<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                    For the fiscal year ended August 31, 2005

[ ]   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 Diversified Industries, Inc.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

            Indiana                                      74-2504501
-------------------------------            ------------------------------------
(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
                ------------------------------------------------
                (Issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

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

            Common Stock ($0.10 par value per share) ("Common Stock")
            ---------------------------------------------------------
                                (Title of Class)

      Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year. $113,096,000

As of November 14, 2005 the aggregate market value of the voting Common Stock of
the Company held by non-affiliates of the registrant, based on the final sale
price on such date, was approximately $11,094,343.

As of November 29, 2005 there were 10,559,843 shares of the Company's voting
Common Stock outstanding.

      Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
<PAGE>

                             Additional Information

For the purpose of calculating the aggregate market value of the Company's
Common Stock held by non-affiliates, the Company utilized the definition of
"affiliates" provided by Rule 12b-2 of the Exchange Act. In applying that
definition, the Company has considered all individual members of the "Control
Group" as designated in the Schedule 13D filed by the Company on August 7, 2000
and on any amendments thereto to be affiliates, as well as all current directors
and executive officers. As used for purposes of determining the aggregate market
value of the Voting Common Stock held by non-affiliates, "beneficial ownership"
of securities means the sole or shared power to vote, or to direct the voting
of, such securities, or the sole or shared investment power with respect to such
securities, including the power to dispose of, or to direct the disposition of,
such securities. In addition, for purposes of this table, a person is deemed to
have "beneficial ownership" of any security that such person had the right to
acquire within 60 days after November 29, 2005. The Company then multiplied the
beneficial ownership of the non-affiliates by the closing price of the Company's
Common Stock, as of the date stated above, to derive the market value.

                                        2

<PAGE>

                      FORTUNE DIVERSIFIED INDUSTRIES, INC.

                            FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                          <C>
                                     PART I

Item 1.       Description of Business...............................           4

Item 2.       Description of Property...............................          11

Item 3.       Legal Proceedings.....................................          12

Item 4.       Submission of Matters to a Vote of Security Holders...          12

                                    PART II

Item 5.       Market for the Registrant's Common Equity and Related
                Stockholder Matters.................................          13

Item 6.       Management's Discussion and Analysis of Results of
                Operations and Financial Condition..................          14

Item 7.       Financial Statements..................................          28

Item 8.       Changes In and Disagreements With Accountants on
                Accounting and Financial Disclosure.................          28

Item 8A.      Controls and Procedures...............................          28

                                   PART III

Item 9.       Directors, Executive Officers, Promoters and
                Control Persons; Compliance With Section 16(a)
                of the Exchange Act.................................          29

Item 10.      Executive Compensation................................          31

Item 11.      Security Ownership of Certain Beneficial Owners
                and Management and Related Stockholder Matters......          33

Item 12.      Certain Relationships and Related Transactions........          35

Item 13.      Exhibits..............................................          36

Item 14.      Principal Accountant Fees and Services................          37

SIGNATURES..........................................................          76
</TABLE>

                                        3

<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Fortune Diversified Industries, Inc. (formerly known as WOW Entertainment, Inc.
and prior to that American Gaming & Entertainment, Ltd.) is an Indiana
corporation incorporated in the State of Delaware in 1988. The Company has
conducted its business directly and through wholly-owned subsidiaries. The term
"Company" as used herein refers to Fortune Diversified Industries, Inc. and its
subsidiaries unless the context otherwise requires.

The Company's current operating focus is achieved through its following twelve
subsidiaries (grouped by segment):

      -     Wireless Infrastructure Segment

            James H. Drew Corp. (JH Drew); PDH, Inc. (PDH); Magtech Services,
            Inc. (Magtech); Cornerstone Wireless Construction Services, Inc.
            (Cornerstone Construction); Innovative Telecommunications
            Consultants, Inc. (ITC); Telecom Technology Corp. (TTC); StarQuest
            Wireless Services, Inc. (StarQuest)

      -     Manufacturing and Distribution Segment

            Nor-Cote International, Inc. (Nor-Cote); Kingston Sales Corporation
            (Kingston); Commercial Solutions, Inc. (Commercial Solutions)

      -     Business Solutions Segment

            Professional Staff Management, Inc., Professional Staff Management,
            Inc. II and Pro Staff, Inc. (collectively "PSM"); CSM, Inc. (CSM)

Prior to fiscal year 2003, the Company operated in the entertainment, electronic
distribution and wireless infrastructure services industries. Subsequently, the
Company has acquired seven subsidiaries and formed one startup company and
expanded into the Professional Employer Organization ("PEO") industry. Following
the general description of the business, the material acquisitions involving the
purchase of a significant amount of assets over the past three years are
discussed.

Effective May 31, 2005 the Company re-domesticated from Delaware to Indiana.
(Additional details regarding this action can be found in the Definitive
Schedule 14C Information Statement that was filed by the Company on May 10,
2005.) On April 26, 2005 the majority shareholders executed a written consent
for a 1-for-10 common stock split, which became effective June 2, 2005. All
references in this form 10-KSB, consolidated financial statements and notes to
the consolidated financial statements related to share amounts, per share
amounts and average shares outstanding have been adjusted retroactively to
reflect the 1-for-10 common stock split. On June 23, 2005, the Company moved
from the Over-The-Counter Bulletin Board to the American Stock Exchange.

Control Group

In order to better understand the Company's business organization and
development, it is important to know that as of August 31, 2005, Messrs. John
Fisbeck, Carter Fortune, Norman Wolcott, Jr., the Norman G. Wolcott, Sr. and
Lucille H. Wolcott Revocable Trust of 1995 Marital Trust and the Norman G.
Wolcott, Sr. and Lucille H. Wolcott Revocable Trust of 1995 Survivor's Trust
(the "Wolcott Trusts") and Harlan Schafir are considered members of a "group"
deemed to beneficially own 8,456,134 shares of the Company's Common Stock
representing 80.1% of the outstanding Common Stock of the Company, which totals
10,559,843 shares. Individually, each of the above persons has the sole voting
and dispositive power over the following number of shares of the Company's
Common Stock as of August 31, 2005: John F. Fisbeck, 1,637,701 (or 15.51%),
Carter M. Fortune, 4,132,810 (or 39.14%), Norman G. Wolcott, Jr., individually,
713,751 (or 6.76%), Norman G. Wolcott Jr., as Trustee of the Wolcott Trusts,
285,372 (or 2.70%), and Harlan M. Schafir, 1,310,000 (or 12.41%). In addition to
the above shares, Messrs. Fisbeck and Fortune share dispositive control over
376,500 shares of the Company's Common Stock held by Fisbeck - Fortune
Development, LLC.

                                        4

<PAGE>

General Description of the Business

The Company's current operating focus is achieved through its Wireless
Infrastructure Segment, its Manufacturing and Distribution Segment, and its
Business Solutions Segment.

Wireless Infrastructure Segment

The Company's Wireless Infrastructure Segment is conducted through its JH Drew,
PDH, Magtech, Cornerstone Construction, ITC, and TTC and StarQuest subsidiaries.
JH Drew is a specialty contractor in the field of infrastructure, including
fiber optic, smart highway systems, traffic signals, street signs, high mast and
ornamental lighting, guardrail, wireless communications, and fabrications of
structural steel. JH Drew has been operating over fifty years serving
contractors and state departments of transportation throughout the Midwestern
United States.

PDH offers a full range of network infrastructure, real estate development
services to the telecommunications industry, among other types of real estate
network critical industries. PDH's full service list of network real estate
development services includes program management, site acquisition, land use
planning, architectural & engineering design, construction management,
co-location facilitation, environmental services, lease capitalization, lease
renegotiation, site marketing and asset management.

Magtech specializes in providing engineering and architectural services for the
telecommunications and the traditional real estate development industries. The
telecommunications industry includes cellular, personal communication services
(PCS), specialized mobile radio (SMR), enhanced specialized mobile radio (ESMR),
microwave systems, fixed wireless, broadband and fiber optics technologies for
carriers, tower consolidators and utilities.

Cornerstone Construction offers construction services to the telecommunications
industry, primarily developing wireless networks for wireless carriers. Services
include program and construction management, electrical, foundation and tower
installations, as well as, antennae and line installations.

ITC provides technical services for wireless equipment manufacturers and
wireless service providers including switch and radio base station engineering
as well as providing the site, survey, delivery, installation and integration
process for the implementation of end user equipment offered by a wide range of
wireless equipment manufacturers.

TTC specializes in the design, engineering and installation of structured
cabling systems for the commercial marketplace and sells telephone and voice
mail systems. TTC provides the data cabinets, racks, cable trays, HUBS, patch
panels, computer furniture, cable management and any peripheral equipment
necessary for a complete voice and data-cabling infrastructure.

StarQuest is a provider of premium communication/ information services,
including digital satellite television and high speed (broadband) Internet, both
wired and wireless. These services are provided exclusively to the United States
multi-dwelling unit (MDU) marketplace.

                                        5

<PAGE>

Manufacturing and Distribution Segment

The Company's Manufacturing and Distribution Segment is conducted through its
Nor-Cote, Kingston, and Commercial Solutions subsidiaries. Nor-Cote is a
manufacturer of UV curable screen printing inks. Nor-Cote inks are printed on
many types of plastic, metals and other substrates that are compatible with the
UV curing process. Typical applications are plastic sheets, point-of-purchase
(POP) signage, banners, decals, cell phones, bottles and containers, CD and DVD
disks, rotary-screen printed labels, and membrane switch overlays for which
Nor-Cote provides conductive ink. Nor-Cote has operating facilities in the
United States, United Kingdom, Singapore, and Malaysia, with worldwide
distributors located in South Africa, Australia, Canada, China, Colombia, Hong
Kong, India, Indonesia, Italy, Japan, Korea, New Zealand, Poland, Spain, Taiwan,
Thailand, Latin America and the United States.

