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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ
    
    ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended August 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-19049
 Fortune Industries, Inc.
 (Exact name of registrant as specified in its charter)
 Indiana
    
    20-2803889(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)6402 Corporate Drive, Indianapolis, Indiana
    
    46278(Address of principal executive offices)
    
    (Zip Code)
 (317) 532-1374
 (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
 Common Stock ($0.10 par value per share) (Common Stock);
    
    American Stock ExchangePreferred Stock ($0.10 par value per share) (Preferred Stock)
    
    American Stock Exchange(Title of Class)
    
    (Name of Exchange on Which Registered)
 Securities registered pursuant to Section 12(g) of the Act:
  o þ
 o þ
 þ o
 o
  o o þ
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 PART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    9Item 1B.
    
    Unresolved Staff Comments
    
    
    16Item 2.
    
    Properties
    
    
    17Item 3.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17PART IIItem 5.
    
    Market for the Registrants Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity
Securities
    
    
    19Item 6.
    
    Selected Financial Data
    
    
    20Item 7.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    20Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 8.
    
    Financial Statements and Supplementary Data
    
    
    41Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    78Item 9A.
    
    Controls and Procedures
    
    
    78Item 9B.
    
    Other Information
    
    
    78PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    79Item 11.
    
    Executive Compensation
    
    
    79Item 12.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters
    
    
    79Item 13.
    
    Certain Relationships and Related Transactions
    
    
    79Item 14.
    
    Principal Accountant Fees and Services
    
    
    79PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    80SIGNATURES
    
    
    81List of SubsidiariesConsent of Independent Registered Public Accounting FirmSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification
 2




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PART I
 
 Item 1. Business
 General
     Wireless Infrastructure Segment
  Site Acquisition
  Engineering, Architecture and Design
  3




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Construction Management
  Technical Consulting
    Customers and Backlog
   Competition
   4




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Government Regulation
  Business Solutions Segment
   Customers
  Competition
  Vendor Relationships
  5




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Government Regulation
  Transportation Infrastructure Segment
   Customers and Backlog
   Materials
  Competition
  Government Regulation
  6




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Ultraviolet Technologies Segment
    Customers
  Competition
  Raw Materials
  Electronics Integration Segment
    7




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Customers
  Vendor Relationships
 .
 Competition
  Employees
  Control Group
  Additional information with respect to the Companys businesses
  http://www.ffi.net http://www.sec.gov http://www.ffi.net
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##### Table of Contents



Item 1A. Risk Factors
  The businesses in which we provide services are highly competitive.
  Our operating results may vary significantly from quarter-to-quarter.
  §
    
    the timing and volume of work under new agreements;§
    
    the termination of existing agreements;§
    
    regional or general economic conditions;§
    
    a change in the mix of our customers, contracts and business;§
    
    the budgetary spending patterns of customers;§
    
    variations in the margins of projects performed during any particular quarter;§
    
    increases in construction and design costs;§
    
    the availability of products to sell;§
    
    changes to the cost of available products;§
    
    changes in bonding requirements applicable to new agreements;§
    
    losses experienced in our operations not otherwise covered by insurance;§
    
    payment risk associated with the financial condition of our customers;§
    
    costs we incur to support growth internally or through acquisitions or otherwise;§
    
    the timing of acquisitions; and§
    
    the magnitude of acquisition assimilation costs.
  We may not be able to successfully achieve the expected benefits of acquisitions, which exposes us
to risks associated with these transactions.
  9




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We may be unsuccessful at integrating companies.
  §
    
    failure of acquired companies to achieve the results that we expect;§
    
    diversion of managements attention from operational matters;§
    
    difficulties integrating the operations and personnel of acquired companies;§
    
    inability to retain key personnel of the acquired companies;§
    
    risks associated with unanticipated events or liabilities;§
    
    the potential disruption of business; and§
    
    the difficulty of maintaining uniform standards, controls, procedures and policies.
  We may not succeed in generating internal growth.
  §
    
    expand the range of services we offer to customers to address their evolving needs;§
    
    attract new customers;§
    
    increase the number of projects performed for existing customers;§
    
    hire and retain employees;§
    
    open additional facilities; and§
    
    reduce our operating and overhead expenses.
  Our customers are often larger companies that have superior bargaining strength.
  The concentration of a portion of our business among large customers could increase credit risks.
  10




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Many of our contracts may be canceled on short notice and we may be unsuccessful in replacing the
contracts as they are completed or expire.
  §
    
    our customers cancel a significant number of contracts;§
    
    we fail to win a significant number of our existing contracts upon re-bid; or§
    
    we complete the required work under a significant number of non-recurring
projects and cannot replace them with similar projects.
 We may not be able to maintain appropriate staffing levels related to our billable workforce.
  We bear the risk of cost overruns on a large percentage of our revenues that are derived from fixed
price contracts.
  Increases in estimated project costs under the percentage-of-completion method of accounting could
cause fluctuations in our quarterly results and adversely affect our operating results.
  A portion of our business depends on our ability to provide surety bonds. We may be unable to
compete for our work on certain projects if we are not able to obtain the necessary surety bonds.
  11




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Our unionized workforce could adversely affect our operations.
  We may incur liabilities or suffer negative financial impact relating to occupational health and
safety matters.
  Our success is dependent on growth in the deployment of wireless networks and new technology
upgrades, and to the extent that such growth slows, our business may be harmed.
  If wireless carriers, network equipment vendors and enterprises do not outsource their wireless
telecommunications services, our business will suffer.
  The telecommunications industry has experienced significant consolidation, and this trend is
expected to continue. It is possible that we and one or more of our competitors each supply
products to the companies that have merged or will merge.
  We could have unfavorable health insurance and workers compensation claim experiences.
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We could face additional liability for worksite employee payroll and benefits costs.
  §
    
    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.
  We may face operational challenges as a result of changes in federal, state and local regulations.
   We may face additional liabilities as a result of increases in unemployment tax rates.
  We face potential client liabilities for employment taxes.
 13




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§
    
    income tax withholding requirements;§
    
    obligations under FICA; and§
    
    obligations under FUTA.
  We may not be able to realize our deferred income tax assets.
  We may not be able to protect our intellectual property rights.
  We are exposed to financial market risks, including interest rate fluctuation and changes in
foreign currency exchange rates.
  Our results of operations could be adversely affected as a result of goodwill impairments.
  14




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Our debt financing is guaranteed by our two majority shareholders (our Chairman of the Board of
Directors and our CEO). A refusal to make additional guarantees by our Chairman of the Board of
Directors could impact our borrowing capabilities.
  We may not have sufficient funds to repay our obligations to creditors when they become due and our
default could have a significant negative impact on our business.
    The Companys shareholders may experience dilution if future equity offerings are used to fund
operations or acquire additional businesses.
  Our business growth could outpace the capability of our corporate management infrastructure.
  The departure of key personnel could disrupt our business, and few of our key personnel are
obligated to stay with us.
  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. We have reported material weaknesses in our internal
control over financial
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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.
    A control group owns a substantial majority of our common stock.
   
 Item 1B. Unresolved Staff Comments
  16




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Item 2. Properties
  ApproximateOwned /
    
    SquareSegment
    
    Location(s)
    
    Description
    
    Leased
    
    FootageCorporate and various
Wireless Infrastructure &
Electronics Integration
subsidiaries
    
    Indianapolis, IN
    
    Corporate offices, various subsidiary offices and warehouse facilities
    
    Leased (1)
    
    
    171,000Wireless Infrastructure
    
    Columbus, OH 
Cleveland, OH, Kansas City, MO, Richmond, VA, Ft. Wayne, IN
and Atlanta, GA
    
    Offices, warehouse facility
Offices, warehouse facilities
    
    Leased (1)
Leased
    
    
    11,000
27,000Business Solutions
    
    Richmond, IN
Indianapolis, IN
Brentwood, TN
    
    Offices
Offices
Offices
    
    Leased (2)
Leased
Leased
    
    
    10,000
7,000
10,000Transportation Infrastructure
    
    Indianapolis, IN, Sedalia, MO, Knoxville, TN
    
    Offices, equipment yard, warehouse, storage and vehicle shop
    
    Leased (1)
    
    
    41,000
    (3)Ultraviolet Technologies
    
    Crawfordsville, IN

Crawfordsville, IN 
United Kingdom,
 Singapore, Shenzhen, China and GuangDong, 
China
Atlanta, GA
    
    Offices

Manufacturing facility
Offices, warehouse and
manufacturing facilities 
Offices, warehouse facility
    
    Leased (1)
Owned
Leased
Leased
    
    
    20,000
34,000
11,000
5,000
 
 (1)
    
    The leases on these properties are with a limited liability company owned by the
Companys two majority shareholders. 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)
    
    Represents total facility square footage. Additionally, we have approximately 14 acres
of yard space.  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Executive Officers of the Registrant
  Name
    
    Age
    
    PositionJohn F. Fisbeck
    
    
    50
    
    
    President and Chief Executive OfficerCarter M. Fortune
    
    
    65
    
    
    TreasurerAmy E. Gallo
    
    
    39
    
    
    Chief Financial OfficerHarlan M. Schafir
    
    
    52
    
    
    Chief Operating Officer (1)
 17




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(1)
    
    Harlan M. Schafir was elected to the Companys Board on October 1, 2003 and was also
appointed Chief Operating Officer of the Company as of that date. Mr. Schafirs term as
Chief Operating Officer ended on September 30, 2006, when his employment contract with
the Company was not renewed.     18




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PART II
 
 Item 5.
    
    Market for the Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 Market Information
  High
    
    LowFiscal Year Ending August 31, 2006Fourth Quarter
    
    $
    5.21
    
    
    $
    3.91Third Quarter
    
    
    5.00
    
    
    
    3.65Second Quarter
    
    
    5.00
    
    
    
    3.10First Quarter
    
    
    7.75
    
    
    
    4.50Fiscal Year Ending August 31, 2005Fourth Quarter
    
    $
    7.55
    
    
    $
    2.00Third Quarter
    
    
    5.90
    
    
    
    2.80Second Quarter
    
    
    8.00
    
    
    
    3.60First Quarter
    
    
    11.80
    
    
    
    7.00
  Shares Authorized for Issuance under Equity Compensation Plans
  Number of securities to
    
    
    Weighted-average
    
    
    Number ofbe issued upon exercise
    
    
    exercise price of
    
    
    securities remainingof outstanding options,
    
    
    outstanding options,
    
    
    available for futurePlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    issuanceEquity Compensation
Plan Approved by
Shareholders (1)
    
    
    14,000
    (2)
    
    $
    0.00
    
    
    
    986,000Total
    
    
    14,000
    
    
    $
    0.00
    
    
    
    986,000
 
 (1)
    
    Includes the 2006 Equity Incentive Plan(2)
    
    Includes shares to be issued upon the vesting of Restricted Stock Units (RSUs), for
which no exercise price will be paid. 19




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Unregistered Shares Issuances
  Amount of Issued
    
    Recipient of IssuedDate of Issuance
    
    Title of Securities
    
    Securities
    
    SecuritiesJune 23, 2006
    
    Common Stock
    
    
    64,459
    
    
    James Westbrook (1)
 
 (1)
    
    James Westbrook was issued 64,459 shares of the Companys Common Stock pursuant to a
unit purchase agreement between the Company and James Westbrook & Associates, LLC to be
held in escrow. The shares of common stock may vest per the terms of the agreement based
upon the achievement of certain financial performance measures during the period June 24,
2006 through August 31, 2009. The Company relied on the exemption from registration
provided under Section 4(2) of the Securities Act. Our reliance
on this exemption was based on the limited nature of the offering,
the sophistication of the recipient and our status as an exchange act
reporting company. 
 Item 6. Selected Financial Data
  Year Ended August 31,2006
    
