushman & Wakefield’s Global
Supply Chain Solutions Group and CB Richard Ellis’ Global Logistics Group.



40







Paul J. Hayes was elected to the Fortune Industries’
Board of Directors on February 21, 2011. Mr. Hayes has over 25 years experience in corporate accounting and finance, primarily
in the commercial real estate, residential construction and land development industries. Prior to his current position, he spent
the last 13 years with The Estridge Companies, serving as Vice President of Finance from 2006 to 2010 and Controller from 1997
to 2006. Mr. Hayes secured over $25 million in land and development financing and served on the company’s executive committee.
Prior to joining Estridge, Mr. Hayes held several positions, including Financial Reporting Controller, with Simon Property Group,
where he worked on the company’s initial public offering in 1993 and the company’s merger with its largest competitor
in 1996. Mr. Hayes began his career with the big-8 public accounting firm Ernst & Whinney providing assurance services to
a wide range of clients in many diverse industries. Effective August 30, 2012, Mr. Paul Hayes resigned from the Company’s
Board of Directors. Mr. Hayes’ resignation was not due to a disagreement with the Company on any matter relating to the
Company’s operations, policies or practices.



Executive Officers of the Company



The executive officers of the Company are as follows:



|Name          |  | Age |  | Position                             
|------------- |  | --- |  | -------------------------------------
|              |  |     |  |                                      
|Tena Mayberry |  | 49  |  | Chief Executive Officer and President
|Randy Butler  |  | 52  |  | Chief Financial Officer              



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.



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, 2012, 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 2013 proxy solicitation materials must set forth such proposal in writing to be received at our corporate
office no later than November 1, 2012. 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 November 1, 2012, 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 2013 proxy solicitation materials or consideration at the 2013 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, 2013, 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.



41







THE AUDIT COMMITTEE



The Company maintains an Audit Committee that is currently
composed of two members, David A. Berry and Richard F. Suja, neither of whom is an officer or employee of the Company or any parent
or subsidiary of the Company. Further, neither Mr. Berry nor Mr. Suja has any other material relationship with the Company that
would interfere with their exercise of independent judgment. The Board has determined that Mr. Berry and Mr. Suja are "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.



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 an executive officer
also services as a director, that individual is excluded from discussions regarding compensation. Currently, the Company’s
only executive officers are its Chief Executive Officer and Chief Financial 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.



42







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.Ms. Mayberry was paid $200,000 in salary during the fiscal year ended June 30, 2012 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, 2012 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.



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, 2012, 2011 and 2010 by our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer. The Company
had no other executive officers during fiscal 2012.



EXECUTIVE COMPENSATION TABLE





|                            |  | Fiscal Period |  |               |         |  |              |   |        |        |  |   |              |  |  |       | 
|--------------------------- |  | ------------- |  | ------------- | ------- |  | ------------ | - | ------ | ------ |  | - | ------------ |  |  | ----- | 
|                            |  | Ended         |  |               |         |  |              |   |        |        |  |   |              |  |  |       | 
|                            |  | June 30, 2012 |  | Annual Salary |         |  | Annual Bonus |   |        | Stock  |  |   | Other        |  |  |       | 
|Name and Principal Position |  | 2011 and 2010 |  | Compensation  |         |  | Compensation |   |        | Awards |  |   | Compensation |  |  | Total | 
|John F. Fisbeck, CEO, 1     |  | 2010          |  | $             | 180,000 |  |              |   |        |        |  |   |              |  |  |       | 
|P. Andy Rayl, COO, 2        |  | 2011          |  | $             | 99,000  |  |              |   |        |        |  |   |              |  |  |       | 
|                            |  | 2010          |  | $             | 105,000 |  |              |   |        |        |  |   |              |  |  |       | 
|Tena Mayberry, CEO, 3       |  | 2012          |  | $             | 200,000 |  |              | $ | 30,000 |        |  | $ | 5,1007       |  |  |       | 
|                            |  | 2011          |  | $             | 200,000 |  |              | $ | 25,000 |        |  | $ | 13,4005      |  |  |       | 
|                            |  | 2010          |  | $             | 180,000 |  |              | $ | 20,000 |        |  |   |              |  |  |       | 
|Randy Butler, CFO, 4        |  | 2012          |  | $             | 130,000 |  |              | $ | 30,000 |        |  | $ | 2,5508       |  |  |       | 
|                            |  | 2011          |  | $             | 130,000 |  |              | $ | 10,000 |        |  | $ | 10,0506      |  |  |       | 
|                            |  | 2010          |  | $             | 130,000 |  |              |   |        |        |  |   |              |  |  |       | 