Kingston and Commercial Solutions are distributors for prominent national
companies in the electronic, sound, security, and video markets. Kingston and
Commercial Solutions offer the latest technology in TVs, sound systems,
electronic locking devices, wire, cable and fiber optics, and intercom systems,
selling to customers in lodging, healthcare, education, transportation and
retail industries.

Business Solutions Segment

The Company's Business Solutions segment is conducted through its PSM and CSM
subsidiaries. PSM and CSM, PEOs, provide cost-effective employee administrative
solutions to companies in 37 states nationwide. The PEO's provide services
typically managed by internal human resources and accounting departments -
including payroll and tax processing and management, worker's compensation and
risk management, benefits administration, unemployment administration, human
resource compliance services, 401k and retirement plan administration and
employee assessments.

                              MATERIAL ACQUISITIONS

During fiscal year 2003, the Company had the following material acquisitions:

Manufacturing and Distribution Segment

Nor-Cote International, Inc.

Nor-Cote Acquisition Company, a wholly owned subsidiary of the Company, acquired
1,451,985.47 shares of the common stock and 747,992.51 shares of the preferred
stock of Nor-Cote, an Illinois corporation, and subsidiaries, constituting all
of the outstanding shares of Nor-Cote pursuant to the terms of a Stock Purchase
Agreement by and among Nor-Cote; Norman G. Wolcott, Jr., individually; Norman G.
Wolcott, Jr. and Norman G. Wolcott, Sr., as co-trustees of the Norman G. Wolcott
and Lucille H. Wolcott Revocable Trust of 1995 (the "Wolcott Trust"); First
Bankers Trust Company, as trustee under the Trust Agreement for the Nor-Cote
International, Inc. Employee Stock Ownership Plan Trust ("ESOP Trust") and the
Company, effective July 1, 2003. The Company transferred 1,239,124 shares of its
Common Stock to Norman G. Wolcott, Jr. and the Wolcott Trust and transferred
766,836 of its own shares to the ESOP Trust. The 766,836 shares were transferred
back to the Company and retired and applied as payment on an inside loan payable
from the ESOP Trust to Nor-Cote in the principal amount of $6,028,991.01. The
debt was non-recourse to the ESOP Trust but was collateralized by 578,875.512
preferred shares that were unallocated to Nor-Cote's ESOP participants.

                                        6

<PAGE>

Additionally, 223,357 shares of the Company's Common Stock were issued to retain
key employees of Nor-Cote. Of the 223,357 common shares issued, 212,857 common
shares were issued according to employment agreements with officers of Nor-Cote
and are contingent upon Nor-Cote obtaining certain earnings goals over the
period July 1, 2003 through July 1, 2006. The contingent stock consideration is
included as a component of the purchase price in accordance with Emerging Issues
Task Force 95-8, "Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase Business Combination,"
under arrangements not affected by employment termination. Consideration for
182,857 shares is included in permanent equity under SFAS 141 as management of
the Company deems likelihood that payment of such contingent consideration is
beyond a reasonable doubt. The remaining 30,000 shares, valued at $69,000 are
included in other long-term liabilities in the Company's consolidated balance
sheet. In addition to the exchange described above, Norman G. Wolcott, Jr. and
the Wolcott Trust received $1,800,000.00 in cash. The ESOP Trust received
$893,608.00 for 169.116.998 preferred shares of Nor-Cote held by the ESOP Trust.
Nor-Cote subsequently filed a Plan of Termination for its ESOP with the Internal
Revenue Service and received a favorable determination letter dated June 15,
2004. The net assets of the ESOP totaling approximately $650,000 have been
distributed to participants in accordance with the Plan of Termination. The
final tax return (Form 5500) has been filed with the Internal Revenue Service.

The source of funds for the transaction came from an unsecured line of credit
from a stockholder of the Company and from a loan from a financial institution.
The fair market value of the 2,229,318 shares of the Company's Common Stock was
$5.127 million (which was based upon the quoted market price of the Company's
Common Stock traded for a reasonable period before and after the acquisition.
The stock price was discounted due to historical trading volume being
significantly lower than shares issued in the transaction) and was also included
as part of the purchase price. In addition to the assumed liabilities, the
aggregate purchase price of the acquisition was $7.821 million of which $5.230
million consists of goodwill and amortizable intangible assets.

During fiscal year 2004, the Company had the following material acquisitions:

Business Solutions Segment

Professional Staff Management, Inc
Professional Staff Management, Inc. II
Pro Staff, Inc.

Effective as of October 1, 2003, the Company acquired all of the outstanding
shares of common stock, no par value, of PSM pursuant to the following
agreements (the "Merger Agreements"):

      AGREEMENT AND PLAN OF MERGER entered into the 1st day of October, 2003, by
      and among Professional Staff Management, Inc., an Indiana Corporation, PSM
      Acquisition, Inc., an Indiana corporation and wholly owned subsidiary of
      the Company and Harlan M. Schafir.

      AGREEMENT AND PLAN OF MERGER entered into the 1st day of October, 2003 by
      and among Professional Staff Management, Inc. II, an Indiana Corporation,
      PSM Acquisition II, Inc., an Indiana corporation and wholly owned
      subsidiary of the Company and Harlan M. Schafir.

      AGREEMENT AND PLAN OF MERGER entered in the 1st day of October, 2003 by
      and among Pro Staff, Inc., an Indiana corporation, PSM Acquisition III,
      Inc., an Indiana corporation and wholly owned subsidiary of the Company
      and Harlan M. Schafir.

                                        7

<PAGE>
The Merger Agreements were intended to qualify as a "reorganization" pursuant
to the provisions of Section 368 of the Internal Revenue Code and specifically
as a reverse-triangular merger under Code Section 368 (a) (2) (E). For
accounting purposes the business combination is being accounted for as a
purchase under SFAS No. 141, "Business Combinations". The Company acquired PSM
in order to gain entry into the PEO industry. With expectations in the industry
of 15-20% compounded growth, the Company believes PSM, through execution of
strategies will be able to take advantage of these growth opportunities. The
Merger Agreements' terms include, among other things, the exchange of all of the
outstanding shares of Professional Staff Management, Inc., (125 shares);
Professional Staff Management II, Inc., (500 shares); and Pro Staff, Inc. (500
shares), all held by Harlan M. Schafir, for a total of 1,310,000 shares of the
Company's Common Stock. The Company formed three wholly-owned subsidiaries, PSM
Acquisition, Inc.; PSM Acquisition II, Inc.; and PSM Acquisition III, Inc. The
Company's shares were exchanged at the following ratios: 6,602 shares of the
Company's Common Stock for each share of PSM; 445 shares of the Company's Common
Stock for each share of PSM II; and, 524 shares of the Company's Common Stock
for each share of Pro Staff. The Company exchanged a total of 1,310,000 shares
as follows: 825,300 shares for the shares of PSM; 222,700 shares for the shares
of PSM II; and 262,000 shares for the shares of Pro Staff.

In addition to the exchanges described above, Mr. Schafir received a total of
$1,000,000.00 in cash. The cash was allocated as follows: $630,000.00 for PSM;
$170,000.00 for the PSM II; and $200,000.00 for Pro Staff.

The principle followed in determining the amount of consideration paid was the
ongoing value of the three companies, with adjustments thereto for certain
aspects of the transaction, including earnings benchmarks as defined by the
Merger Agreements. Prior to the Merger Agreements, there was no material
relationship between the Company or any of its subsidiaries and the exchanging
parties identified above.

The source of the Company's consideration included the Company's shares, and
cash held by the Company prior to the Merger Agreements. The fair market value
of the Company's 1,310,000 shares issued was $3.93 million (which was based upon
an independent valuation based on the bid price discounted for various factors,
including liquidity) and was included as part of the purchase price. In addition
to the assumed liabilities, the aggregate purchase price of the acquisition was
$4.93 million of which $4.679 million consists of goodwill and other intangible
assets.

The dispositions of the Company's shares held by Mr. Schafir are substantially
restricted by two Option Agreements. The first is an Option Agreement entered
into the 1st day of October, 2003 by and between Harlan M. Schafir, Carter M.
Fortune and Robert J. Kingston; the second is an Option Agreement entered into
the 1st day of October, 2003 by and between Harlan M. Schafir, and the Company.
(collectively, "Option Agreements").

Wireless Infrastructure Segment

James H. Drew Corporation

On April 30, 2004, the Company acquired all of the outstanding shares of common
stock, no par value, of James H. Drew Corporation and its wholly-owned
subsidiary, Tennessee Guardrail, Inc. (collectively "JH Drew") pursuant to the
agreement entitled "Stock Purchase Agreement" by and between Cemex, Inc.,
("Seller") and the Company ("Buyer"). The Stock Purchase Agreement's terms
include, among other things, the exchange of all of the outstanding shares of JH
Drew for $13.15 million, of which $11.5 million was paid in cash at closing and
the remaining $1,650,000 plus $57,000 interest was paid to seller on December
15, 2004. In calculating the purchase price the parties considered, among other
factors: JH Drew's consolidated accounts receivable, costs and estimated
earnings in excess of billings on uncompleted contracts, inventories, accounts
payable and other current assets and current liabilities. The funds constituting
the purchase price were derived from the combination of a loan from Fifth Third
Bank and a loan to the Company from its former Chief Executive Officer and
current majority shareholder Carter M. Fortune.