    2005 (1)
    
    2004 (2)
    
    2003 (3)
    
    2002(Dollars in thousands, except per share data)Total Revenues
    
    $
    157,113
    
    
    $
    113,096
    
    
    $
    66,882
    
    
    $
    15,470
    
    
    $
    2,342Net Income (Loss)
    
    
    2,219
    
    
    
    (2,317
    )
    
    
    2,402
    
    
    
    115
    
    
    
    (2,075
    )Net Income (Loss) Available to Common Shareholders
    
    
    1,888
    
    
    
    (2,317
    )
    
    
    2,402
    
    
    
    115
    
    
    
    (2,075
    )Net Income (Loss) per Share:Basic
    
    $
    0.18
    
    
    $
    (0.22
    )
    
    $
    0.23
    
    
    $
    0.01
    
    
    $
    (0.30
    )Diluted
    
    $
    0.16
    
    
    $
    (0.22
    )
    
    $
    0.23
    
    
    $
    0.01
    
    
    $
    (0.30
    )Weighted Average Shares Outstanding:Basic
    
    
    10,582
    
    
    
    10,496
    
    
    
    10,209
    
    
    
    7,739
    
    
    
    6,983Diluted
    
    
    11,845
    
    
    
    10,501
    
    
    
    10,249
    
    
    
    7,829
    
    
    
    7,023Consolidated Balance Sheet Data:Cash and Short-Term Investments
    
    $
    4,913
    
    
    $
    5,986
    
    
    $
    5,486
    
    
    $
    1,222
    
    
    $
    291Working Capital
    
    
    23,383
    
    
    
    1,200
    
    
    
    9,174
    
    
    
    3,358
    
    
    
    939Goodwill and Intangibles, net
    
    
    16,283
    
    
    
    16,385
    
    
    
    12,303
    
    
    
    7,219
    
    
    
    2,027Total Assets
    
    
    74,285
    
    
    
    65,086
    
    
    
    51,569
    
    
    
    18,033
    
    
    
    6,262Long-Term
Obligations and Redeemable Preferred Stock
    
    
    34,512
    
    
    
    11,585
    
    
    
    12,881
    
    
    
    7,210
    
    
    
    2,606Shareholders Equity
    
    
    20,950
    
    
    
    12,073
    
    
    
    12,818
    
    
    
    5,654
    
    
    
    490
 
 (1)
    
    Includes the acquisition of CSM, Inc. in April 2005.(2)
    
    Includes the acquisition of Professional Staff Management, Inc. in October 2003 and the
James H. Drew Corp. in April 2004.(3)
    
    Includes the acquisition of Nor-Cote International, Inc. in July 2003. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  20




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Regulation S-K.
  Key Factors Affecting or Potentially Affecting Results of Operations and Financial Condition
  Holding Company
   §
    
    Earnings are dependant on a number of factors including our ability to execute
operational strategies and integration of acquisitions under central business units. Our
historical growth has been due to several significant acquisitions over the past five
years. Future growth in revenues and earnings may not increase at the same rate as
historical growth.§
    
    We have current and long-term debt liabilities of $31.2 million. Principal payments of
$3.5 million and estimated interest payments of approximately $2.4 million are due within
12 months. The ability to meet financing needs may affect future management strategies.§
    
    Our tax benefit for the year ended August 31, 2006 was ($0.4) million and our effective
rate was (39.0)% as a result of the release of $0.5 million of the valuation allowance. As a
result of the release of the valuation allowance to offset 100% of current federal taxes
and recognition of the deferred tax benefit, our effective tax rate is substantially lower
than statutory rates. Management has made significant estimates with respect to the
realizability of our deferred tax assets. The valuation allowance primarily relates to net
operating
 21




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loss carryforwards. We evaluate a variety of factors in determining the amount
of the deferred tax assets to be recognized pursuant to SFAS No. 109, including the number
of years our operating loss can be carried forward, our earnings history and our near-term
earnings expectations. Although realization is not assured, management believes it is more
likely than not that all of the net deferred income tax assets will be realized.§
    
    Certain of our expenses, such as wages, benefits and rent, are subject to normal
inflationary pressures. Inflation for medical costs can impact both our reserves for
self-funded medical plans as well as our reserves for workers compensation claims.§
    
    Typically, the first, third and fourth quarter represent the best quarters for our
consolidated financial results. These results are increased as a result of our investment
in the construction industry.§
    
    We maintain a solid working relationship with all of our unions and good employee
relations are a focus of our management. Although we believe we have good employee
relations, there can be no assurances that work stoppages can be avoided in future periods.§
    
    A control group, which includes our two majority shareholders, owns 80.3% of the
outstanding Common Stock of the Company. As a result, these persons 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 these shareholders may differ from
the interests of the Companys other shareholders and their stock ownership may thereby
limit the ability of other shareholders to influence the management and affairs of the
Company.
 Wireless Infrastructure
  Business Solutions
  Transportation Infrastructure
  22




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Ultraviolet Technologies
  Electronics Integration
  Results of Operations
  Net revenues for the year ended August 31,
    
    
    Operating income for the year ended August 31,2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Wireless Infrastructure
    
    $
    27,859
    
    
    $
    14,911
    
    
    $
    6,352
    
    
    $
    (124
    )
    
    $
    (603
    )
    
    $
    (95
    )Business Solutions
    
    
    44,543
    
    
    
    28,458
    
    
    
    17,958
    
    
    
    3,423
    
    
    
    2,369
    
    
    
    2,010Transportation Infrastructure
    
    
    57,931
    
    
    
    46,549
    
    
    
    17,539
    
    
    
    2,970
    
    
    
    1,008
    
    
    
    1,590Ultraviolet Technologies
    
    
    12,437
    
    
    
    10,771
    
    
    
    10,526
    
    
    
    667
    
    
    
    (219
    )
    
    
    469Electronics Integration
    
    
    14,343
    
    
    
    12,407
    
    
    
    14,507
    
    
    
    (91
    )
    
    
    (1,095
    )
    
    
    (162
    )Holding Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,195
    )
    
    
    (2,465
    )
    
    
    (1,264
    )Segment Totals
    
    $
    157,113
    
    
    $
    113,096
    
    
    $
    66,882
    
    
    $
    3,650
    
    
    $
    (1,005
    )
    
    $
    2,548Net income (loss) available
to common shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,888
    
    
    $
    (2,317
    )
    
    $
    2,402
 Year ended August 31, 2006 versus August 31, 2005
   §
    
    The Wireless Infrastructure increases were due mainly to increased demand for products
and services offered by our companies due to the cellular communication industrys
investment in expansion of their networks and increased marketing of our services.§
    
    The Business Solutions increases were due to the acquisition of CSM in April 2005 as
well as increased customer base.§
    
    The Transportation Infrastructure increases were due to improved market conditions due
to the release of federal highway funds and due to favorable weather conditions.§
    
    The Ultraviolet Technologies increases were due to new product offerings and expanded
revenue streams in the Asian marketplace.
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§
    
    The Electronics Integration increases were due to the acquisition of AVR in November
2005, which created our entry into the custom home theatre market.
  §
    
    Decreased expenses relating to impairment charges on certain intangible assets of $0.6
million recognized in the Electronics Integration and Wireless Infrastructure segments in
fiscal year 2005.§
    
    Increased productivity as a result of more favorable weather conditions and a change in
job mix where we acted as general contractor in our Transportation Infrastructure segment.§
    
    Expansion of television product offerings through new vendor relationships at more
competitive pricing in our Electronics Integration segment.§
    
    Implementation of a more stringent credit policy and an improved inventory management
system in our Electronics Integration segment.§
    
    Favorable claims experience related to our health and workers compensation plans in the
Business Solutions segment.§
    
    Income tax benefit of $0.5 million due to the release of
a portion of our valuation allowance related
to our net operating loss
carryforward based on conservative
projections of taxable earnings in fiscal 2007.
  §
    
    Increase in expenses related to hiring of new management and sales personnel in the
Wireless Infrastructure and Business Solutions segments.§
    
    Increase in expenses related to new offices in the Wireless Infrastructure and
Ultraviolet Technologies segments.§
    
    Increase in interest expense of $1.0 million, or 72% due mainly to our issuance of a
$7.5 million long-term convertible note payable in November 2005 and financing of the CSM
acquisition. Additionally, interest expense increased approximately $0.6 million due to
the changes in prime rate over the last fiscal year.
 Year ended August 31, 2005 versus August 31, 2004
   §
    
    We completed the acquisition of CSM in April 2005, JH Drew in April 2004 and PSM in
October 2003.§
    
    We experienced internal, organic revenue growth of approximately $11.0 million due
mainly to an increase in demand for services provided by certain subsidiaries in our
Wireless Infrastructure segment due to the cellular communication industrys investment in
expansion of their networks and an increase in the customer base in our PEO business due to
small market penetration in the geographic regions which we service.
  §
    
    Loss on a project in our Wireless Infrastructure segment of approximately $1.2 million
due to additional costs incurred in excess of contract prices. The project related to
services performed by our technical services group outside our typical area of expertise
and in a geographic area where significant expenses were incurred related to overtime and
travel.§
    
    Impairment loss on certain intangible assets in our Wireless Infrastructure and
Electronics Integration segments of $0.6 million due to management directed restructuring
in the respective divisions. Restructurings included a change in customer list due to the
loss of a master distributor agreement and a decrease in volume from the majority of
customers included in the customer list at the purchase date and restructurings of
personnel resulting in non-compete agreement violations.
 24




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§
    
    Decrease in gross profit in the Transportation Infrastructure segment due mainly to
seasonality of the construction business, suppressed gross margins due to increased
competition resulting from a delayed passing of legislation within the highway construction
industry, and an increase in steel and diesel prices.§
    
    Increase in interest expense of $0.8 million. Interest expense increased in fiscal year
2005 approximately $0.5 million due to an increase in prime and LIBOR rates. The remaining
increase was due to an increase in debt of $10.6 million resulting from acquisitions and
operating and capital expenditure needs.§
    
    Increase in workers compensation claims in the Transportation Infrastructure segment
over the prior year of approximately $0.2 million.§
    
    Total inventory markdowns of $0.2 million related to our Electronics Integration segment
for market price adjustments and obsolescence.
  Wireless Infrastructure
  Year endedAugust 31, 2006
    
    
    August 31, 2005
    
    
    August 31, 2004(Dollars in thousands)Net revenues
    
    $
    27,859
    
    
    
    100
    %
    
    $
    14,911
    
    
    
    100
    %
    
    $
    6,352
    
    
    
    100
    %Cost of revenues
    
    
    21,898
    
    
    
    78.6
    %
    
    
    11,597
    
    
    
    77.8
    %
    
    
    5,044
    
    
    
    79.4
    %Gross profit
    
    
    5,961
    
    
    
    21.4
    %
    
    
    3,314
    
    
    
    22.2
    %
    
    
    1,308
    
    
    
    20.6
    %Operating expensesSelling, general and administrative
    
    
    5,680
    
    
    
    20.4
    %
    
    
    3,496
    
    
    
    23.4
    %
    
    
    1,279
    
    
    
    20.1
    %Depreciation and amortization
    
    
    405
    
    
    
    1.5
    %
    
    
    202
    
    
    
    1.4
    %
    
    
    124
    
    
    
    2.0
    %Impairment loss of intangible assets
    
    
    
    
    
    
    0.0
    %
    
    
    219
    
    
    
    1.5
    %
    
    
    
    
    
    
    0.0
    %Total operating expenses
    
    
    6,085
    
    
    
    21.8
    %
    
    
    3,917
    
    
    