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



| | (2) | P. Andy Rayl was employed as the Company’s COO from
                                                                 May 8, 2008 to April 1, 2011.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Tena Mayberry began her term as the Company’s President
                                                                 on April 13, 2009 and as the Company’s CEO on January 1,
                                                                 2010.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Randy Butler began his term as the Company’s Chief
                                                                 Financial Officer on April 2, 2009.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Represents the aggregate fair value of 20,000 shares of unrestricted
                                                                 common stock granted on April 6, 2011 at a price of $0.67 per
                                                                 share, which represents the closing price of the Company’s
                                                                 shares on the grant date.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Represents the aggregate fair value of 15,000 shares of unrestricted
                                                                 common stock granted on April 6, 2011 at a price of $0.67 per
                                                                 share, which represents the closing price of the Company’s
                                                                 shares on the grant date.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Represents the aggregate fair value of 10,000 shares of unrestricted
                                                                 common stock granted on February 20, 2012 at a price of $0.51
                                                                 per share, which represents the closing price of the Company’s
                                                                 shares on the grant date.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Represents the aggregate fair value of 5,000 shares of unrestricted
                                                                 common stock granted on February 20, 2012 at a price of $0.51
                                                                 per share, which represents the closing price of the Company’s
                                                                 shares on the grant date.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Grant of Plan Based Awards



On April 6, 2011, Tena Mayberry was awarded 20,000 shares of
common stock in accordance with her employment agreement.



On April 6, 2011, Randy Butler was awarded 15,000 shares of
common stock in accordance with his employment agreement.



On February 20, 2012, Tena Mayberry was awarded 10,000 shares
of common stock in accordance with her employment agreement.



43







On February 20, 2012, Randy Butler was awarded 5,000 shares
of common stock in accordance with her employment agreement.



No other plan-based awards were made to the named executive
officers during the fiscal period ended June 30, 2012, 2011 and 2010.



Outstanding Equity Awards



There were no outstanding equity awards for the named executive
officers as of the end of the fiscal period ended June 30, 2012.



Option Exercises and Vested Stock



There were no option/SAR exercises during the fiscal period
ended June 30, 2012 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, 2012.



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, 2012.



Compensation of Directors



The following table sets forth the compensation paid to all
Directors of the Company during the fiscal period ended June 30, 2012:



DIRECTOR COMPENSATION TABLE



|                |  | Fees Earned or |        |  | All Other    |  |  |       | 
|--------------- |  | -------------- | ------ |  | ------------ |  |  | ----- | 
|Name            |  | paid in Cash   |        |  | Compensation |  |  | Total | 
|                |  |                |        |  |              |  |  |       | 
|David A. Berry  |  | $              | 12,000 |  |              |  |  |       | 
|Richard F. Suja |  | $              | 12,000 |  |              |  |  |       | 
|Paul J. Hayes   |  | $              | 12,000 |  |              |  |  |       | 



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, 2012.



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.



David A. Berry

Richard F. Suja



44







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, 2012:



|Plan Category                                         |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |         |  | Weighted-
average exercise priceof outstanding
 options,
 warrants and
rights |   |      | Number of securities remaining available for future issuance | 
|----------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | ------- |  | ----------------------------------------------------------------------------- | - | ---- | ------------------------------------------------------------ | 
|                                                      |  |                                                                                             |         |  |                                                                               |   |      |                                                              | 
|Equity Compensation Plan Approved by Shareholders (1) |  |                                                                                             | 890,783 |  |                                                                               | $ | 0.00 |                                                              | 
|Total                                                 |  |                                                                                             | 890,783 |  |                                                                               | $ | 0.00 |                                                              | 



| | (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, 2012
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
Class | 
|-------------- |  | ------------------------------------ | ------------------------------------------------------------- |  | ---------------------------------------------- |  | --------- | ---------------- | 
|               |  |                                      |                                                               |  |                                                |  |           |                  | 
|Common Stock   |  |                                      | Carter M. Fortune 6402 Corporate Drive Indianapolis, IN 46278 |  |                                                |  | 7,344,687 | (2)              | 



| | (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, 2012.
                                                       "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%) 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, 2012
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.



|Title of Class |  | Name and Address of Beneficial Owner                          |  | Amount and Nature of Beneficial
 Ownership (1) |           |  | Percent of 
Class |  
|-------------- |  | ------------------------------------------------------------- |  | ---------------------------------------------- | --------- |  | ----------------- | -
|Common 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     |  |                                                | 50,000    |  |                   |  
|Common Stock   |  | Randy Butler 6402 Corporate Drive Indianapolis, IN 46278      |  |                                                | 30,000    |  |                   |  
|Common Stock   |  | All current executive officers and Directors as a group       |  |                                                | 7,434,687 |  |                   |  



| | (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, 2012.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | As the sole member of 14 West, LLC, Carter M. Fortune has sole voting
                                                       and dispositive power over 1,259,834 (10%) 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





45







CHANGES IN CONTROL



On March 26, 2012, CEP, Inc., a Tennessee corporation (“Parent”),
CEP Merger Sub, Inc., a Tennessee corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), and Fortune
Industries, Inc., an Indiana corporation (the “Company”), entered into an Agreement and Plan of Merger (the “Merger
Agreement”) whereby Merger Sub will merge with and into the Company (the “Merger”) with the Company surviving
as a subsidiary of CEP (the “Surviving Corporation”). The Surviving Corporation will continue to be named “Fortune
Industries, Inc.” when the merger is effective.