                                        8

<PAGE>

The purchase price includes $434,000 of stock consideration. This amount
consists of 43,000 shares valued at the closing price of the Company's stock on
the date of purchase at $10.10 share.

During fiscal year 2005, the Company had the following material acquisitions:

Business Solutions Segment

CSM, Inc.

On April 5, 2005 the Company acquired CSM, Inc. ("CSM") and its subsidiary
companies pursuant to an Agreement and Plan of Merger (the "Agreement") by and
between the Company, CSM, CSM Merger Corporation (a Tennessee corporation and
wholly-owned subsidiary of the Company), Carter M. Fortune, Marc Fortune, Greg
Daily, Harbinger Mezzanine Partners, L.P., Doug Altenbern, Jeff Gould, Bob
Boston, and Don Denbo. CSM is the holding company for Century II Staffing, Inc.
("Century II") and other related subsidiary entities. Founded in 1985, Century
II serves over 200 company locations, representing over 3,100 employees in more
than 24 states. The Company acquired CSM in order to facilitate its growth
strategy in the PEO industry, with a focus on servicing the small to mid size
client market. CSM joined PSM in the Company's Business Solutions Segment. CSM
operates under its own management team with Harlan Schafir, President and CEO of
the Company's PSM subsidiary, on CSM's Board of Directors. The effective date of
the acquisition for accounting purposes was April 1, 2005. The results of
operations for the five months ended August 31, 2005 are included in the
Company's consolidated statements of operations.

The terms of the Agreement include, among other things, the payment of
approximately $2 million by the Company to retire certain debts owed by CSM, the
payment of approximately $700,000 in cash by the Company to the shareholders of
CSM and the issuance of 150,000 restricted shares of the Company's Common Stock
to be held in escrow until such time as the shares may be earned by the
shareholders of CSM upon the achievement of certain financial performance
measures by CSM.

Per the agreement the 150,000 restricted shares will vest over the three year
period from April 1, 2005 through March 31, 2008 based upon annual EBITDA
calculations. For every $1.70 of EBITDA in excess of $850,000 during each twelve
month period, one share of Common Stock will vest. Vesting is limited to 50,000
shares annually and no carryover of excess earnings is permitted. The vested
shares of Common Stock can be put to Carter M. Fortune during the period June 1,
2008 to September 30, 2008 at $10.033 per share. In addition, any holder of
vested shares may only exercise his/ her Put if the Company's common stock is
not listed on the OTC Bulletin Board or any national securities exchange during
the thirty day period preceding the exercise period or if the average bid price
per share during the thirty day period preceding the exercise period is less
than the put price. The 150,000 shares are valued at the closing price of the
Company's stock on the date of purchase at $4.00 share. The contingent stock
consideration is included as a component of the purchase price in accordance
with SFAS 141, "Business Combinations" and Emerging Issues Task Force 95-8,
"Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination," under arrangements not affected
by employment termination. The consideration is included in permanent equity
under SFAS 141 as management of the Company deems likelihood that payment of
such contingent consideration is beyond a reasonable doubt.

                                        9

<PAGE>

                                   Competition

The markets in which the Company operates are highly competitive, requiring
substantial resources and skilled and experienced personnel. The Company
competes with other companies in most of the geographic markets in which it
operates, and several of its competitors are large companies that have greater
financial, technical and marketing resources than the Company does. In addition,
there are relatively few barriers to entry into the industries in which the
Company operates and, as a result, any organization that has adequate financial
resources and access to technical expertise may become a competitor. The Company
believes that a significant portion of the Company's revenue will be derived
from direct bidding on products as well as unit price agreements, and price will
often be an important factor in the award of such business and agreements.

Accordingly, the Company could be underbid by its competitors in an effort by
them to procure such business. The Company believes that, as demand for its
products and services increases, customers will increasingly consider other
factors in choosing a provider, including: technical expertise and experience,
financial and operational resources, nationwide presence, industry reputation
and dependability. Management believes that the Company will benefit when these
factors are considered. There can be no assurance, however, that the Company's
competitors will not develop the expertise, experience and resources to provide
products and services that are superior in both price and quality to the
Company's products and services, or that the Company will be able to maintain or
enhance its competitive position.

                              Intellectual Property

The Company owns, controls or claims ownership of certain intellectual
properties associated with its business. The Company also claims a proprietary
interest in all confidential or trade secret information relating to its
businesses. Nor-Cote is party to a Patent License Agreement allowing it to
license certain conductive ink technologies and related intellectual property.

                                   Regulation

The Company's operations are subject to various federal, state and local laws
and regulations including:

      -     licensing requirements applicable to architects, engineers and other
            professionals;

      -     building and electrical codes;

      -     permitting and inspection requirements applicable to construction
            projects;

      -     Federal Communication Commission and Federal Aviation Administration
            regulations and requirements;

      -     regulations relating to worker safety and environmental protection;

      -     special bidding and procurement requirements on government projects;

      -     federal regulations relating to various employee benefit plans
            including 401(k) plan, cafeteria plan, group health plans, welfare
            benefit plans, health care flexible spending plan;

      -     federal regulations relating to employment taxes including
            withholding of income tax and obligations under FICA and FUTA;

      -     state regulations relating to employment taxes including State
            Unemployment Tax and;

      -     certain states have varying regulations regarding licensing,
            registration or certification requirements for PEOs. Regardless of
            whether a state has licensing, registration or certification
            requirements we must comply with a number of other state and local
            regulations that could impact our operations.

                                       10

<PAGE>

The Company believes that it has all the licenses required to conduct its
operations and that it is in substantial compliance with applicable regulatory
requirements. The failure of the Company to comply with applicable regulations
could result in substantial fines or revocation of its operating licenses.

The Company, through its Wireless Infrastructure and Manufacturing and
Distribution Segments is subject to various federal and state environmental
regulations. These regulations do not generally have a material effect upon the
Company.

Research and Development

Nor-Cote is the only subsidiary of the Company that incurs material research and
development expenses. During the fiscal year ending August 31, 2005, Nor-Cote
incurred $440,000 of research and development expenses as compared to $386,000
for the fiscal year August 31, 2004. Research and development takes place at
Nor-Cote's facility. These expenses primarily relate to research regarding
improvements to Nor-Cote's existing ultraviolet inks and the development of new
ultraviolet inks.

Employees

As of November 29, 2005, the Company had approximately 524 full-time employees
of which 371 were primarily engaged in the Wireless Infrastructure Segment, 89
were engaged in the Manufacturing and Distribution Segment, 52 were engaged in
the Business Solutions Segment, and 12 were primarily engaged by the Holding
Company (as hereafter defined). The Company had 41 part - time employees of
which 37 were primarily engaged in the Wireless Infrastructure Segment, 3 were
engaged in the Manufacturing and Distribution Segment, and 1 in the Business
Solutions Segment. In addition, the Business Solutions Segment of the Company
"co-employs" approximately 5,700 full-time employees and 1,200 part-time
employees. Total employees employed by the Company in all categories and
segments are approximately 7,465.

The Company anticipates that it will increase its staff within all of the
segments in the coming year. The Company's in-house staff is supplemented with
contract personnel on an as-needed basis. The Company believes that its
relationships with its employees are generally satisfactory. In the Company's JH
Drew subsidiary, approximately 192 of the Company's employees are represented by
a union.

ITEM 2. DESCRIPTION OF PROPERTY

In March 2004 the Company entered into an operating lease agreement
("Agreement") to rent one of its office and warehouse facilities from a related
party in which two members of the Control Group have an interest. The Agreement
expires in February 2009. The Agreement provides for base rent of $42,000 per
month. 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. The building is occupied by Fortune
Diversified Industries, Inc. (the "Holding Company") and several subsidiaries
including Kingston, Commercial Solutions, TTC, StarQuest, PDH, ITC, Magtech,
Cornerstone and Cornerstone Construction. 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.

As part of an arrangement, dated July 2003, entitled "Agreement for Purchase and
Sale of Real Estate" between the Company's Nor-Cote subsidiary and a party
controlled by a Company Shareholder, Nor-Cote purchased, in fiscal year 2005,
the office building in which the US administrative personnel are located. A
subsequent agreement was executed between Nor-Cote and a related party for the
sale of that building. No gain or loss was recorded on the transaction. On
September 1, 2005, Nor-Cote entered into an operating lease agreement to rent
the building from the related party. The agreement provides for base rent of
$7,000 per month. 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.

                                       11

<PAGE>

Additionally, Nor-Cote leases office and warehouse space in the UK, Singapore
and Malaysia under various operating lease arrangements expiring in various
years through 2015 with monthly rent of approximately $8,016. Nor-Cote entered
into an agreement to lease office and warehouse space in Atlanta, GA as part of
an operating lease through May 2007. The agreement provides for base rent of
$2,940 per month and three one-year renewal options.

Nor-Cote owns a building in Crawfordsville, IN where Nor-Cote's manufacturing
operations are conducted. The building is fully owned by the Company and has no
mortgages or other encumbrances.

PSM leases an office building in Richmond, IN from a related party. The lease is
for a period of five years and expires May 2008. The lease provides for a base
rent of $2,000 per month with nominal annual increases. The lease also includes
one renewal option, which allows the Company to extend the lease term for an
additional year.