    26.3
    %
    
    
    1,403
    
    
    
    22.1
    %Segment operating income (loss)
    
    $
    (124
    )
    
    
    -0.4
    %
    
    $
    (603
    )
    
    
    -4.0
    %
    
    $
    (95
    )
    
    
    -1.5
    %
 Revenues
    25




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##### Table of Contents



Gross Profit
   Operating Income (Loss)
   Business Solutions
  Year endedAugust 31, 2006
    
    
    August 31, 2005
    
    
    August 31, 2004(Dollars in thousands)Net revenues
    
    $
    44,543
    
    
    
    100
    %
    
    $
    28,458
    
    
    
    100
    %
    
    $
    17,958
    
    
    
    100
    %Cost of revenues
    
    
    34,084
    
    
    
    76.5
    %
    
    
    21,646
    
    
    
    76.1
    %
    
    
    13,854
    
    
    
    77.1
    %Gross profit
    
    
    10,459
    
    
    
    23.5
    %
    
    
    6,812
    
    
    
    23.9
    %
    
    
    4,104
    
    
    
    22.9
    %Operating expensesSelling, general and administrative
    
    
    6,437
    
    
    
    14.5
    %
    
    
    4,107
    
    
    
    14.4
    %
    
    
    1,937
    
    
    
    10.8
    %Depreciation and amortization
    
    
    599
    
    
    
    1.3
    %
    
    
    336
    
    
    
    1.2
    %
    
    
    157
    
    
    
    0.9
    %Total operating expenses
    
    
    7,036
    
    
    
    15.8
    %
    
    
    4,443
    
    
    
    15.6
    %
    
    
    2,094
    
    
    
    11.7
    %Segment operating income (loss)
    
    $
    3,423
    
    
    
    7.7
    %
    
    $
    2,369
    
    
    
    8.3
    %
    
    $
    2,010
    
    
    
    11.2
    %
 Revenues
  26




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##### Table of Contents



Gross Profit
   Operating Income
   Transportation Infrastructure
  27




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##### Table of Contents



Year endedAugust 31, 2006
    
    
    August 31, 2005
    
    
    August 31, 2004(Dollars in thousands)Net revenues
    
    $
    57,931
    
    
    
    100
    %
    
    $
    46,549
    
    
    
    100
    %
    
    $
    17,539
    
    
    
    100
    %Cost of revenues
    
    
    51,137
    
    
    
    88.3
    %
    
    
    42,268
    
    
    
    90.8
    %
    
    
    14,803
    
    
    
    84.4
    %Gross profit
    
    
    6,794
    
    
    
    11.7
    %
    
    
    4,281
    
    
    
    9.2
    %
    
    
    2,736
    
    
    
    15.6
    %Operating expensesSelling, general and administrative
    
    
    3,340
    
    
    
    5.8
    %
    
    
    2,814
    
    
    
    6.0
    %
    
    
    945
    
    
    
    5.4
    %Depreciation and amortization
    
    
    484
    
    
    
    0.8
    %
    
    
    459
    
    
    
    1.0
    %
    
    
    201
    
    
    
    1.1
    %Total operating expenses
    
    
    3,824
    
    
    
    6.6
    %
    
    
    3,273
    
    
    
    7.0
    %
    
    
    1,146
    
    
    
    6.5
    %Segment operating income (loss)
    
    $
    2,970
    
    
    
    5.1
    %
    
    $
    1,008
    
    
    
    2.2
    %
    
    $
    1,590
    
    
    
    9.1
    %
 Revenues
   Gross Profit
   Operating Income
   28




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##### Table of Contents



Ultraviolet Technologies
  Year endedAugust 31, 2006
    
    
    August 31, 2005
    
    
    August 31, 2004(Dollars in thousands)Net revenues
    
    $
    12,437
    
    
    
    100
    %
    
    $
    10,771
    
    
    
    100
    %
    
    $
    10,526
    
    
    
    100
    %Cost of revenues
    
    
    7,177
    
    
    
    57.7
    %
    
    
    5,934
    
    
    
    55.1
    %
    
    
    5,602
    
    
    
    53.2
    %Gross profit
    
    
    5,260
    
    
    
    42.3
    %
    
    
    4,837
    
    
    
    44.9
    %
    
    
    4,924
    
    
    
    46.8
    %Operating expensesSelling, general and administrative
    
    
    4,175
    
    
    
    33.6
    %
    
    
    4,663
    
    
    
    43.3
    %
    
    
    4,035
    
    
    
    38.3
    %Depreciation and amortization
    
    
    418
    
    
    
    3.4
    %
    
    
    393
    
    
    
    3.6
    %
    
    
    420
    
    
    
    4.0
    %Total operating expenses
    
    
    4,593
    
    
    
    36.9
    %
    
    
    5,056
    
    
    
    46.9
    %
    
    
    4,455
    
    
    
    42.3
    %Segment operating income (loss)
    
    $
    667
    
    
    
    5.4
    %
    
    $
    (219
    )
    
    
    -2.0
    %
    
    $
    469
    
    
    
    4.5
    %
 Revenues
   Gross Profit
   Operating Income
  29




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##### Table of Contents



Electronics Integration
  Year endedAugust 31, 2006
    
    
    August 31, 2005
    
    
    August 31, 2004(Dollars in thousands)Net revenues
    
    $
    14,343
    
    
    
    100
    %
    
    $
    12,407
    
    
    
    100
    %
    
    $
    14,507
    
    
    
    100
    %Cost of revenues
    
    
    11,913
    
    
    
    83.1
    %
    
    
    10,626
    
    
    
    85.6
    %
    
    
    11,955
    
    
    
    82.4
    %Gross profit
    
    
    2,430
    
    
    
    16.9
    %
    
    
    1,781
    
    
    
    14.4
    %
    
    
    2,552
    
    
    
    17.6
    %Operating expensesSelling, general and administrative
    
    
    2,397
    
    
    
    16.7
    %
    
    
    2,243
    
    
    
    18.1
    %
    
    
    2,484
    
    
    
    17.1
    %Depreciation and amortization
    
    
    124
    
    
    
    0.9
    %
    
    
    216
    
    
    
    1.7
    %
    
    
    230
    
    
    
    1.6
    %Impairment loss of intangible assets
    
    
    
    
    
    
    0.0
    %
    
    
    417
    
    
    
    3.4
    %
    
    
    
    
    
    
    0.0
    %Total operating expenses
    
    
    2,521
    
    
    
    17.6
    %
    
    
    2,876
    
    
    
    23.2
    %
    
    
    2,714
    
    
    
    18.7
    %Segment operating income (loss)
    
    $
    (91
    )
    
    
    -0.6
    %
    
    $
    (1,095
    )
    
    
    -8.8
    %
    
    $
    (162
    )
    
    
    -1.1
    %
 Revenues
   Gross Profit
   30




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##### Table of Contents



Operating Income (Loss)
   Holding Company
 Operating Expense
   Interest Expense
   Income Taxes
  31




---



##### Table of Contents



Liquidity and Capital Resources
         32




---



##### Table of Contents



Cash Flows
    Contractual Obligations and Commercial Commitments
  Payments Due ByLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-2 years
    
    
    3-5 years
    
    
    5 yearsContractual obligation
    
    (Dollars in thousands)Debt and capital
lease obligations
    
    $
    31,167
    
    
    $
    3,488
    
    
    $
    13,640
    
    
    $
    6,039
    
    
    $
    8,000Operating lease (1)
    
    
    4,507
    
    
    
    1,882
    
    
    
    2,027
    
    
    
    447
    
    
    
    151Total
    
    $
    35,674
    
    
    $
    5,370
    
    
    $
    15,667
    
    
    $
    6,486
    
    
    $
    8,151
 
 (1)
    
    Operating leases represent the total future minimum lease payments.  Off Balance Sheet Arrangements
  Transactions with Related Parties
  33




---



##### Table of Contents



Guaranties
  Restricted Cash
  Payment and Performance Bonds
  Control Group
  34




---



##### Table of Contents



Critical Accounting Policies
   Revenue Recognition:
    35




---



##### Table of Contents



Valuation of Accounts Receivable and Inventory Reserves:
  36




---



##### Table of Contents



Goodwill and Other Intangible Assets:
    Impairment of Long-Lived Assets:
  Income Taxes:
  37




---



##### Table of Contents



Accrued Insurance and Workmens Compensation Reserves:
  New Accounting Policies:
     38




---



##### Table of Contents



Forward-Looking Statements:
  39




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    40




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 FORTUNE INDUSTRIES, INC.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm.
    
    
    42Consolidated Balance Sheets as of August 31, 2006 and 2005.
    
    
    43Consolidated Statements of Operations for the years ended August 31, 2006, 2005 and 2004
    
    
    45Consolidated Statements of Shareholders Equity for the years ended August 31, 2006,
2005 and 2004.
    
    
    46Consolidated Statements of Cash Flows for the years ended August 31, 2006, 2005 and 2004
    
    
    47Notes to Consolidated Financial Statements.
    
    
    49
 41




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Report of Independent Registered Public Accounting Firm
 
     
 42




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##### Table of Contents



FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
 August 31,
    
    
    August 31,2006
    
    
    2005ASSETSCURRENT ASSETSCash and equivalents
    
    $
    3,632
    
    
    $
    3,787Restricted cash
    
    
    3,462
    
    
    
    1,484Marketable securities (Note 3)
    
    
    1,281
    
    
    
    2,199Accounts receivable, net (Note 4)
    
    
    25,731
    
    
    
    21,358Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 5)
    
    
    4,500
    
    
    
    2,681Inventory, net (Note 6)
    
    
    6,761
    
    
    
    8,315Deferred tax asset (Note 11)
    
    
    1,535
    
    
    
    1,014Prepaid expenses and other current assets
    
    
    1,922
    
    
    
    1,790Total Current Assets
    
    
    48,824
    
    
    
    42,628OTHER ASSETSProperty, plant & equipment, net (Note 7)
    
    
    6,323
    
    
    
    5,064Goodwill (Note 8)
    
    
    11,984
    
    
    
    11,680Other intangible assets, net (Note 8)
    
    
    4,299
    
    
    
    4,705Long-term accounts receivable (Note 4)
    
    
    1,276
    
    
    
    600Other long-term assets
    
    
    1,579
    
    
    
    409Total Other Assets
    
    
    25,461
    
    
    
    22,458TOTAL ASSETS
    
    $
    74,285
    
    
    $
    65,086
 See Accompanying Notes to Consolidated Financial Statements
 43




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##### Table of Contents



FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
 August 31,
    
    
    August 31,2006
    
    
    2005LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESLine of credit (Note 9)
    
    $
    
    
    
    $
    18,998Current maturities of long-term debt (Note 9)
    
    
    2,124
    
    
    
    2,675Current maturities of convertible term note (Note 9)
    
    
    1,364
    
    
    
    Accounts payable
    
    
    9,324
    
    
    
    7,095Health and workers compensation reserves
    
    
    3,363
    
    
    
    4,000Accrued expenses
    
    
    5,449
    
    
    
    6,288Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 5)
    
    
    1,968
    
    
    
    2,101Other current liabilities
    
    
    1,849
    
    
    
    271Total Current Liabilities
    
    
    25,441
    
    
    
    41,428LONG-TERM LIABILITIES (NOTE 9)Line of credit
    
    
    3,330
    
    
    
    Long-term debt, less current maturities
    
    
    18,213
    
    
    
    4,898Convertible term note
    
    
    6,136
    
    
    
    Line of credit  related party
    
    
    
    
    
    
    6,618Other long-term liabilities
    
    
    215
    
    
    
    69Total Long-Term Liabilities
    
    
    27,894
    
    
    
    11,585Total Liabilities
    
    
    53,335
    
    
    