Further details of this transaction can be found in the Form
8-K filed on March 26, 2012 and the Agreement and Plan of Merger which was attached as Exhibit 10.1 of the Form 8-K. Additional
information has been provided in a Fortune Proxy Statement Form 14-A filed on May 22, 2012 and Fortune Schedule 13E-3 filed on
May 29, 2012.



On September 20, 2012, the Company
announcedthat it has reached an agreement in principal to restructure its current merger agreement by planning to enter
into an amended merger agreement with Ide Management Group, LLC (“Ide”), a skilled nursing facility management group
headquartered in Greenfield, Indiana (the “Amended Agreement”). The Amended Agreement is subject to final documentation,
completion of due diligence, regulatory compliance and other normal contingencies. Once completed, a revised Proxy Statement and
the Amended Agreement will be filed with the SEC for review. Further, the Amended Agreement will result in the Company remaining
registered with the Securities and Exchange Commission, and it is anticipated that it will continue to be publicly traded. Current
shareholders of the Company will continue to own their Company shares.



In connection with the Amended Agreement, the Company will
exchange all of its professional employer organization (“PEO”) subsidiaries for all of the common and preferred shares
owned by the late Carter M. Fortune and by CEP, Inc., a Tennessee corporation which had previously entered into a merger agreement
with the Company to acquire all the Company’s PEO operations. As a result of the revised transaction structure, the Company
will cease being in the PEO business and through its newly acquired Ide subsidiaries, will operate a chain of over 20 skilled
nursing facilities located in Indiana, Illinois, Iowa and Wisconsin.



The Amended Agreement provides that Ide will merge with a to-be
formed subsidiary of the Company, and become a wholly-owned subsidiary of the Company. Mark Ide, the sole member of Ide, will
receive sufficient shares of the Company in exchange for full ownership of Ide. As a result, Mr. Ide will own a substantial majority
of the Company shares. In addition, Ide will pay the Company three hundred thousand dollars ($300,000) as part of the transaction,
which has been deposited into an escrow account with an independent third-party bank. The terms and conditions of the escrow agreement
and the revised merger transaction are more fully described in the Company’s Form 8-K filed on September 20, 2012.





Mr. Fortune has pledged his ownership holdings in the Company
as collateral on certain personal debt obligations. Mr. Fortune passed away on August 25, 2012. If Mr. Fortune’s shares in
the Company are not sold through the aforementioned transactions, or by some other similar transaction, and if his estate 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
$45 was recognized in fiscal period 2012 under these agreements. This lease was terminated on April 1, 2012.



46







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 reduction in the outstanding balance of the term loan note due
to the majority shareholder and a three year term promissory note receivable in the amount of $3,500 whose maturity date was extended
to June 30, 2012.  The promissory note receivable bears interest at prime plus 1% and is interest only for the first
twelve months, with $50 and $100 monthly principal payments due in years two and three, respectively. The unpaid balance at maturity
is due in lump sum payment. As of the date of this filing, the promissory note receivable was still outstanding and the Board
is considering an additional extension.



Effective December 31, 2010, the Company revised its estimate
regarding the collectability of the term note receivable.  Based on this change in estimate, the Company reclassified
the note receivable as a reduction to its outstanding preferred stock as prescribed by a Security Agreement between the Company
and the related party.  Under terms of this Security Agreement and in the event of default of the term note receivable,
the Company obtains the right to equal value of the preferred stock as defined including but not limited to title, interest and
dividends.  As of June 30, 2012 and the date of this filing, the Company has no intention to convert the note receivable
in the foreseeable future.



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,
2012 were certified by Somerset CPA’s, P.C. (“Somerset”). The following table sets forth the aggregate fees
billed to the Company by Somerset:



|                   |  | Fiscal 2012 |         |  | Fiscal 2011 |  
|------------------ |  | ----------- | ------- |  | ----------- | -
|                   |  |             |         |  |             |  
|Audit Fees         |  | $           | 245,000 |  |             | $
|Audit Related Fees |  |             | 90,000  |  |             |  
|Tax Fees           |  |             | 255,000 |  |             |  
|All Other Fees     |  |             | -       |  |             |  
|                   |  | $           | 590,000 |  |             | $



Audit Fees: The aggregate fees billed in each of the fiscal
periods ended June 30, 2012 and 2011 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, 2012 and 2011 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, 2012 and 2011 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, 2012
and 2011, 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.



47







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 2012.



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 20 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. |  | Description                                                                                                                                   
|------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|2.1                 |  | 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.
| | -- | ----------------



48







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, 2012 | By:                     
|                         |                         
|                         |                         
|                         |                         
|Date: September 28, 2012 | By:                     
|                         |                         
|                         |                         



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, 2012 |  | /s/ David A. Berry       
|------------------------ |  | -------------------------
|                         |  | David A. Berry, Director 
|                         |  |                          
|Date: September 28, 2012 |  | /s/ Richard F. Suja      
|                         |  | Richard F. Suja, Director



49