Additionally, PSM leases an office building in Indianapolis, Indiana under a
lease agreement, which expires in December, 2008. There is no option to renew
the lease. The lease amount is $5,450 a month and is not subject to annual
increases or additional expenses such as property taxes, utilities, or
insurance.

On April 30, 2004, JH Drew entered into an operating lease agreement to rent
three buildings located in Indiana, Tennessee and Missouri from a related party.
The lease agreement includes a five-year term with on option to extend the lease
term for a one-year period and provides for base rent of $15,000 per month.
Following the first twelve-month period, the base rent shall be adjusted
annually to fair market value. 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.

On November 1, 2004, the asset acquisition of Magtech created sublease
obligations. In Indianapolis, Indiana the obligation is $1,500 a month from
November 1, 2004 through June 30, 2006. No operations are conducted in this
building. In Fort Wayne, Indiana the obligation is $2,600 a month from November
1, 2004 through December 31, 2010.

CSM leases office space in Brentwood, TN, under an agreement which expires in
January 2009. In addition to a monthly base rent of $9,000, the agreement
requires the Company to pay any increase in operating costs, real estate taxes,
and utilities over the base year.

In the opinion of the Company, its properties are adequate for its present
needs. The Company does not anticipate difficulty in renewing existing leases as
they expire or in finding alternative facilities. We believe all of our assets
are adequately covered by insurance.

ITEM 3. LEGAL PROCEEDINGS

The Company is not involved in any legal proceedings or claims that it believes
will have a material adverse effect on the Company's business or financial
condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal 2005.

                                       12

<PAGE>

                                     PART II

ITEM  5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

Market Information: The Common Stock of Fortune Diversified Industries, Inc. is
traded on the American Stock Exchange (Symbol: FFI). The approximate number of
holders of common stock was 1,385 (including shareholders of record and shares
held in street name) at November 29, 2005.

Since June 23, 2005, our $0.10 per share par value common stock, trades on the
American Stock Exchange under the symbol "FFI." Prior to June 23, 2005, our
stock traded on the NASD OTC Bulletin Board under the symbol "FDVI" for the
period June 17, 2001 through June 1, 2005 and under the symbol "FDVF" for the
period June 2, 2005 through June 22, 2005. High and low quotations reported by
the NASD OTC Bulletin Board or the American Stock Exchange, as applicable,
during the periods indicated are shown below. These quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions and may
not represent actual transactions. All share prices presented in this Annual
Report on Form 10-KSB have been restated to reflect the 1-for-10 stock split
effective June 2, 2005.

<TABLE>
<CAPTION>
                                                     High               Low
                                                     ----               ---
<S>                                                 <C>                <C>
Fiscal Year Ending August 31, 2005
     First Quarter                                  $11.80             $7.00
     Second Quarter                                   8.00              3.60
     Third Quarter                                    5.90              2.80
     Fourth Quarter                                   7.55              2.00

Fiscal Year Ending August 31, 2004
     First Quarter                                  $16.00             $3.00
     Second Quarter                                  16.50              8.70
     Third Quarter                                   12.50              8.50
     Fourth Quarter                                  10.10              7.50
</TABLE>

The Company has never declared or paid any dividends on its Common Stock. The
Board of Directors presently intends to retain any and all earnings for use in
the Company's business and therefore does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future.

There have been no securities authorized for issuance under any type of equity
compensation plan as of the end of fiscal year August 31, 2005.

The following table sets forth, for the period covered by this Form 10KSB, all
sales of unregistered securities by the Company that were not previously
reported.

<TABLE>
<CAPTION>
   Date                 Title of              Amount of          Recipient of
Of Issuance            Securities         Issued Securities   Issued Securities
-----------           ------------        -----------------   -----------------
<S>                   <C>                 <C>                 <C>
4/14/2005             Common Stock        20,000              Jeffrey Lewis (1)
</TABLE>

(1) Jeffrey Lewis was issued 20,000 shares of the Company's Common Stock
pursuant to Mr. Lewis' exercise of an option to purchase shares of the Company's
Common Stock. Mr. Lewis paid $2,000 to purchase the shares. The Company relied
on the exemption from registration provided under Section 4(2) of the Securities
Act.

                                       13

<PAGE>

Purchases of Equity Securities by the Small Business Issuer and Affiliated
Purchasers

<TABLE>
<CAPTION>

                                                                      MAXIMUM
                                                       TOTAL         NUMBER OF
                                                      SHARES          SHARES
                                       AVERAGE       PURCHASED        THAT MAY
                                        PRICE        AS PART OF        YET BE
                        TOTAL           PAID          PUBLICLY       PURCHASED
                       SHARES            PER          ANNOUNCED        UNDER
    PERIOD            PURCHASED         SHARE           PLANS        THE PLAN
------------------    ---------        -------       ----------      ---------
<S>                   <C>              <C>            <C>            <C>
June 20, 2005           1,600           $3.13           1,600        999,000 (1)
</TABLE>

(1) This amount is an approximate figure based upon a plan allowing the Company
to re-purchase up to $5 Million in Company common Stock. The share quantity is
therefore based on an approximate share price of $5.00/share.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION

Critical Accounting Policies

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

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

Valuation of Accounts Receivable and Inventory Reserves: Collectability of
accounts receivable is evaluated for each subsidiary based on the subsidiary's
industry and current economic conditions. Other factors include analysis of
historical bad debts, projected losses, and current past due accounts.
Inventories are valued at lower of cost or market using the first-in, first-out
method based on average cost. The Company's valuation of inventory includes both
a markdown reserve for inventory that will be sold below original cost, and a
usage reserve. The reserve values are evaluated by each subsidiary based upon
historical information and assumptions about future demand and market
conditions. The usage reserve value is based on historical information and
assumptions as to usage of current product in inventory and related usage
trends. The Company's accounts receivable and inventory reserves increased by
$400,000 and $127,000 respectively, at August 31, 2005 compared to August 31,
2004. It is possible that changes to the markdown and usage reserves could be
required in future periods due to changes in market conditions.

                                       14

<PAGE>

Goodwill and Other Intangible Assets:

The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets". With the adoption of SFAS No. 142,
material goodwill included in the Company's Wireless Infrastructure, Business
Solutions, and Manufacturing and Distribution Segments was assessed for
impairment. In making this assessment, management relies on a number of factors
including operating results, business plans, economic projections, anticipated
future cash flows, and transactions and market place data. There are inherent
uncertainties related to these factors and management's judgment in applying
them to the analysis of goodwill impairment. Since management's judgment is
involved in performing goodwill and other intangible assets valuation analyses,
there is risk that the carrying value of the goodwill and other intangible
assets may be overstated or understated.

The Company has elected to perform the annual impairment test of recorded
goodwill as required by SFAS 142 as of the end of fiscal fourth quarter. The
results of this annual impairment test indicated that the fair value of each of
the reporting units as of August 31, 2005, exceeded the carrying, or book value,
including goodwill, and therefore recorded goodwill was not subject to
impairment.

The Company recognized impairment on certain other intangible assets in its
Manufacturing and Distribution Segment of $417,000 and its Wireless
Infrastructure Segment of $219,000. Management determined the assets were
impaired based upon (a) violation of non-compete agreements with certain
terminated employees and (b) substantial change in the customer mix within the
Manufacturing and Distribution Segment.

Impairment of Long-Lived Assets:

The Company evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which generally requires the
Company to assess these assets for recoverability whenever events or changes in
circumstance indicate that the carrying amounts of such assets may not be
recoverable. The Company considers historical performances and future estimated
results in its evaluation of potential impairment and then compares the carrying
amount of the asset to the estimated non-discounted future cash flows expected
to result from the use of the asset. If such assets are considered to be
impaired, the impairment recognized is measured by comparing projected
individual segment discounted cash flows to the asset segment carrying values.
The estimation of fair value is measured by discounting expected future cash
flows at the discount rate the Company utilizes to evaluate potential
investments. Actual results may differ from these estimates and as a result the
estimation of fair values may be adjusted in the future.

Income Taxes:

Deferred tax assets are recognized for taxable temporary differences, tax credit
and net operating loss carryforwards. These assets are reduced by a valuation
allowance, which is established when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. In 2004, based
on this evaluation; the Company recorded approximately a 75% valuation allowance
on the consolidated balance sheet for its deferred tax assets. This amount
approximates a valuation allowance of 25% on its Business Solutions Segment,
valuation allowance of 100% on its Manufacturing and Distribution Segment, and
valuation allowance of 75% on its Wireless Infrastructure segment. During 2005,
the Company recorded a 100% valuation allowance on additions to deferred tax
assets due to uncertainty regarding future profitability of the Company based on
(a) the current year loss and (b) estimated increase in budgeted operating
expenses related to implementation of certain provisions of the Sarbanes Oxley
Act of 2002. In addition, management is required to estimate taxable income for
future years by taxing jurisdictions and to consider this when making its
judgment to determine whether or not to record a valuation allowance for part or
all of a deferred tax asset. A one percent change in the Company's overall
statutory tax rate for 2005 would not have a material effect in the carrying
value of the net deferred tax assets or liabilities.