    53,013COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY (NOTE 13)Common stock, $0.10 par value; 150,000,000 authorized;
10,522,722 and 10,559,843 issued and outstanding at
August 31, 2006 and August 31, 2005, respectively
    
    
    1,053
    
    
    
    1,046Preferred stock, $0.10 par value; 1,000,000 authorized;
66,180 and 0 issued and outstanding at August 31, 2006
and August 31, 2005, respectively
    
    
    6,618
    
    
    
    Additional paid-in capital and warrants outstanding (Note 12)
    
    
    17,633
    
    
    
    17,340Accumulated deficit
    
    
    (4,518
    )
    
    
    (6,406
    )Accumulated other comprehensive income
    
    
    164
    
    
    
    93Total Shareholders Equity
    
    
    20,950
    
    
    
    12,073TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    74,285
    
    
    $
    65,086
 See Accompanying Notes to Consolidated Financial Statements
 44




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##### Table of Contents



FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 Year endedAugust 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2004REVENUESService revenues
    
    $
    57,354
    
    
    $
    39,809
    
    
    $
    24,310Product revenues
    
    
    99,759
    
    
    
    73,287
    
    
    
    42,572TOTAL REVENUES
    
    
    157,113
    
    
    
    113,096
    
    
    
    66,882COST OF REVENUESService cost of revenues
    
    
    43,184
    
    
    
    30,702
    
    
    
    19,076Product cost of revenues
    
    
    83,025
    
    
    
    61,369
    
    
    
    32,182TOTAL COST OF REVENUES
    
    
    126,209
    
    
    
    92,071
    
    
    
    51,258GROSS PROFIT
    
    
    30,904
    
    
    
    21,025
    
    
    
    15,624OPERATING EXPENSESSelling, general and administrative expenses
    
    
    24,985
    
    
    
    19,685
    
    
    
    11,912Depreciation and amortization
    
    
    2,269
    
    
    
    1,709
    
    
    
    1,164Impairment on intangible assets (Note 8)
    
    
    
    
    
    
    636
    
    
    
    Total Operating Expenses
    
    
    27,254
    
    
    
    22,030
    
    
    
    13,076OPERATING INCOME (LOSS)
    
    
    3,650
    
    
    
    (1,005
    )
    
    
    2,548OTHER INCOME (EXPENSE)Interest income
    
    
    346
    
    
    
    61
    
    
    
    Interest expense
    
    
    (2,483
    )
    
    
    (1,445
    )
    
    
    (620
    )Gain (loss) on investments in marketable securities, net (Note 3)
    
    
    (7
    )
    
    
    (40
    )
    
    
    36Exchange rate gain (loss)
    
    
    5
    
    
    
    
    
    
    
    (34
    )Other income
    
    
    285
    
    
    
    194
    
    
    
    19Total Other Income (Expense)
    
    
    (1,854
    )
    
    
    (1,230
    )
    
    
    (599
    )INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
    
    
    1,796
    
    
    
    (2,235
    )
    
    
    1,949Provision (Benefit) for income taxes (Note 11)
    
    
    (423
    )
    
    
    82
    
    
    
    (453
    )NET INCOME (LOSS)
    
    
    2,219
    
    
    
    (2,317
    )
    
    
    2,402Preferred stock dividends
    
    
    331
    
    
    
    
    
    
    
    NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    1,888
    
    
    $
    (2,317
    )
    
    $
    2,402BASIC INCOME (LOSS) PER COMMON SHARE
    
    $
    0.18
    
    
    $
    (0.22
    )
    
    $
    0.23Basic weighted average shares outstanding
    
    
    10,582,203
    
    
    
    10,495,794
    
    
    
    10,208,544DILUTED INCOME (LOSS) PER COMMON SHARE
    
    $
    0.16
    
    
    $
    (0.22
    )
    
    $
    0.23Diluted weighted average shares outstanding
    
    
    11,845,284
    
    
    
    10,500,794
    
    
    
    10,248,544
 See Accompanying Notes to Consolidated Financial Statements
 45




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##### Table of Contents



FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(DOLLARS IN THOUSANDS)
 Additional
    
    
    
    
    
    
    AccumulatedPaid-in Capital
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Preferred
    
    
    and Warrants
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    ComprehensiveStock
    
    
    Stock
    
    
    Outstanding
    
    
    Deficit
    
    
    Income
    
    
    Equity
    
    
    IncomeBALANCE AT AUGUST 31, 2003
    
    $
    802
    
    
    $
    
    
    
    $
    11,406
    
    
    $
    (6,491
    )
    
    $
    (63
    )
    
    $
    5,654
    
    
    $
    52Issuance of 1,370,000 shares of common
stock for acquisitions
    
    
    137
    
    
    
    
    
    
    
    4,329
    
    
    
    
    
    
    
    
    
    
    
    4,466
    
    
    $
    Reclassification of temporary equity to
permanent equity
    
    
    80
    
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    480
    
    
    
    Reclassification of permanent equity to
temporary equity
    
    
    (11
    )
    
    
    
    
    
    
    (242
    )
    
    
    
    
    
    
    
    
    
    
    (253
    )
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,402
    
    
    
    
    
    
    
    2,402
    
    
    
    2,402Foreign currency translation
adjustments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208
    
    
    
    208
    
    
    
    208Unrealized gains (losses) on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126
    )
    
    
    (126
    )
    
    
    (126
    )Reclassification adjustments for realized
gains & losses included in net income,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )
    
    
    (13
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,523BALANCE AT AUGUST 31, 2004
    
    $
    1,008
    
    
    $
    
    
    
    $
    15,893
    
    
    $
    (4,089
    )
    
    $
    6
    
    
    $
    12,818Issuance of 223,450 shares of common
stock for acquisitions
    
    
    23
    
    
    
    
    
    
    
    1,012
    
    
    
    
    
    
    
    
    
    
    
    1,035
    
    
    $
    Exercise of stock options
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Reclassification of 80,000 shares of common
stock for contingency settlements
    
    
    8
    
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    Other stock compensation
    
    
    5
    
    
    
    
    
    
    
    259
    
    
    
    
    
    
    
    
    
    
    
    264
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,317
    )
    
    
    
    
    
    
    (2,317
    )
    
    
    (2,317
    )Foreign currency translation
adjustments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (17
    )
    
    
    (17
    )Unrealized gains (losses) on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    64
    
    
    
    64Reclassification adjustments for realized
gains & losses included in net income,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    40
    
    
    
    40Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,230
    )BALANCE AT AUGUST 31, 2005
    
    $
    1,046
    
    
    $
    
    
    
    $
    17,340
    
    
    $
    (6,406
    )
    
    $
    93
    
    
    $
    12,073Issuance of 64,459 shares of common
stock for acquisitions
    
    
    7
    
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    $
    Retirement of 101,580 shares of common
stock
    
    
    (2
    )
    
    
    
    
    
    
    (98
    )
    
    
    
    
    
    
    
    
    
    
    (100
    )
    
    
    Issuance of 66,180 shares of preferred
stock
    
    
    
    
    
    
    6,618
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,618
    
    
    
    Stock compensation
    
    
    2
    
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,219
    
    
    
    
    
    
    
    2,219
    
    
    
    2,219Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (331
    )
    
    
    
    
    
    
    (331
    )
    
    
    Foreign currency translation
adjustments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    80
    
    
    
    80Unrealized gains (losses) on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (16
    )
    
    
    (16
    )Reclassification adjustments for realized
gains & losses included in net income,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    7
    
    
    
    7Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,290BALANCE AT AUGUST 31, 2006
    
    $
    1,053
    
    
    $
    6,618
    
    
    $
    17,633
    
    
    $
    (4,518
    )
    
    $
    164
    
    
    $
    20,950
 See Accompanying Notes to Consolidated Financial Statements
 46




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FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
 Year EndedAugust 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet Income (Loss)
    
    $
    2,219
    
    
    $
    (2,317
    )
    
    $
    2,402Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    2,269
    
    
    
    2,301
    
    
    
    1,164Stock based compensation
    
    
    100
    
    
    
    264
    
    
    
    (Gain) Loss on sale of investments
    
    
    7
    
    
    
    40
    
    
    
    (36
    )Loss on disposal of fixed assets
    
    
    
    
    
    
    5
    
    
    
    122Deferred income taxes
    
    
    (521
    )
    
    
    
    
    
    
    (625
    )Changes in certain operating assets and liabilities:Restricted cash
    
    
    (1,978
    )
    
    
    (987
    )
    
    
    Accounts receivable, net
    
    
    (4,277
    )
    
    
    (4,792
    )
    
    
    (2,338
    )Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    (1,819
    )
    
    
    (802
    )
    
    
    763Inventory, net
    
    
    1,567
    
    
    
    1,537
    
    
    
    (1,913
    )Prepaid assets and other current assets
    
    
    (130
    )
    
    
    29
    
    
    
    (11
    )Other long-term assets
    
    
    (809
    )
    
    
    (830
    )
    
    
    (24
    )Accounts payable
    
    
    2,181
    
    
    
    1,109
    
    
    
    623Health and workers compensation reserves
    
    
    (637
    )
    
    
    (457
    )
    
    
    479Accrued expenses and other current liabilities
    
    
    727
    
    
    
    (548
    )
    
    
    (350
    )Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    (133
    )
    
    
    189
    
    
    
    252Net Cash Provided by (Used in) Operating Activities
    
    
    (1,234
    )
    
    
    (5,259
    )
    
    
    508CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (2,754
    )
    
    
    (1,932
    )
    
    
    (961
    )Purchases of marketable securities
    
    
    (204
    )
    
    
    (176
    )
    
    
    (2,435
    )Proceeds from sale of marketable securities
    
    
    1,050
    
    
    
    
    
    
    
    689Proceeds from sale of certificates of deposits
    
    
    
    
    
    
    
    
    
    
    24Acquisition of productive assets and businesses
    
    
    (502
    )
    
    
    (2,758
    )
    
    
    (8,605
    )Net Cash Used in Investing Activities
    
    
    (2,410
    )
    
    
    (4,866
    )
    
    
    (11,288
    )CASH FLOWS FROM FINANCING ACTIVITIESNet borrowings (payments) under line of credit
    
    
    (15,668
    )
    
    
    11,050
    
    
    
    6,910Borrowings on short-term debt  related party
    
    
    
    
    
    
    800
    
    
    
    Payments on short-term debt  related party
    
    
    
    
    
    
    (827
    )
    
    
    Borrowings on long-term debt
    
    
    20,000
    
    
    
    1,880
    
    
    
    8,665Borrowings on long-term debt  related party
    
    
    
    
    
    
    
    
    
    
    4,308Payments on long-term debt
    
    
    (7,236
    )
    
    
    (2,496
    )
    
    
    (6,473
    )Debt issuance costs
    
    
    (856
    )
    
    
    
    
    
    
    Borrowings from convertible debentures
    
    
    7,500
    
    
    
    
    
    
    
    Dividends on preferred stock
    
    
    (331
    )
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    (5
    )
    
    
    (201
    )Net Cash Provided by Financing Activities
    
    
    3,409
    
    
    
    10,402
    
    
    
    13,209Effect of exchange rate changes on cash
    
    
    80
    
    
    
    (17
    )
    
    
    213NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    
    
    (155
    )
    
    
    260
    
    
    
    2,642CASH AND EQUIVALENTSBeginning of Period
    
    
    3,787
    
    
    
    3,527
    
    
    
    885End of Period
    
    $
    3,632
    
    
    $
    3,787
    
    
    $
    3,527
 See Accompanying Notes to Consolidated Financial Statements.
 47




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FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
 Year EndedAugust 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2004SUPPLEMENTAL DISCLOSURESInterest paid
    
    $
    2,431
    
    
    $
    1,398
    
    
    $
    536Income taxes paid
    
    $
    85
    
    
    $
    116
    
    
    $
    Unrealized net gain (loss) on marketable securities
    
    $
    (16
    )
    
    $
    22
    
    
    $
    126Non-cash investing and financing activities:Issuance of preferred stock for debt extinguishment
    
    $
    6,618Issuance of warrants in connection with loan refinancing
    
    
    200$
    6,818Acquisitions (See Note 2)Cash and equivalents
    
    $
    15
    
    
    $
    2,704
    
    
    $
    4,496Restricted savings account
    
    
    
    
    
    
    
    
    
    
    246Accounts receivable
    
    
    96
    
    
    
    672
    
    
    
    8,933Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    
    
    
    
    
    
    
    
    6,842Inventory
    
    
    13
    
    
    
    106
    
    
    
    1,777Prepaid expenses and other current assets
    
    
    2
    
    
    
    1,303
    
    
    
    147Other non-current assets
    
    
    1
    
    
    
    195
    
    
    
    431Accounts payable
    
    
    (48
    )
    
    
    (1,290
    )
    
    
    (2,747
    )Accrued expenses and other current liabilities
    
    
    (12
    )
    
    
    (4,121
    )
    
    
    (2,857
    )Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    
    
    
    
    
    
    
    
    (1,661
    )Health and workers compensation reserves
    
    
    
    
    
    
    
    
    
    
    (3,271
    )Vehicles, equipment and leasehold improvements
    
    
    77
    
    
    
    
    
    
    
    1,347Goodwill and other intangible assets
    
    
    658
    
    
    
    4,982
    
    
    
    4,831802
    
    
    
    4,551
    
    
    
    18,514Common stock consideration
    
    
    300
    
    
    
    1,039
    
    
    
    4,364Cash paid
    
    $
    502
    
    
    $
    3,512
    
    
    $
    14,150
 See Accompanying Notes to Consolidated Financial Statements.
 48




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##### Table of Contents



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
  Principles of Consolidation:
 Foreign Currency Translation:
 Comprehensive Income (Loss):
 Estimates:
  Revenue and Cost Recognition:
 49




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##### Table of Contents



50




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##### Table of Contents



Cash and Equivalents:
 Restricted Cash:
 Marketable Securities:
 Accounts Receivable:
 Inventories:
 Shipping and Handling:
 Property, Plant, Equipment, and Depreciation:
 51




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##### Table of Contents



Goodwill and Other Indefinite-Lived Intangible Assets:
  Long-lived Assets:
 Fair Value of Financial Instruments:
 Stock-based Compensation:
 Income per Common Share:
  52




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##### Table of Contents



Income Taxes:
 Research and Development Costs:
 Advertising Costs:
 Warrants Issued With Convertible Debt:
  Self-Funded Insurance:
  Workers
Compensation:
 New Accounting Pronouncements:
     53




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##### Table of Contents



NOTE 2  ACQUISITIONS AND PRO FORMA FINANCIAL STATEMENTS
 Acquisitions
  54




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##### Table of Contents



Audio  Video Revolution, Inc. (Electronics Integration segment)
   Inventory, net
    
    $
    13Property, Plant and equipment, net
    
    
    59Goodwill
    
    
    130$
    202Cash consideration
    
    $
    202$
    202
  CSM, Inc. (Business Solutions segment)
     Cash
    
    $
    2,704Accounts receivable, net
    
    
    302Prepaid expenses and other current assets
    
    
    1,290Property and equipment
    
    
    132Goodwill
    
    
    707Intangible assets
    
    
    3,1008,235
 55




---



##### Table of Contents



Accounts payable
    
    
    1,146Other accrued liabilities
    
    
    2,257Deferred revenue
    
    
    1,361Other current liabilities
    
    
    1714,935$
    3,300Cash consideration
    
    $
    2,700Fair value of common stock consideration
    
    
    600$
    3,300
  James H. Drew Corporation (Transportation Infrastructure segment)
     Contracts receivable, net
    
    
    8,277Cost and estimated earnings in excess of billings
    
    
    6,842Inventory, net
    
    
    1,777Prepaid expenses
    
    
    23Deferred tax asset
    
    
    389Property and equipment
    
    
    1,327Acquired goodwill
    
    
    15218,787Accounts payable
    
    
    2,628Accrued expenses and other current liabilities
    
    
    914Billings in excess of costs and estimated earnings
    
    
    1,6615,203$
    13,584Cash consideration
    
    $
    13,150Fair value of common stock consideration
    
    
    434$
    13,584
 56




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##### Table of Contents



Professional Staff Management, Inc. (Business Solutions segment)
     Cash and cash equivalents
    
    $
    4,496Restricted savings account
    
    
    246Accounts receivable, net
    
    
    656Interest receivable
    
    
    3Prepaid expense
    
    
    121Property and equipment, net
    
    
    20Other assets
    
    
    42Goodwill
    
    
    3,580Customer list
    
    
    700Non-Compete agreement
    
    
    39910,263Current maturities of notes payable
    
    
    4Accounts payable
    
    
    119Payroll taxes and withholdings
    
    
    525Accrued worksite employee payroll cost
    
    
    240Health and workers compensation reserves
    
    
    3,271Other accrued compensation
    
    
    545Due to shareholder
    
    
    7Customer deposits
    
    
    106Other accrued liabilities
    
    
    5165,333$
    4,930Cash consideration
    
    $
    1,000Fair value of common stock consideration
    
    
    3,930$
    4,930
 Pro Forma Financial Statements
  57




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##### Table of Contents



Year endedAugust 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2004Net revenue
    
    $
    157,343
    
    
    $
    123,195
    
    
    $
    112,129Operating income (loss)
    
    $
    3,650
    
    
    $
    (1,616
    )
    
    $
    3,496Net income (loss) available to common shareholders
    
    $
    1,888
    
    
    $
    (2,938
    )
    
    $
    2,373Basic income (loss) per common share
    
    $
    0.18
    
    
    $
    (0.28
    )
    
    $
    0.23Diluted income (loss) per common share
    
    $
    0.16
    
    
    $
    (0.28
    )
    
    $
    0.23
 NOTE 3  INVESTMENTS IN MARKETABLE EQUITY SECURITIES
  August 31,
    
    
    August 31,2006
    
    
    2005Amortized cost
    
    $
    1,310
    
    
    $
    2,221Net unrealized loss
    
    
    (16
    )
    
    
    (22
    )Estimated fair value
    
    $
    1,281
    
    
    $
    2,199
  NOTE 4  ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE
  August 31,
    
    
    August 31,2006
    
    
    2005Accounts receivable
    
    $
    13,856
    
    
    $
    16,178Contracts receivable:Progress billing
    
    
    11,683
    
    
    
    5,075Retainages
    
    
    1,606
    
    
    
    1,75227,145
    
    
    
    23,005Less allowance for doubtful accounts and sales returns
    
    
    (1,414
    )
    
    
    (1,647
    )$
    25,731
    
    
    $
    21,358Long-term accounts receivable
    
    $
    1,276
    
    
    $
    600
 58




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##### Table of Contents



NOTE 5  CONTRACTS IN PROGRESS
  August 31,
    
    
    August 31,2006
    
    
    2005Costs incurred on uncompleted contracts
    
    $
    36,700
    
    
    $
    25,744Estimated earnings recognized to date on uncompleted contracts
    
    
    7,416
    
    
    
    5,41244,116
    
    
    
    31,156Less billings on uncompleted contracts
    
    
    (41,584
    )
    
    
    (30,576
    )$
    2,532
    
    
    $
    580
  August 31,
    
    
    August 31,2006
    
    
    2005Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    4,500
    
    
    $
    2,681Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    1,968
    
    
    
    2,101$
    2,532
    
    
    $
    580
 NOTE 6  INVENTORY
  August 31,
    
    
    August 31,2006
    
    
    2005Raw materials
    
    $
    698
    
    
    $
    757Work-in-process
    
    
    72
    
    
    
    39Finished goods
    
    
    6,259
    
    
    
    7,8967,029
    
    
    
    8,692Less inventory reserve
    
    
    (268
    )
    
    
    (377
    )$
    6,761
    
    
    $
    8,315
 59




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##### Table of Contents



NOTE 7  PROPERTY AND EQUIPMENT
  August 31,
    
    
    August 31,2006
    
    
    2005Land and building
    
    $
    1,891
    
    
    $
    1,951Machinery and equipment
    
    
    6,934
    
    
    
    5,615Research equipment
    
    
    389
    
    
    
    420Office equipment
    
    
    4,857
    
    
    
    4,131Vehicles
    
    
    3,633
    
    
    
    3,067Leasehold improvements
    
    
    316
    
    
    
    14518,020
    
    
    
    15,329Less accumulated depreciation
    
    
    (11,697
    )
    
    
    (10,265
    )$
    6,323
    
    
    $
    5,064
  NOTE 8  GOODWILL AND OTHER INTANGIBLE ASSETS
  Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    SegmentInfrastructure
    
    
    Solutions
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    TotalsGoodwill at August
31, 2005
    
    $
    1,189
    
    
    $
    4,287
    
    
    $
    152
    
    
    $
    4,694
    
    
    $
    1,358
    
    
    $
    11,680Goodwill acquired
    
    
    308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    438Goodwill adjustment
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )Goodwill at August
31, 2006
    
    $
    1,497
    
    
    $
    4,153
    
    
    $
    152
    
    
    $
    4,694
    
    
    $
    1,488
    
    
    $
    11,984
   August 31, 2006Gross
    
    
    
    
    
    
    
    
    
    
    Weighted AverageCarrying
    
    
    Accumulated
    
    
    Net Book
    
    
    AmortizationAmount
    
    
    Amortization
    
    
    Value
    
    
    Period (in years)Customer relationships
    
    $
    3,342
    
    
    $
    675
    
    
    $
    2,667
    
    
    
    10Non-compete
    
    
    200
    
    
    
    38
    
    
    
    162
    
    
    
    10Non-compete
    
    
    1,229
    
    
    
    468
    
    
    
    761
    
    
    
    5Non-compete
    
    
    200
    
    
    
    81
    
    
    
    119
    
    
    
    3Total
    
    
    4,971
    
    
    
    1,262
    
    
    
    3,709
    
    
    
    8Tradename (not
subject to
amortization)
    
    
    590
    
    
    
    
    
    
    
    590Total
    
    $
    5,561
    
    
    $
    1,262
    
    
    $
    4,299
 60




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##### Table of Contents



August 31, 2005Gross
    
    
    
    
    
    
    
    
    
    
    Weighted AverageCarrying
    
    
    Accumulated
    
    
    Net Book
    
    
    AmortizationAmount
    
    
    Amortization
    
    
    Value
    
    
    Period (in years)Customer relationships
    
    $
    3,222
    
    
    $
    352
    
    
    $
    2,870
    
    
    
    10Non-compete
    
    
    200
    
    
    
    18
    
    
    
    182
    
    
    
    10Non-compete
    
    
    1,229
    
    
    
    222
    
    
    
    1,007
    
    
    
    5Non-compete
    
    
    100
    
    
    
    44
    
    
    
    56
    
    
    
    3Total
    
    
    4,751
    
    
    
    636
    
    
    
    4,115
    
    
    
    8Tradename (not
subject to
amortization)
    
    
    590
    
    
    
    
    
    
    
    590Total
    
    $
    5,341
    
    
    $
    636
    
    
    $
    4,705
    
    
    
    
    2007
    
    $
    6432008
    
    
    6272009
    
    
    6372010
    
    
    3742011
    
    
    3712012 and thereafter
    
    
    1,057Total
    
    $
    3,709
 NOTE 9  DEBT ARRANGEMENTS
  August 31,
    
    
    August 31,2006
    
    
    2005Notes payable:Revolving line of
credit promissory note
due August 31, 2008.
Interest at LIBOR plus
1.75% or 1.50% upon
achievement of certain
financial performance
criteria. The loan is
secured by the
business assets of the
Company.
    