                                       15

<PAGE>

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

Accrued insurance and workmen's compensation reserves:

The Company's Business Solutions Segment recognizes significant reserves in
relation to its partially self-insured worksite employees' health and accident
benefit programs based on (a) amount of past claims incurred and (b) estimated
time lag to report and pay such claims. The Company's policy is to accrue
estimated unpaid claims incurred during the fiscal year based on weighted
average historical claims paid over a 2-month to 3-month lag period. PSM is
insured for losses in excess of $180,000 per person with an aggregate stop loss
of $11,110,000 at August 31, 2005. The combined reserve recognized for unpaid
health and accident benefits on the Company's consolidated balance sheet is
$4,000,000 for the year ended August 31, 2005.

New Accounting Policies:

In September 2004, the Financial Accounting Standards Board's (FASB) Emerging
Issue Task Force ("EITF") reached a consensus on EITF Issue No. 04-08, "The
Effect of Contingently Convertible Instruments on Diluted Earnings per Share."
The Task Force reached a conclusion that Contingently Convertible Instruments
should be included in diluted earnings per share computations, if dilutive,
regardless of whether the market price trigger or other contingent features have
been met. Contingent stock resulting from various acquisitions over the last 3
years, not included in the Company's common stock outstanding at August 31,
2005; are included in the accompanying statements of operations and Note 14 in
diluted earnings per share.

In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) 151, "Inventory Costs". This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage), and requires that these items be recognized as
current-period charges. In addition, SFAS 151 is effective for the first quarter
of fiscal year 2006. The Company does not expect the impact of adopting this
standard to be material.

In December 2004, the FASB issued Statements No. 123R, "Share-Based Payment"
("FAS 123R"), an amendment of FASB Statements No. 123 and 95. Under FAS 123R,
all forms of share-based payment to employees, including employee stock options,
would be treated as compensation and recognized in the statement of operations.
This statement is effective for interim periods beginning after June 15, 2005.
The SEC has delayed implementation date to fiscal years beginning on or after
June 15, 2005. The Company anticipates adopting the provisions of FAS 123R
beginning September 1, 2005. The impact on future periods is not expected to be
material.

In May 2005, the FASB issued Statement SFAS No. 154 "Accounting Changes and
Error Corrections" (SFAS 154) which supersedes APB Opinion No. 20, Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements". SFAS 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes, unless impractible,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific
to the newly adopted accounting principle. The correction of an error in
previously issued financial statements is not an accounting change. However, the
reporting of an error correction involves adjustments to previously issued
financial statements similar to those generally applicable to reporting an
accounting change retroactively. Therefore, the reporting of a correction of an
error by restating previously issued financial statements is also addressed by
this Statement. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company is in
the process of determining the impact of SFAS 154 on its consolidated results of
operations and financial condition.

                                       16

<PAGE>

RESULTS OF OPERATIONS FOR THE YEARS ENDED AUGUST 31, 2005 AND AUGUST 31, 2004

Executive Overview

Financial Summary

Revenues were $113.096 million for the year ended August 31, 2005 compared with
$66.882 million for the year ended August 31, 2004. The increase in revenues was
primarily attributable to the acquisitions of Ink Source, Magtech, EI Solution,
and CSM in 2005 and PSM, ITC, and JH Drew in 2004. Additionally the Company
experienced internal, organic revenue growth of approximately $11 million due
mainly to an 1) increase in demand for services provided by certain subsidiaries
in the Company's Wireless Infrastructure Segment due to the cellular
communication industry's investment in expansion of their networks and 2)
increase in customer base in the Company's PEO business due to small market
penetration in the geographic regions which we service.

Despite the increased revenues, the Company reported a net loss of ($2.317)
million or ($.22) per share for the year ended August 31, 2005 compared with net
income of $2.402 million or .23 per share for the year ended August 31, 2004.
The following factors contributed to the decrease in net income in fiscal year
2005:

      -     Loss on a project, considered a special charge by management in the
            Company's Wireless Infrastructure Segment of approximately $1.2
            million due to additional costs incurred in excess of contract
            prices. The special charge relates to the Company's aggressive
            approach to gain market share and geographic expansion, mainly in
            its ITC subsidiary.

            -     Management has taken steps to minimize future losses through
                  implementation of a new management team within this subsidiary
                  as well as ongoing restructurings related to customer contract
                  negotiations, purchasing procedures, and cost reduction plans.

      -     Increase in estimates for the Company's allowance for doubtful
            accounts of $400,000 due mainly to (a) an increase in revenues in
            the Wireless Infrastructure Segment, (b) certain revenue recognition
            issues concerning multiple elements within certain wireless
            contracts, and (c) reduction in accounts receivable turnover in
            certain wireless subsidiaries due to slow payments by certain
            customers.

      -     Impairment loss on certain intangible assets in the Company's
            Manufacturing and Distribution and Wireless Infrastructure Segments
            of $636,000 due to management directed restructuring in the
            respective divisions.

            -     Restructurings included (a) a change in customer list due to
                  the loss of a master distributor agreement and (b) a decrease
                  in volume from majority of customers included in the customer
                  list at the purchase date.

            -     Restructurings of personnel resulting in non-compete agreement
                  violations

      -     Compensation expense related to vesting of Company stock under
            certain employment agreements and vesting of cash bonus programs
            related to acquisitions of approximately $500,000.

      -     Company growth and subsidiary expansion in all segments.

      -     Decrease in gross profit of JH Drew due mainly to (a) seasonality of
            the construction business, (b) suppressed gross margin in JH Drew
            due to increased competition resulting from a delay in congress to
            approve a federal highway bill expected to increase government
            spending of highway construction projects by the billions, and (c)
            increase in steel and diesel prices.

            -     The Company expects increased revenues in the fourth quarter
                  of 2006 due to states' issuance of work from the federal
                  passing of the bill in August 2005.

      -     Increase in interest expense of $825,000. Interest expense increased
            in fiscal year 2005 approximately $450,000 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 cash flow
            needs.

      -     Increase in workers compensation claims in the Company's JH Drew
            subsidiary over the prior year of approximately $223,000.

      -     Total inventory markdowns of $203,000 related to the Company's
            Manufacturing and Distribution Segment for market price adjustments
            and obsolescence.

                                       17

<PAGE>
Management's expectations for fiscal year 2006 include internal revenue growth
estimates of 15%-20%. With the wireless industry improving, the Company believes
there is opportunity for continued substantial growth in the Company's Wireless
Infrastructure Segment. Management believes the ability for the Company's
wireless subsidiaries to offer turnkey services to build or expand networks puts
the Company at a competitive advantage. These advantages include, but are not
limited to; providing customers with a one-stop shop approach to servicing the
wireless industry, efficiencies created by working from the same locations and
thereby creating the ability to complete projects more timely relative to the
Company's competition. The Company anticipates marketing these services and
bidding on more projects directly with the carriers, rather than operating as
subcontractors, which is expected to increase gross margin and net income.
Management anticipates internal revenue growth in the Business Solutions Segment
from the Company's PEO businesses of approximately 12%-15%. Due to the small
market saturation within the PEO industry for companies with 100-500 employees,
management believes that this growth estimate may prove to be conservative.
Though PSM and CSM continue to specialize in fee revenue associated with the
administration of payroll and related services; the Company continues to expand
other services including human resource outsourcing, employment training and
testing. Earnings will be dependant on a number of factors including the ability
of the Company to execute strategies.

Summarized financial information concerning the Company's reportable segments is
shown in the following table (amounts in thousands):

<TABLE>
<CAPTION>
                                                                          MANUFACTURING  AND     WIRELESS      HOLDING     SEGMENT
                                                     BUSINESS SOLUTIONS      DISTRIBUTION     INFRASTRUCTURE   COMPANY      TOTAL
<S>                                                  <C>                  <C>                 <C>             <C>         <C>
YEAR ENDED AUGUST 31, 2005
Net revenues                                         $           28,458   $           22,109  $       62,529  $       --  $ 113,096
Cost of revenues                                                 21,646               15,989          54,436          --     92,071
                                                     ------------------   ------------------  --------------  ----------  ---------
Gross profit                                                      6,812                6,120           8,093          --     21,025
Operating expenses
    Selling, general and administrative expenses                  4,107                6,386           6,830       2,362     19,685
    Depreciation and amortization                                   336                  581             689         103      1,709
    Impairment loss of intangible assets                             --                  417             219          --        636
                                                     ------------------   ------------------  --------------  ----------  ---------
       Total operating expense                                    4,443                7,384           7,738       2,465     22,030
                                                     ------------------   ------------------  --------------  ----------  ---------

Segment operating income (loss)                      $            2,369   $           (1,264) $          355  $   (2,465) $  (1,005)
                                                     ==================   ==================  ==============  ==========  =========

AS OF AUGUST 31, 2005
Cash                                                 $            3,103   $              399  $          414  $     (129) $   3,787
Restricted savings account                                        1,484                   --              --          --      1,484
Available for sale investments                                    2,199                   --              --          --      2,199
Accounts receivable                                               1,304                3,315          16,736           3     21,358
Costs and estimated earnings in excess of billing
    of billing on uncompleted contracts                              --                   --           2,681          --      2,681
Inventory, net                                                       15                4,120           4,180          --      8,315
Prepaid expenses and other current assets                           421                  198             940         231      1,790
Deferred tax asset                                                  563                   --             451          --      1,014
Property and equipment, net                                         306                2,212           2,077         469      5,064
Goodwill                                                          4,287                5,970           1,423          --     11,680
Other intangible assets, net                                      3,773                  740             192          --      4,705
Accounts receivable - long term                                      --                   --             600          --        600
Other long term assets                                               18                   55              --         336        409
                                                     ------------------   ------------------  --------------  ----------  ---------