    $
    3,330
    
    
    $
    
 61




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##### Table of Contents



August 31,
    
    
    August 31,2006
    
    
    2005Term loan note due in
monthly installments
of $167 plus interest
at LIBOR plus 1.75% or
1.50% upon achievement
of certain financial
performance criteria
through maturity date,
August 31, 2011. The
loan is secured by the
business assets of the
Company and personal
guarantees of the
Companys two majority
shareholders.
    
    
    20,000
    
    
    
    Revolving line of
credit promissory note
due August 31, 2006.
Interest at .5% less
than the credit
facilitys Prime Rate.
The loan is secured
by the business assets
of the Company, with a
second lien on assets
pledged by the
Companys majority
shareholder.
    
    
    
    
    
    
    18,998Various term notes due
in monthly
installments totaling
$211 plus interest at
..5% less than the
credit facilitys
Prime Rate through
maturity dates between
April 30, 2007 and
July 15, 2009. The
loans were secured by
the business assets of
the Company, with a
second lien on assets
pledged by the
Companys majority
shareholder.
    
    
    
    
    
    
    7,113Various term notes due
in monthly
installments of $6,
including interest at
ranges from 4.9% to
9.03% through April
2010. The loans are
secured by vehicles
and equipment.
    
    
    173
    
    
    
    233Convertible Term Note:Convertible term note
due in monthly
installments of $227
plus interest at the
Prime Rate plus 3.0%
(subject to
adjustments as
described below)
through maturity date,
November 30, 2008.
The loan is guaranteed
by the
Companys two majority
shareholders.
    
    
    7,500
    
    
    
    Debt with shareholder:Unsecured revolving
line of credit
promissory note with
the Companys majority
shareholder due May 1,
2007. Interest at
LIBOR plus 3.0%.
    
    
    
    
    
    
    6,618Term note due in
monthly installments
of $3 including
interest at 4.0%
through September
2008. The loan is
secured by vehicles
and equipment.
    
    
    63
    
    
    
    94Capital leases:Various notes due in
monthly installments
of $5 including
interest at ranges
from 2.3% to 11.6%
through June 2010. The
loans are secured by
computers and
equipment.
    
    
    101
    
    
    
    133Total debt
    
    
    31,167
    
    
    
    33,189Less current maturities
    
    
    (3,488
    )
    
    
    (21,673
    )Long-term portion of outstanding debt
    
    $
    27,679
    
    
    $
    11,516
 62




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##### Table of Contents



2007
    
    $
    3,4882008
    
    
    8,1662009
    
    
    5,4742010
    
    
    2,0392011
    
    
    2,0002012 and thereafter
    
    
    10,000$
    31,167
 Credit Facility Loan and Security Agreement
   Cancellation of Line of Credit  Related Party
  Convertible Term Note
   
    
    the average closing price of the Companys common stock as reported by
Bloomberg, L.P. for the five trading days immediately preceding the
repayment date is greater than or equal to 109% of the conversion
price of the Note, set in the Note at $5.50 per share (based upon the
conversion price of $5.50, the average closing price required would be
$6.00);
 63




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##### Table of Contents




    
    the total value of the shares converted cannot exceed 25% of the
aggregate dollar trading volume of the Companys common stock for the
previous twenty-two trading days;
    
    there must be an effective registration statement covering the shares
of the Companys common stock into which the principal and interest
under the Note are convertible or an exemption from registration for
resale must be available pursuant to Rule 144 of the Securities Act;
and
    
    there must be no event of default existing under the Note that has not
been cured or is otherwise waived in writing by Laurus at Laurus
option.
   
    
    a failure to make payments under the Note when due;
    
    a material breach of the transaction documents by the Company;
    
    bankruptcy related events;
    
    a change of control transaction without prior approval; and
    
    events of default under certain other agreements to which the Company is a party.
   
    
    Laurus may not convert the Note or exercise the Laurus Warrant for a
number of shares that would cause all shares then held by Laurus to
exceed 4.99% of the Companys outstanding shares of common stock
unless there has been an event of default or Laurus provides the
Company with seventy-five days prior notice.
    
    Laurus agreed that it would not acquire in aggregate more than
2,108,764 shares of common stock through the conversion of the Note or
the Laurus Warrant or through any agreement related thereto unless the
Companys shareholders approved such issuance.
  64




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##### Table of Contents



NOTE 10  RETIREMENT PLAN
   NOTE 11  INCOME TAXES
  August 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2004Tax at U.S. Federal statutory rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State and local taxes, net of federal benefit
    
    
    5.6
    
    
    
    5.6
    
    
    
    5.8Other
    
    
    
    
    
    
    
    
    
    
    1.4Change in valuation allowance
    
    
    (78.6
    )
    
    
    (39.6
    )
    
    
    (73.3
    )(39.0
    )%
    
    
    0.0
    %
    
    
    (32.1
    )%
  Year EndedAugust 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    753
    
    
    $
    (41
    )
    
    $
    690State
    
    
    124
    
    
    
    72
    
    
    
    172877
    
    
    
    31
    
    
    
    862Deferred:Federal
    
    
    (328
    )
    
    
    (567
    )
    
    
    (55
    )State
    
    
    (54
    )
    
    
    (318
    )
    
    
    (3
    )(382
    )
    
    
    (885
    )
    
    
    (58
    )Change in valuation allowance
    
    
    (920
    )
    
    
    936
    
    
    
    (1,257
    )Net income tax (benefit)
    
    $
    (423
    )
    
    $
    82
    
    
    $
    (453
    )
 65




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##### Table of Contents



August 31,
    
    
    August 31,2006
    
    
    2005Current:Allowances for doubtful accounts and inventory
    
    $
    596
    
    
    $
    850Accrued liabilities and other
    
    
    900
    
    
    
    524Noncurrent:Amortization of covenants
    
    
    (84
    )
    
    
    304Depreciation
    
    
    (233
    )
    
    
    (91
    )Net operating losses and other carryforwards
    
    
    2,467
    
    
    
    2,4583,646
    
    
    
    4,045Valuation allowance
    
    
    (2,111
    )
    
    
    (3,031
    )Total deferred tax assets
    
    $
    1,535
    
    
    $
    1,014
  NOTE
12  EQUITY INCENTIVE PLANS AND OTHER STOCK COMPENSATION
 Restricted Share Units
   Warrants
  66




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##### Table of Contents



NOTE 13  SHAREHOLDERS EQUITY
 Common Stock
  Number of SharesAuthorized
    
    
    Issued
    
    
    Outstanding
    
    
    AmountAugust 31, 2006Common stock, $0.10 par value
    
    
    150,000,000
    
    
    
    10,522,722
    
    
    
    10,522,722
    
    
    $
    1,053August 31, 2005Common stock, $0.10 par value
    
    
    150,000,000
    
    
    
    10,559,843
    
    
    
    10,559,843
    
    
    $
    1,046
   Preferred Stock
  Number of SharesAuthorized
    
    
    Issued
    
    
    Outstanding
    
    
    AmountAugust 31, 2006Preferred stock, $0.10 par value
    
    
    1,000,000
    
    
    
    66,180
    
    
    
    66,180
    
    
    $
    6,618August 31, 2005Preferred stock, $0.10 par value
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    $
    
  67




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##### Table of Contents



NOTE 14  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
  Reclassification ofUnrealized Gains
    
    
    Realized Gains
    
    
    Accumulated OtherForeign Currency
    
    
    (Losses) on
    
    
    (Losses) included in
    
    
    Comprehensive IncomeAdjustments
    
    
    Securities
    
    
    Net Income
    
    
    (Loss)Balance at August 31, 2004
    
    $
    132
    
    
    $
    (113
    )
    
    $
    (13
    )
    
    $
    6Period change
    
    
    (17
    )
    
    
    64
    
    
    
    40
    
    
    
    87Balance at August 31, 2005
    
    
    115
    
    
    
    (49
    )
    
    
    27
    
    
    
    93Period change
    
    
    80
    
    
    
    (16
    )
    
    
    7
    
    
    
    71Balance at August 31, 2006
    
    $
    195
    
    
    $
    (65
    )
    
    $
    34
    
    
    $
    164
  NOTE 15  PER SHARE DATA
  Year EndedAugust 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2004Net Income (Loss) Available to Common Shareholders
    
    $
    1,888
    
    
    $
    (2,317
    )
    
    $
    2,402Basic Income (Loss) Per Common Share
    
    $
    0.18
    
    
    $
    (0.22
    )
    
    $
    0.23Basic weighted average number of common shares outstanding
    
    
    10,582,203
    
    
    
    10,495,794
    
    
    
    10,208,544Diluted Income (Loss) Per Common Share:
    
    $
    0.16
    
    
    $
    (0.22
    )
    
    $
    0.23Diluted weighted average number of common shares outstanding
    
    
    11,845,284
    
    
    
    10,500,794
    
    
    
    10,248,544
  68




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##### Table of Contents



NOTE 16  OPERATING LEASE COMMITMENTS
 Property Lease Commitments
 Segment
    
    Location(s)
    
    DescriptionCorporate and various
Wireless Infrastructure &
Electronics Integration
subsidiaries
    
    Indianapolis, IN (1)
    
    Corporate offices, various subsidiary offices
and warehouse facilitiesWireless Infrastructure
    
    Columbus, OH (2); Cleveland, OH, Kansas City, MO,
Atlanta, GA, and Richmond, VA metropolitan areas (3);
Ft. Wayne, IN (4)
    
    Offices, warehouse facilitiesBusiness Solutions
    
    Richmond, IN (5); Indianapolis, IN (6); Brentwood, TN (7)
    
    OfficesTransportation Infrastructure
    
    Indianapolis, IN, Sedalia, MO, Knoxville, TN (8)
    
    Offices, equipment yard, warehouse, storageUltraviolet Technologies
    
    Crawfordsville, IN (9); United Kingdom, Singapore,
Shenzhen, China and GuangDong, China (10); Atlanta, GA
(11)
    
    Offices, warehouse and manufacturing facilitiesElectronics Integration
    
    Avon, IN (12)
    
    Showroom
 
 (1)
    
    The leases on these properties are with a limited liability company owned by the
Companys two majority shareholders. The operating lease agreement provides for monthly
base rent of $42 per month for office and warehouse facilities through February 2009,
adjusted annually to fair market value. The agreement also includes a one year renewal
option. The lease is an Absolute Triple Net Lease which provides for the lessee to pay
most expenses related to the building including repairs and maintenance, insurance, and
property taxes.(2)
    
    The leases on these properties are with a limited liability company owned by the
Companys two majority shareholders. The operating lease agreement provides for monthly
base rent of $4 through April 30, 2011, adjusted annually to fair market value. The
agreement also includes a one year renewal option. The lease is an Absolute Triple Net
Lease which provides for the lessee to pay most expenses related to the building including
repairs and maintenance, insurance, and property taxes.(3)
    
    The Company maintains various operating lease agreements that provide for monthly base
rents between $3 and $8 that expire between April 1, 2007 and April 30, 2011 and may be
adjusted annually to fair market value or to increases defined in the agreements. The
agreements include various multi-year renewal options and the lessee pays most expenses
related to the building including repairs and maintenance, insurance, and property taxes.(4)
    