Total Segment Assets                                 $           17,473   $           17,009  $       29,694  $      910  $  65,086
                                                     ==================   ==================  ==============  ==========  =========

YEAR ENDED AUGUST 31, 2004
Net revenues                                         $           17,958   $           23,394  $       25,530  $       --  $  66,882
Cost of revenues                                                 13,854               16,374          21,030          --     51,258
                                                     ------------------   ------------------  --------------  ----------  ---------
Gross profit                                                      4,104                7,020           4,500          --     15,624
Operating expenses
    Selling, general and administrative expenses                  1,937                5,882           2,861       1,232     11,912
    Depreciation and amortization                                   157                  634             341          32      1,164
                                                     ------------------   ------------------  --------------  ----------  ---------
       Total operating expense                                    2,094                6,516           3,202       1,264     13,076
                                                     ------------------   ------------------  --------------  ----------  ---------

Segment operating income (loss)                      $            2,010   $              504  $        1,298  $   (1,264) $   2,548
                                                     ==================   ==================  ==============  ==========  =========

AS OF AUGUST 31, 2004
Cash                                                 $            2,836   $              633  $           50  $        8  $   3,527
Restricted savings account                                          210                   --              --          --        210
Available for sale investments                                    1,959                   --              --          --      1,959
Accounts receivable                                                 844                3,601          11,442           7     15,894
Costs and estimated earnings in excess of billing
    of billing on uncompleted contracts                              --                   --           1,879          --      1,879
Inventory, net                                                       11                3,253           6,482          --      9,746
Prepaid expenses and other current assets                           227                  198             358          32        815
Deferred tax asset                                                  563                   --             451          --      1,014
Property and equipment, net                                          37                2,121           1,649         231      4,038
Goodwill                                                          3,580                5,957             655          --     10,192
Other intangible assets, net                                        962                1,012             137          --      2,111
Other long term assets                                               43                   94              19          28        184
                                                     ------------------   ------------------  --------------  ----------  ---------

Total Segment Assets                                 $           11,272   $           16,869  $       23,122  $      306  $  51,569
                                                     ==================   ==================  ==============  ==========  =========
</TABLE>

                                       18
<PAGE>

Wireless Infrastructure

Revenues

Revenues for the year ended August 31, 2005 amounted to $62.529 million compared
to $25.53 million for the year ended August 31, 2004, an increase of $36.999
million or 145%. The increase in revenues was due mainly to 1) the acquisition
of JH Drew on April 30, 2004 resulting in a $29.111 million increase and 2) an
increase in revenues of $8.52 million in the Company's subsidiaries which
provide services that assist in the expansion and upgrade of the wireless
carriers' cellular communication networks.

JH Drew, which was acquired on April 30, 2004, reported revenues of $46.669
million for the twelve months ended August 31, 2005, compared to $17.558 million
for the four months ended August 31, 2004. JH Drew reported an increase of 2% in
pro-forma revenues for the twelve months ended August 31, 2004 (which includes
eight months of activity prior to ownership by the Company) as compared to
twelve months ended August 31, 2005. The increase in pro-forma revenues was due
mainly to a mild spring and moderate rainfall in the summer in the Midwest
states where JH Drew operates.

The subsidiaries which provide services that assist in the expansion of the
wireless carriers cellular communication networks and upgrades include ITC,
Magtech, PDH and Cornerstone Construction. The $8.52 million, or 133% increase
in revenues was due mainly to (a) growth in the industry which created demand
for the Company's services and (b) the Company's acquisitions of ITC in 2004 and
Magtech in 2005. ITC reported twelve months revenue of $3.338 million in fiscal
year 2005 and four months of revenue of $538,000 in fiscal year 2004. Magtech
was acquired during fiscal year 2005, and reported ten months revenue of $2.144
million (net of $480,000 inter-company sales). The Company's competition over
the past five years has decreased due to a corresponding decrease in demand for
network expansion and upgrade services by wireless carriers. Due to capital
expansion in the industry over the past year, the Company was able to increase
market share with existing customers and procure new customers as steps were
taken by the carriers for larger investments in these areas. Although revenue
increased significantly in each subsidiary, the Wireless Infrastructure Segment
reported a net loss from operations. The loss was primarily attributable to
costs incurred in excess of contract prices. The Company has taken steps to
mitigate future losses through implementation of a new management team within
this subsidiary as well as ongoing restructurings related to customer contract
negotiations, purchasing procedures, and cost reduction plans. JH Drew is
reporting a backlog of $23 million at August 31, 2005 as compared to $28 million
at August 31, 2004. Since congress passed the federal highway bill in August
2005, management anticipates backlog to increase over the course of the year,
but revenue to remain flat until fourth quarter of fiscal year 2006. Management
believes 2006 revenue will be comparable to 2005 revenue with margins tight due
to increased competition minimizing industry profits. Anticipated revenues in
2007; however, are expected to increase with work from the federal highway bill
once approved by the various states. Additional challenges for JH Drew during
2005 included an increase in steel prices which had an adverse effect on
contract profitability, and an increase in fuel prices which are expected to
continue to have a negative effect on gross margin for much of 2006.

Management believes the wireless industry will continue to strengthen over the
next few years. The Company believes there is opportunity for continued
substantial growth in the Company's Wireless Infrastructure Segment of business.
Management believes the ability for the Company's subsidiaries to offer turnkey
services to build or expand networks positions the wireless companies at a
unique competitive advantage. Advantages include being a one-stop shop for the
Company's clients and efficiencies created by working out of the same locations
allowing projects to be completed more timely. The Company anticipates on
marketing these services and bidding on more projects directly with the
carriers, rather than operating as subcontractors, which will increase margins
and income.

                                       19

<PAGE>
Key risk factors facing these companies in 2006 include industry mergers;
customer budget constraints; ability to cancel or put a project on hold; ability
of the companies to hire and retain experienced personnel; execution of business
strategies; competition shutting us out of a market with a customer; keeping up
with new technologies and industry standards; and working capital constraints.

Gross Profit

Gross profit for the year ended August 31, 2005 was $8.093 million representing
12.94% of revenues, compared to $4.5 million representing 17.63% of revenues for
the fiscal year ended August 31, 2004. The increase in gross profit dollars was
due to the increased revenue as discussed above. The decrease in gross profit
margin of 4.69% was due mainly to 1) the Company's JH Drew subsidiary reporting
9.42% gross profit margin for twelve months ended August 31, 2005 compared to
15.69% gross profit margin for the four months ended August 31, 2004 and 2) the
Company's ITC subsidiary reporting a decrease in gross profit margin, from
35.13% for the four months ended August 31, 2004 as compared to 3.80% for the
twelve months ended August 31, 2005.

The decrease in JH Drew gross profit margin was primarily attributable to
seasonality and the inherent factors within the construction business, heavy
competition as a result of the delayed passing of the federal highway bill, and
increase in steel and diesel prices. The decrease in ITC gross profit margin was
due mainly to costs incurred in excess of contract prices. The Company has taken
steps to mitigate future losses through implementation of a new management team
within this subsidiary as well as ongoing restructurings related to customer
contract negotiations, purchasing procedures, and cost reduction plans.

Gross profit margin, excluding inter-company sales, in the Company's Magtech and
PDH subsidiaries decreased 1.9% due mainly to the increase in work as a
percentage of revenues outsourced to subcontractors, which increased at a rate
higher than internally generated revenues with employees. In addition, the
increase in costs associated with adding new employees and training costs
affected margins negatively.

Gross profit margins increased 13% in the Company's Cornerstone Construction
subsidiary due to internal management restructuring and successful execution of
strategies including accepting contracts with higher margins, procuring
additional work directly with carriers, and hiring employees rather than
subcontracting a larger percentage of the work performed.

Operating Income

Operating income for the year ending August 31, 2005 was $355,000, compared to
$1.298 million for the year ended August 31, 2004, a decrease of $943,000. JH
Drew reported a decrease in operating income of $484,000 for the twelve months
ended August 31, 2005 as compared to the four months ended August 31, 2004. The
decrease in JH Drew operating income was due mainly to decreased gross margins
as discussed above as well as and an increase in workers compensation claims in
the Company's JH Drew subsidiary resulting in an increase in operating expense
of $223,000.

Additionally, the Company's ITC subsidiary reported a decrease in operating
income of $1.318 million due mainly to decreased gross margins as discussed
above. ITC recognized an impairment charge on certain intangible assets of
$219,000 due to restructurings of personnel, resulting in non-compete agreement
violations. The remaining subsidiaries in the wireless telecommunications
segment reported an increase in operating profits of $859,000.

                                       20

<PAGE>

Manufacturing and Distribution

Revenues

Revenues for the year ended August 31, 2005 were $22.109 million compared to
$23.394 million for the year ended August 31, 2004, a decrease of $1.285 million
or 5%. There was a decrease in revenues of approximately $1.465 million or 11%
in the distribution companies, Kingston and Commercial Solutions, despite
Commercial Solutions only reporting seven months of activity for the twelve
months ended August 31, 2004, compared to twelve months ended August 31, 2005.
The decrease in revenues in the distribution companies was mainly the result of:

      -     Decreased customer base due to the implementation of a more
            stringent credit policy resulting in lower sales volume.

      -     Decreased customer base due to increased pricing of certain products
            related to the loss of a master distributor agreement in April 2005
            with a major manufacturer for commercial televisions.

This decrease in revenues was offset somewhat by Commercial Solutions' and
Kingston's expansion of product offerings, mainly other brand name televisions
from other manufacturers at competitive prices.

Nor-Cote's revenues increased 2.3% due mainly to revenues resulting from the
acquisition of Ink-Source on September 30, 2004. This increase at Nor-Cote was
offset by a decrease in revenues in the tag and label and compact disk markets
which are shrinking, moving to combination print processes or becoming a
commodity in a highly competitive market. Additionally Nor-Cote has experienced
a small increase in sales in Asia due to an increase in sales in the nameplate/
membrane switch and container inks which are offsetting the erosion of sales in
the compact disk market.

Future trends for revenue and profitability for Kingston and Commercial
Solutions are difficult to predict due to a variety of known and unknown risks
and uncertainties, including, without limitation, (i) dependence upon principal
suppliers and availability and price of electronic and rubber products; (ii)
loss of significant customers or a reduction in prices we charge these
customers; (iii) lack of demand for our products and services in certain markets
and our inability to maintain margins; (iv) our ability to absorb, through
revenue growth, the increasing operating costs that we have incurred and
continue to incur in connection with our activities; (v) uncertainty as to
whether electronic equipment manufacturers will continue to outsource aspects of
their business to us; (vi) possible adverse effect on demand for our products
resulting from consolidation of electronic manufacturers (vii) economic
conditions in our markets; (viii) ability to respond to rapid technological
changes in the electronics industry; (ix) access to or the cost of increasing
amounts of capital, trade credit or other financing; (x) ability to meet intense
industry competition; (xi) ability to manage and sustain future growth at our
historical or industry rates; (xii) success of relationships with electronics
equipment manufacturers, (xiii) seasonality; (xiv) ability to attract and retain
qualified management and other personnel and (xv) ability to maintain adequate
business insurance at reasonable cost.

Principal risks and uncertainties that may limit the success of Nor-Cote include
(i) raw material shortages or discontinuance of product (ii) the cost of
increasing amounts of capital, trade credit or other financing in order to
facilitate R&D investments; (iii) raw material price increases (iv) ability to
attract and retain qualified management and other personnel; (v) loss of
significant customers or a reduction in prices we charge these customers; (vi)
lack of demand for our products and services in certain markets and our
inability to maintain margins; (vii) our ability to absorb, through revenue
growth, the increasing operating costs that we have incurred and continue to
incur in connection with our activities; and (viii) risks of foreign operations,
including currency, trade restrictions and political risks in our foreign
markets. Because of the aforementioned uncertainties affecting our future
operating results, past performance should not be considered to be a reliable
indicator of future performance, and investors should not use historical trends
to anticipate future results or trends.

                                       21

<PAGE>

Gross Profit

Gross profit for the year ended August 31, 2005 was $6.120 million representing
28% of sales, compared to $7.02 million representing 30% of sales for the year
ended August 31, 2004. Nor-Cote's gross margins are significantly higher than
the distribution companies of Kingston and Commercial Solutions due to the
specialty niche of ink manufacturing products. Nor-Cote's revenues as a percent
of the total Manufacturing and Distribution Segment revenue was 49% for the 12
months ended August 31, 2005 as compared to 45% for the 12 months ended August
31, 2004. There was a decrease in gross profit margins at Nor-Cote of 2%. The
decrease in gross profit margin at Nor-Cote was due mainly to an increase in raw
material costs that were offset somewhat by a price increase in the fourth
quarter ended August 31, 2005; and an increase in Asia sales for higher margin
products as discussed above. Additionally Kingston and Commercial Solution's
gross profit margin decreased approximately 4.6% due mainly to a) increased
freight costs, and b) a $203,000 increase in inventory reserves due to lower of
cost or market and obsolescence adjustments at Commercial Solutions and Kingston
Sales.

Operating Income

Operating income (loss) for the year ended August 31, 2005 was $(1.264) million,
compared to $504,000 for the year ended August 31, 2004, a decrease of $1.768
million. The decrease in operating income was primarily attributable to the
decrease in gross margins as discussed above plus an increase in operating
expenses of approximately $601,000 in the Company's Nor-Cote subsidiary
including the hiring of additional personnel, stock issued to employees as part
of certain employment agreements, and increased expenses related to opening a
new US branch and increased marketing efforts in Latin America and Asia. These
Nor-Cote expenses were incurred primarily for business expansion and technology
investment but were not offset in 2005 with increased revenues. Additionally,
Commercial Solutions only reported seven months of activity for fiscal year 2004
as compared to twelve months activity for the fiscal year ended August 31, 2005,
resulting in increased costs of $337,000. Kingston recognized impairment on
certain intangible assets of $417,000 due to a management directed restructure.
The restructure resulted in a change to Kingston's customer base and changes in
key employees with non-compete agreements.

Business Solutions

Revenues

Revenues for the year ended August 31, 2005 were $28.458 million compared to
$17.958 million for the year ended August 31, 2004, an increase of $10.500
million. PSM, which was acquired on October 1, 2003, reported revenue of $21.935
million (net of inter-company revenues of $630,000) for the year ended August
31, 2005 as compared to $17.958 for the eleven months ended August 31, 2005, an
increase of $3.977 million. PSM's pro forma revenues for the twelve months ended
August 31, 2005 versus twelve months ended August 31, 2004 (which includes one
month activity prior to ownership by the Company) show an approximate 12.5%
increase. The increase in revenues was due to an increase in customer base
related to increased demand by customers. CSM, which was acquired on April 1,
2005, reported revenue of $6.523 million for the five months ended August 31,
2005.

Management anticipates internal growth in our PEO businesses of approximately
12%-15%. Due to the small market saturation within the PEO industry for
companies with 100-500 employees, management believes that this growth estimate
may prove to be conservative. Though PSM and CSM's primary focus involves fee
revenue associated with the administration of payroll and related services, the
Company continues to expand other services including human resource outsourcing,
employment training and testing.

                                       22

<PAGE>
The business variables that the Company works to overcome include the risk of
the partially self funded health insurance and workers compensation insurance
reserves; the volatile economy; unemployment insurance claims; employers
liability insurance industry; government regulations on employment, employment
taxes and insurance; and client credit risks.

Gross Profit

Gross profit for the year ended August 31, 2005 was $6.812 million, representing
23.94% of revenue as compared to $4.104 million for the year ended August 31,
2004, representing 24.54% of revenue. PSM reported gross margin of $5.382
million, or 23.86%, for the twelve months ended August 31, 2005 as compared to
$4.104 million, or 24.54%, for the eleven months ended August 31, 2004. The
increase in gross profit percentage was due mainly to a decrease in PSM's health
insurance reserves based upon a decrease in historical claims paid. This
decrease in insurance expense was offset somewhat by a 1% Indiana state increase
in the unemployment tax in January 2005. CSM, which was acquired on April 1,
2005, reported gross profit of $1.430 million or 21.9% of revenues for the five
months ended August 31, 2005.

Operating Income

Operating income for the year ended August 31, 2005 was $2.369 million as
compared to $2.010 million for the year ended August 31, 2004. PSM, which was
acquired on October 1, 2004, reported operating income of $2.158 million for the
twelve months ended August 31, 2005 as compared to $2.010 million for the eleven
months ended August 31, 2004. Operating income increased disproportionately with
revenues due mainly to an increase in internal employees. CSM reported operating
income of $227,000 for the five months ended August 31, 2005.

Holding Company

The Company's Holding Company does not have any income producing operating
assets. As such, the operating loss is equal to operating expenses. Operating
expenses consist primarily of employee compensation and benefits, legal,
accounting and consulting fees. Operating expenses for the year ended August 31,
2005 were $2.465 million, compared to $1.264 million for the year ended August
31, 2004, an increase of $1.201 million. This increase was due mainly to an
increase in accounting and legal expenses due mainly to corporate growth through
acquisitions, the hiring of additional employees in accounting and information
technology as well as a new CEO in June 2005. The Company expects to double its
budget in fiscal year 2006 for personnel and outside accounting and consulting
due primarily to Sarbanes Oxley legislation passed in 2002.

Interest expense for the year ended August 31, 2005 was approximately $1.445
million as compared to $620,000 for the year ended August 31, 2004. Interest
expense increased in fiscal year 2005 approximately $450,000 due to an increase
in prime and LIBOR rates. The remaining increase was due to an increase in debt
of $10.6 million.

Significant estimates have been made by management with respect to the
realizability of the Company's deferred tax assets. Actual results could differ
from these estimates making it reasonably possible that a change in these
estimates could occur in the near term. The net change in the valuation
allowance for deferred income tax assets was $0 and $625,000 at August 31, 2005
and 2004, respectively. The valuation allowance relates primarily to net
operating loss carryforwards, tax credit carryforwards, and net deductible
temporary differences. The Company evaluates a variety of factors in determining
the amount of the deferred income tax assets to be recognized pursuant to SFAS
No. 109, including the number of years the Company's operating loss and tax
credits can be carried forward, the existence of taxable temporary differences,
the Company's earnings history and the Company's near-term earnings
expectations. 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.

                                       23

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      1)    At August 31, 2005, cash and available for sale investments totaled
            $5.986 million at August 31, 2005 as compared to $5.486 million at
            August 31, 2004.

      2)    As of August 31, 2005 the Company had working capital of
            approximately $1.2 million compared with $9.174 million at August
            31, 2004. The decrease in working capital is primarily attributable
            to an increase in borrowings under the Company's line of credit of
            $11.050 million.