    The Company maintains a sublease obligation that provides for monthly base rent of $3
through December 31, 2010 and may be adjusted annually to fair market value or to increases
defined in the agreement. The agreement includes a one year renewal option and the lessee
pays most expenses related to the building including repairs and maintenance, insurance,
and property taxes.(5)
    
    The lease on this property is with the former Chief Operating Officer of the Company.
The operating lease agreement provides for monthly base rent of $4 through May 30, 2008,
with nominal annual increases. The agreement also includes a one year renewal option.(6)
    
    The Company maintains a sublease obligation that provides for monthly base rent of $5
through December 31, 2008 and may be adjusted annually to fair market value or to increases
defined in the agreement. The lessee pays most expenses related to the building including
repairs and maintenance, insurance, and property taxes. There is no renewal option.(7)
    
    The Company maintains an operating lease agreement that provides for monthly base rent
of $10 through January 31, 2009. 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.(8)
    
    The leases on these properties are with a limited liability company owned by the
Companys two majority shareholders. The operating lease agreement provides for monthly
base rent of $15 through April 30, 2009, adjusted annually to fair market value. The
agreement also includes a one year renewal option. The lease is an Absolute Triple Net
Lease which provides for the lessee to pay most expenses related to the buildings
including repairs and maintenance, insurance, and property taxes. 69




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##### Table of Contents



(9)
    
    The leases on these properties are with a limited liability company owned by the
Companys two majority shareholders. The operating lease agreement provides for monthly
base rent of $7 through August 31, 2009, adjusted annually to fair market value. The
Agreement also includes one renewal option.(10)
    
    The Company maintains various operating leases in the United Kingdom, Singapore and
China providing for monthly base rent of approximately $18 with various expirations through
2015, which may be adjusted annually to fair market value or to increases defined in the
agreement. The agreement includes a one year renewal option and the lessee pays most
expenses related to the building including repairs and maintenance, insurance, and property
taxes.(11)
    
    The Company maintains an operating lease agreement that provides for monthly base rent
of $3 through May 31, 2007 and may be adjusted annually to fair market value or to
increases defined in the agreement. The lessee pays most expenses related to the building
including repairs and maintenance, insurance, and property taxes. The lease includes three
one year renewal options.(12)
    
    The Company maintains a sublease obligation provides for monthly base rent of $1
through September 30, 2006.  Equipment
   Facilities
    
    
    Vehicles and Equipment2007
    
    $
    1,328
    
    
    $
    5542008
    
    
    1,203
    
    
    
    472009
    
    
    759
    
    
    
    182010
    
    
    225
    
    
    
    2011
    
    
    170
    
    
    
    2012 and thereafter
    
    
    203
    
    
    
    $
    3,888
    
    
    $
    619
 70




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##### Table of Contents



NOTE 17  RELATED PARTY TRANSACTIONS
  August 31,
    
    
    August 31,2006
    
    
    2005Assets:Note receivable from subsidiary employee
    
    $
    300
    
    
    $
    300Liabilities:Long-term line of credit
    
    
    
    
    
    
    (6,618
    )Installment notes payable
    
    
    (63
    )
    
    
    (94
    )Net assets (liabilities)
    
    $
    237
    
    
    $
    (6,412
    )
     August 31,
    
    
    August 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2004Revenues:Electronics Integration (1)
    
    $
    83
    
    
    $
    
    
    
    $
    Total
    
    
    83
    
    
    
    
    
    
    
    Expenses:Wireless Infrastructure (2) (3) (4)
    
    
    292
    
    
    
    231
    
    
    
    64Business Solutions (5)
    
    
    47
    
    
    
    24
    
    
    
    22Transportation Infrastructure (6)
    
    
    180
    
    
    
    180
    
    
    
    60Ultraviolet Technologies (7)
    
    
    84
    
    
    
    78
    
    
    
    Electronics Integration (2) (8)
    
    
    281
    
    
    
    235
    
    
    
    117Holding Company (9) (10)
    
    
    192
    
    
    
    392
    
    
    
    187Total
    
    
    1,076
    
    
    
    1,140
    
    
    
    450
 
 (1)
    
    The Companys AVR subsidiary performed $83 worth of services for businesses owned by
the Companys two majority shareholders.(2)
    
    The Company maintains an operating lease agreement for rental of a building with a
related party. A majority of the Companys subsidiaries maintain offices and or warehouse
space in the facility. The lease agreement includes a five year term with one option to
extend the lease term for a one year period. The agreement provides for a monthly base rent
of $42 per month. The base rent shall be adjusted annually to fair market value. In
addition the Company shall pay certain expenses including taxes, assessments, maintenance
and repairs. Rent and related expenses of $554, $461 and $120 were recognized for the
years ended August 31, 2006, 2005 and 2004, respectively.(3)
    
    The Company maintains a debt obligation to its majority shareholder for the purchase of
vehicles and equipment. The loans are secured by the assets and pay interest at 6%.
Interest expense of $3, $5 and $5 was recognized for the years ended August 31, 2006, 2005
and 2004, respectively.(4)
    
    The Companys Fortune Wireless subsidiary maintains an operating lease agreement for
rental of a building with a related party. The operating lease agreement provides for
monthly base rent of $4 through April 30, 2011, adjusted annually to fair market value. The
agreement also includes a one year renewal option. Rent and related expenses of $16 were
recognized for the year ended August 31, 2006.(5)
    
    The Companys PSM subsidiary holds two leases for an office building in Richmond, IN
from a related party. The leases are for a period of five years and expire in May 2008 and
August 2010. The agreements 71




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##### Table of Contents



provide for base rent of $4 per month with nominal annual increases. Rent and related
expense of $47, $24 and $22 were recognized for the years ended August 31, 2006, 2005 and
2004, respectively.(6)
    
    The Companys JH Drew subsidiary maintains an operating lease agreement for rental of
three buildings located in Indiana, Tennessee and Missouri with a related party. The lease
agreement includes a five year term with one option to extend the lease term for a one year
period and provides for base rent of $15,000 per month. The base rent shall be adjusted
annually to fair market value. In addition the Company shall pay certain expenses including
taxes, assessments, maintenance and repairs. Rent and related expenses of $180, $180 and
$60 were recognized for the years ended August 31, 2006, 2005 and 2004, respectively.(7)
    
    The Companys Nor-Cote subsidiary maintains an operating lease agreement for rental of
a building from a related party. The agreement provides for monthly base rent of $7 and
expires in August 2009. The base rent shall be adjusted annually to fair market value. The
Agreement also includes one renewal option, which allows the Company to extend the lease
term for an additional year. Rent and related expenses of $84 and $78 were recognized for
the years ended August 31, 2006 and 2005, respectively.(8)
    
    The Company leased an office and warehouse facility in which a former Director of the
Company is a member. The lease was terminated in May 2004. Rent expense of $56 was
recognized for the year ended August 31, 2004.(9)
    
    Consulting services of $73 were paid to a related party company owned by the Companys
Chief Executive Officer. These consulting services will be recognized as compensation
expense for disclosure purposes for the Chief Executive Officer.(10)
    
    The Company had borrowings under a long-term unsecured line of credit with the
Companys majority shareholder. Interest expense booked on the line of credit was $119,
$392 and $187 for the years ended August 31, 2006, 2005 and 2004, respectively. Other Related Party Transactions
  Guaranties
  NOTE 18  SIGNIFICANT ESTIMATES
   72




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##### Table of Contents



NOTE 19  CONCENTRATION OF CREDIT RISK
  NOTE
20  COMMITMENTS AND CONTINGENCIES
 Litigation
  73




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##### Table of Contents



Restricted Cash
  Payment and Performance Bonds
  NOTE
21  QUARTERLY FINANCIAL DATA (UNAUDITED)
  For the Three Months EndedNovember 30,
    
    February 28,
    
    May 31,
    
    August 31,2006:Revenues
    
    $
    36,443
    
    
    $
    33,356
    
    
    $
    39,468
    
    
    $
    47,846Gross Profit
    
    
    7,238
    
    
    
    7,534
    
    
    
    7,570
    
    
    
    8,562Net income available to common shareholders
    
    
    847
    
    
    
    362
    
    
    
    143
    
    
    
    536Basic earnings (loss) per share
    
    
    0.08
    
    
    
    0.03
    
    
    
    0.01
    
    
    
    0.06Diluted earnings (loss) per share
    
    
    0.08
    
    
    
    0.03
    
    
    
    0.01
    
    
    
    0.042005:Revenues
    
    $
    25,048
    
    
    $
    20,149
    
    
    $
    31,904
    
    
    $
    35,995Gross Profit
    
    
    4,890
    
    
    
    3,709
    
    
    
    6,631
    
    
    
    5,795Net income (loss) available to common shareholders
    
    
    703
    
    
    
    (1,324
    )
    
    
    1,078
    
    
    
    (2,774
    )Basic earnings (loss) per share
    
    
    0.07
    
    
    
    (0.13
    )
    
    
    0.10
    
    
    
    (0.26
    )Diluted earnings (loss) per share
    
    
    0.07
    
    
    
    (0.13
    )
    
    
    0.10
    
    
    
    (0.26
    )
 74




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##### Table of Contents



NOTE 22  SEGMENT INFORMATION
   Segment & Entity
    
    Business ActivityWireless InfrastructureFortune Wireless, Inc.; PDH, Inc.; Innovative
Telecommunications Consultants, Inc.; Magtech
Services, Inc.; Cornerstone Wireless
Construction Services, Inc.; James Westbrook
& Associates, LLC
    
    Installer and service provider of cell phone tower sitesBusiness SolutionsProfessional Staff Management, Inc. and
subsidiaries; CSM, Inc. and subsidiaries and
related entities
    
    Provider of outsourced human resource servicesTransportation InfrastructureJames H. Drew Corp. and subsidiaries
    
    Installer of highway construction safety productsUltraviolet TechnologiesNor-Cote International, Inc. and subsidiaries
    
    Manufacturer of UV curable screen printing ink productsElectronics IntegrationKingston Sales Corporation and subsidiaries;
Commercial Solutions, Inc.; Audio-Video
Revolution, Inc. and subsidiaries
    
    Distributor and installer of home and commercial electronics
  Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Solutions (1)
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    Company
    
    
    TotalsYear Ended August 31, 2006Net revenues
    
    $
    27,859
    
    
    $
    44,543
    
    
    $
    57,931
    
    
    $
    12,437
    
    
    $
    14,343
    
    
    $
    
    
    
    $
    157,113Cost of revenues
    
    
    21,898
    
    
    
    34,084
    
    
    
    51,137
    
    
    
    7,177
    
    
    
    11,913
    
    
    
    
    
    
    
    126,209Gross profit
    
    
    5,961
    
    
    
    10,459
    
    
    
    6,794
    
    
    
    5,260
    
    
    
    2,430
    
    
    
    
    
    
    
    30,904Operating expensesSelling, general and administrative
    
    
    5,680
    
    
    
    6,437
    
    
    
    3,340
    
    
    
    4,175
    
    
    
    2,397
    
    
    
    2,956
    
    
    
    24,985Depreciation and amortization
    
    
    405
    
    
    
    599
    
    
    
    484
    
    
    
    418
    
    
    
    124
    
    
    
    239
    
    
    
    2,269Total operating expenses
    
    
    6,085
    
    
    
    7,036
    
    
    
    3,824
    
    
    
    4,593
    
    
    
    2,521
    
    
    
    3,195
    
    
    
    27,254Segment operating income (loss)
    
    $
    (124
    )
    
    $
    3,423
    
    
    $
    2,970
    
    
    $
    667
    
    
    $
    (91
    )
    
    $
    (3,195
    )
    
    $
    3,650
 
 (1)
    
    Gross billings of $293,367 less worksite employee payroll costs of $248,824. 75




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##### Table of Contents



Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Solutions (1)
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    Company
    
    
    TotalsYear Ended August 31, 2005 (restated)Net revenues (external customers)
    
    $
    14,911
    
    
    $
    28,458
    
    
    $
    46,549
    
    
    $
    10,771
    
    
    $
    12,407
    
    
    $
    
    
    
    $
    113,096Cost of revenues
    
    
    11,597
    
    
    
    21,646
    
    
    
    42,268
    
    
    
    5,934
    
    
    
    10,626
    
    
    
    
    
    
    
    92,071Gross profit
    
    
    3,314
    
    
    
    6,812
    
    
    
    4,281
    
    
    
    4,837
    
    
    
    1,781
    
    
    
    
    
    
    
    21,025Operating expensesSelling, general and administrative
    
    
    3,496
    
    
    
    4,107
    
    
    
    2,814
    
    
    
    4,663
    
    
    
    2,243
    
    
    
    2,362
    
    
    
    19,685Depreciation and amortization
    
    
    202
    
    
    
    336
    
    
    
    459
    
    
    
    393
    
    
    
    216
    
    
    
    103
    
    
    
    1,709Impairment loss of intangible assets
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    417
    
    
    
    
    
    
    
    636Total operating expenses
    
    
    3,917
    
    
    
    4,443
    
    
    
    3,273
    
    
    
    5,056
    
    
    
    2,876
    
    
    
    2,465
    
    
    
    22,030Segment operating income (loss)
    
    $
    (603
    )
    
    $
    2,369
    
    
    $
    1,008
    
    
    $
    (219
    )
    
    $
    (1,095
    )
    
    $
    (2,465
    )
    
    $
    (1,005
    )
 
 (1)
    
    Gross billings of $193,136 less worksite employee payroll costs of $164,678. Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Solutions (1)
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    Company
    
    
    TotalsYear Ended August 31, 2004 (restated)Net revenues (external customers)
    
    $
    6,352
    
    
    $
    17,958
    
    
    $
    17,539
    
    
    $
    10,526
    
    
    $
    14,507
    
    
    $
    
    
    
    $
    66,882Cost of revenues
    
    
    5,044
    
    
    
    13,854
    
    
    
    14,803
    
    
    
    5,602
    
    
    
    11,955
    
    
    
    
    
    
    
    51,258Gross profit
    
    
    1,308
    
    
    
    4,104
    
    
    
    2,736
    
    
    
    4,924
    
    
    
    2,552
    
    
    
    
    
    
    
    15,624Operating expensesSelling, general and administrative
    
    
    1,279
    
    
    
    1,937
    
    
    
    945
    
    
    
    4,035
    
    
    
    2,484
    
    
    
    1,232
    
    
    
    11,912Depreciation and amortization
    
    
    124
    
    
    
    157
    
    
    
    201
    
    
    
    420
    
    
    
    230
    
    
    
    32
    
    
    
    1,164Total operating expenses
    
    
    1,403
    
    
    
    2,094
    
    
    
    1,146
    
    
    
    4,455
    
    
    
    2,714
    
    
    
    1,264
    
    
    
    13,076Segment operating income (loss)
    
    $
    (95
    )
    
    $
    2,010
    
    
    $
    1,590
    
    
    $
    469
    
    
    $
    (162
    )
    
    $
    (1,264
    )
    
    $
    2,548
 
 (1)
    
    Gross billings of $123,798 less worksite employee payroll costs of $105,840. Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Solutions
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    Company
    
    
    TotalsAs of August 31, 2006Current AssetsCash and equivalents
    
    $
    (791
    )
    
    $
    4,308
    
    
    $
    78
    
    
    $
    594
    
    
    $
    (187
    )
    
    $
    (370
    )
    
    $
    3,632Restricted savings account
    
    
    
    
    
    
    3,462
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,462Available for sale investments
    
    
    
    
    
    
    1,246
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    1,281Accounts receivable, net
    
    
    9,632
    
    
    
    1,858
    
    
    
    10,701
    
    
    
    1,884
    
    
    
    2,260
    
    
    
    (604
    )
    
    
    25,731Costs and estimated earnings in excess
of billings on uncompleted contracts
    
    
    2,269
    
    
    
    
    
    
    
    2,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,500Inventory, net
    
    
    218
    
    
    
    30
    
    
    
    3,154
    
    
    
    1,721
    
    
    
    1,638
    
    
    
    
    
    
    
    6,761Deferred tax asset
    
    
    
    
    
    
    876
    
    
    
    659
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,535Prepaid expenses and
other current assets
    
    
    255
    
    
    
    623
    
    
    
    424
    
    
    
    286
    
    
    
    22
    
    
    
    312
    
    
    
    1,922Total Current Assets
    
    
    11,583
    
    
    
    12,403
    
    
    
    17,247
    
    
    
    4,485
    
    
    
    3,733
    
    
    
    (627
    )
    
    
    48,824Other AssetsProperty, plant & equipment, net
    
    
    1,311
    
    
    
    448
    
    
    
    1,686
    
    
    
    1,997
    
    
    
    299
    
    
    
    582
    
    
    
    6,323Goodwill
    
    
    1,497
    
    
    
    4,153
    
    
    
    152
    
    
    
    4,695
    
    
    
    1,487
    
    
    
    
    
    
    
    11,984Other intangible assets, net
    
    
    359
    
    
    
    3,289
    
    
    
    
    
    
    
    651
    
    
    
    
    
    
    
    
    
    
    
    4,299Accounts receivable  long term
    
    
    
    
    
    
    
    
    
    
    1,276
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,276Other long term assets
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    14
    
    
    
    87
    
    
    
    1,450
    
    
    
    1,579Total Other Assets
    
    
    3,167
    
    
    
    7,918
    
    
    
    3,114
    
    
    
    7,357
    
    
    
    1,873
    
    
    
    2,032
    
    
    
    25,461Total Assets
    
    $
    14,750
    
    
    $
    20,321
    
    
    $
    20,361
    
    
    $
    11,842
    
    
    $
    5,606
    
    
    $
    1,405
    
    
    $
    74,285
 76




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##### Table of Contents



Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Solutions
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    Company
    
    
    TotalsAs of August 31, 2005 (restated)Current AssetsCash and equivalents
    
    $
    55
    
    
    $
    3,103
    
    
    $
    359
    
    
    $
    399
    
    
    $
    
    
    
    $
    (129
    )
    
    $
    3,787Restricted savings account
    
    
    
    
    
    
    1,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,484Available for sale investments
    
    
    
    
    
    
    2,199
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,199Accounts receivable, net
    
    
    6,915
    
    
    
    1,304
    
    
    
    9,821
    
    
    
    1,652
    
    
    
    1,663
    
    
    
    3
    
    
    
    21,358Costs and estimated earnings in excess
of billings on uncompleted contracts
    
    
    414
    
    
    
    
    
    
    
    2,267
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,681Inventory, net
    
    
    121
    
    
    
    15
    
    
    
    4,059
    
    
    
    1,805
    
    
    
    2,315
    
    
    
    
    
    
    
    8,315Deferred tax asset
    
    
    
    
    
    
    563
    
    
    
    451
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,014Prepaid expenses and
other current assets
    
    
    542
    
    
    
    421
    
    
    
    398
    
    
    
    193
    
    
    
    5
    
    
    
    231
    
    
    
    1,790Total Current Assets
    
    
    8,047
    
    
    
    9,089
    
    
    
    17,355
    
    
    
    4,049
    
    
    
    3,983
    
    
    
    105
    
    
    
    42,628Other AssetsProperty, plant & equipment, net
    
    
    1,011
    
    
    
    306
    
    
    
    1,066
    
    
    
    2,076
    
    
    
    136
    
    
    
    469
    
    
    
    5,064Goodwill
    
    
    1,271
    
    
    
    4,287
    
    
    
    152
    
    
    
    4,694
    
    
    
    1,276
    
    
    
    
    
    
    
    11,680Other intangible assets, net
    
    
    192
    
    
    
    3,773
    
    
    
    
    
    
    
    740
    
    
    
    
    
    
    
    
    
    
    
    4,705Accounts receivable  long term
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600Other long term assets
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    14
    
    
    
    41
    
    
    
    336
    
    
    
    409Total Other Assets
    
    
    2,474
    
    
    
    8,384
    
    
    
    1,818
    
    
    
    7,524
    
    
    
    1,453
    
    
    
    805
    
    
    
    22,458Total Assets
    
    $
    10,521
    
    
    $
    17,473
    
    
    $
    19,173
    
    
    $
    11,573
    
    
    $
    5,436
    
    
    $
    910
    
    
    $
    65,086
 NOTE 23  SUBSEQUENT EVENTS
 Departure of Directors or Principal Officers
  PSM Agreement
  77




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
    
 Item 9B. Other Information
  78




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##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services.
  79




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
  (1)
    
    Financial Statements. Reference is made to the Index to Consolidated Financial
Statements on page 42 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.
 ExhibitNo.
    
    Description3.1
    
    Articles of Amendment to the Companys Restated Articles of Incorporation (1)10.1
    
    Fortune Industries, Inc. 2006 Equity Incentive Plan (2)21.1
    
    List of subsidiaries (3)23.1
    
    Consent of Independent Registered Public Accounting Firm (3)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 John F. Fisbeck. (3)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 Amy E. Gallo. (3)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 John F. Fisbeck. (3)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 Amy E. Gallo. (3)
  1.
    
    This exhibit is incorporated by reference from the Companys Current Report on Form
8-K, dated April 17, 2006.2.
    
    This exhibit is incorporated by reference from the Companys Registration Statement on
Form S-8, dated April 18, 2006.3.
    
    Attached hereto.
 80




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##### Table of Contents



SIGNATURES
  FORTUNE INDUSTRIES, INC.Date:  November 28, 2006
    By:
    /s/ John F. FisbeckJohn F. Fisbeck,Chief Executive Officer  Date:  November 28, 2006
    /s/ John F. FisbeckJohn F. Fisbeck, Chief Executive Officer and DirectorDate:  November 28, 2006
    /s/ Amy E. GalloAmy E. Gallo, Chief Financial OfficerDate:  November 28, 2006
    /s/ Carter M. FortuneCarter M. Fortune, Chairman of the BoardDate:  November 28, 2006
    /s/ P. Andy RaylP. Andy Rayl, DirectorDate:  November 28, 2006
    /s/ David A. BerryDavid A. Berry, DirectorDate:  November 28, 2006
    /s/ Nolan R. LackeyNolan R. Lackey, Director 81




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##### Table of Contents



FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DOLLARS IN THOUSANDS)
 Balance at
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    
    
    
    Write-offs /
    
    End ofAllowance for Doubtful Accounts
    
    of Year
    
    Provision
    
    Recoveries
    
    YearYear ended August 31, 2004
    
    $
    338
    
    
    $
    791
    
    
    $
    17
    
    
    $
    1,112Year ended August 31, 2005
    
    
    1,112
    
    
    
    680
    
    
    
    280
    
    
    
    1,512Year ended August 31, 2006
    
    
    1,512
    
    
    
    36
    
    
    
    134
    
    
    
    1,414
 Balance at
    
    
    
    
    
    Balance atValuation Allowance on
    
    Beginning
    
    Provisions
    
    End ofDeferred Tax Asset
    
    of Year
    
    (Reduction)
    
    YearYear ended August 31, 2004
    
    $
    3,367
    
    
    $
    (1,272
    )
    
    $
    2,095Year ended August 31, 2005
    
    
    2,095
    
    
    
    936
    
    
    
    3,031Year ended August 31, 2006
    
    
    3,031
    
    
    
    (920
    )
    
    
    2,111
 See accompanying Reports of Independent Registered Public Accounting Firm.
 S-1