      3)    Cash flows used in operations for the year ended August 31, 2005 was
            $5.259 million as compared to cash flow provided by operating
            activities of $508,000 at August 31, 2004. This decrease in
            operating cash flows was due mainly to an increase in accounts
            receivable of $5.560 million. The increase in accounts receivable
            was due mainly to an increase in revenues in the fiscal fourth
            quarter as a result of the Company's subsidiaries which provide
            services that assist in the expansion of the wireless carriers
            cellular communication networks (PDH, Magtech, ITC Cornerstone
            Construction). Additionally accounts receivable days outstanding
            increased due mainly to longer pay terms with customers of these
            subsidiaries.

      4)    At August 31, 2005 the Company had used substantially all of its
            funds available on its line of credit with the bank. Subsequent to
            August 31, 2005, the Company procured an additional $1 million on
            its line of credit with the bank.

      5)    Total debt at August 31, 2005 was $33.956 million as compared to
            $22.622 million at August 31, 2004. The increase in debt was
            primarily due to the acquisitions of CSM, Magtech, EI Solutions and
            Ink Source utilizing 2.758 million in cash, as well as funds used
            in operating activities of $5.259 million, and capital expenditures
            of $1.932 million.

The Company has focused in the past year on rapid internal growth as well as
growth through acquisitions. The Company has incurred substantial operating
costs in the areas of research and development, branch expansion, and hiring of
additional personnel. Sources of funds for this expansion have mainly been from
additional borrowings from the bank. At August 31, 2005 the Company was in
violation of certain covenants related to its' consolidated financial
statements. The bank has granted the Company a waiver for such violations. Our
loans with the bank are guaranteed by personal assets of two of the Company's
majority stockholders. The Company is reviewing opportunities for additional
capital through equity offerings and new bank debt as well as restructuring of
debt with a related party through a preferred stock offering. On November 21,
2005, the Company procured $7.5 million in cash minus certain transaction costs
per the terms of a Securities Purchase Agreement with an investment company. The
terms of the agreement include the issuance of a Convertible Term Note. The note
is due on or before November 2008. Subject to the terms of the note, the note is
payable in cash or is convertible into shares of the Company's common stock. The
Company also issued a warrant to purchase up to 272,727 shares of the Company's
common stock.

We believe that cash to be generated from operations in 2006, along with
available cash and cash equivalents, as well as additional cash sources from
external banks and investors will be sufficient to fund our 2006 operating
needs.

                                       24

<PAGE>

RISK FACTORS

The Company's businesses are subject to a variety of risks, including the risks
described below. The risks and uncertainties described below are not the only
ones facing the Company. Additional risks and uncertainties not known to
management of the Company, or that management of the Company currently considers
to be immaterial, may also impair its business operations. If any of the
following risks actually occur, the Company's business, financial condition and
results of operations could be materially and adversely affected.

The industries the Company serves are subject to rapid technological and
structural changes that could reduce the demand for the products and services
the Company provides. The telecommunications industry is undergoing rapid change
as a result of technological advances and deregulation that could, in certain
cases, reduce the demand for the Company's services or otherwise adversely
affect its business. Improvements in existing technology may allow
telecommunications companies to significantly improve their networks without
physically upgrading them and thereby using the Company's services. In addition,
consolidation in the telecommunications industry may result in the loss of one
or more customers.

The Company may be unsuccessful at generating internal growth. The Company's
ability to generate internal growth will be affected by, among other factors,
its ability to:

      -     expand the range of services it offers 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 its operating and overhead expenses.

In addition, the Company's customers may reduce the number or size of projects
available to the Company due to their inability to obtain capital. Many of the
factors affecting the Company's ability to generate internal growth may be
beyond its control, and the Company cannot be certain that its strategies will
be successful or that it will be able to generate cash flow sufficient to fund
its operations and to support internal growth. Its inability to achieve internal
growth could materially and adversely affect its business, financial condition
and results of operations. A number of other factors, including financing
conditions for the industries the Company serves, could adversely affect its
customers and their ability or willingness to fund capital expenditures in the
future.

The Company may be unsuccessful at integrating companies that it acquires. The
Company may not successfully integrate its acquired companies with its existing
operations without substantial costs, delays or other operational or financial
problems. Failure to implement proper overall business controls could result in
inconsistent operating and financial practices at the companies the Company
acquires, and its overall profitability could be adversely affected. Integrating
its acquired companies involves a number of special risks which could materially
and adversely affect the Company's business, financial condition and results of
operations, including:

      -     failure of acquired companies to achieve results expected by the
            Company

      -     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.

If one of the acquired companies suffers customer dissatisfaction or performance
problems, the reputation of the entire Company could be materially and adversely
affected.

                                       25

<PAGE>

The Company may not have access in the future to sufficient funding to finance
desired growth. If it cannot secure additional financing from time to time in
the future on acceptable terms, the Company may be unable to support its growth
strategy. The Company cannot readily predict the timing, size and success of its
acquisition efforts and therefore the capital it will need for these efforts.
Using cash for acquisitions limits its financial flexibility and makes the
Company more likely to seek additional capital through future debt or equity
financings. If the Company seeks additional debt or equity financing, it may
have to agree to additional covenants that limit its operational and financial
flexibility. When it seeks additional debt or equity financings, it cannot be
certain that additional debt or equity will be available to it at all or on
terms acceptable to it.

The Company's operating results may vary significantly from quarter-to-quarter.
During the winter months, demand for its services may be lower due to inclement
weather. Additionally, the Company's quarterly results may also be materially
affected by:

      -     the availability of products to sell;

      -     changes to the cost of available products;

      -     the timing and volume of work under new agreements;

      -     regional or general economic conditions;

      -     the budgetary spending patterns of customers;

      -     variations in the margins of projects performed during any
            particular quarter;

      -     the termination of existing agreements;

      -     costs the Company incurs to support growth internally or through
            acquisitions or otherwise;

      -     losses experienced in its operations not otherwise covered by
            insurance;

      -     a change in the mix of our customers, contracts and business;

      -     increases in design costs;

      -     the timing of acquisitions; and

      -     the timing and magnitude of acquisition assimilation costs.

Accordingly, the Company's operating results in any particular quarter may not
be indicative of the results that can be expected for any other quarter or for
the entire year.

Many of the Company's contracts may be canceled on short notice and the Company
may be unsuccessful in replacing the contracts as they are completed or expire.

The Company could experience a material adverse effect on its revenue, net
income and liquidity if any of the following occur:

      -     its customers cancel a significant number of contracts;

      -     it fails to win a significant number of its existing contracts upon
            re-bid; or

      -     it completes the required work under a significant number of
            non-recurring projects and cannot replace them with similar
            projects.

The Company's business growth could outpace the capability of its corporate
management infrastructure. The Company cannot be certain that its systems,
procedures and controls will be adequate to support its operations as they
expand. Future growth also will impose significant additional responsibilities
on members of the Company's senior management, including the need to recruit and
integrate new senior level managers and executives. The Company cannot be
certain that it can recruit and retain such additional managers and executives.
To the extent that it is unable to manage its growth effectively, or is unable
to attract and retain additional qualified management, the Company's financial
condition and results of operations could be materially and adversely affected.

                                       26

<PAGE>

The departure of key personnel could disrupt the Company's business. The Company
depends on the continued efforts of its executive officers and on senior
management of the businesses it acquires. Although the Company intends to enter
into an employment agreement with each of its executive officers and certain
other key employees, it cannot be certain that any individual will continue in
such capacity for any particular period of time. The loss of key personnel, or
the inability to hire and retain qualified employees, could adversely affect the
Company's business, financial condition and results of operations. The Company
does not carry key-person life insurance on any employees other than the CEO.

The Company's business is labor intensive and it may be unable to attract and
retain qualified employees. The Company's ability to increase productivity and
profitability will be limited by its ability to employ, train and retain skilled
personnel necessary to meet its requirements. The Company cannot be certain that
it will be able to maintain an adequate skilled labor force necessary to operate
efficiently and to support its growth strategy or that its labor expenses will
not increase as a result of a shortage in the supply of skilled personnel. Labor
shortages or increased labor costs could have a material adverse effect on the
Company's ability to implement its growth strategy and its operations.

The telecommunications industry and the PEO industry are highly competitive and
are served by numerous small, owner-operated private companies, a few public
companies and large regional companies. In addition, relatively few barriers
prevent entry into the industries. As a result, any organization that has
adequate financial resources and access to technical expertise may become one of
the Company's competitors. Competition in the industry depends on a number of
factors, including price. Certain of the Company's competitors may have lower
overhead cost structures and may, therefore, be able to provide their services
at lower rates than the Company is able to provide. In addition, some of the
Company's competitors are larger and have greater resources than the Company
does. Management of the Company cannot be certain that its competitors will not
develop the expertise, experience and resources to provide services that are
superior in both price and quality to the Company's services.

Similarly, management of the Company cannot be certain that it will be able to
maintain or enhance the Company's competitive position within its industry. The
Company may also face competition from the in-house service organizations of
existing or prospective customers. Telecommunication companies usually employ
personnel who perform some of the same types of services the Company provides.
PEO customers usually employ personnel who perform some of the same types of
services the Company provides. The Company cannot be certain that its existing
or prospective customers will continue to outsource services in the future.

The Company could have potential exposure to environmental liabilities. The
Company's operations are subject to various environmental laws and regulations.
As a result, management cannot be certain that it will be able to identify or be
indemnified for all potential environmental liabilities relating to any acquired
business, property or assets.

The Company may not be able to protect its intellectual property rights. The
Company is exposed to financial market risks, including interest rate
fluctuation and changes in foreign currency exchange rates. The Company is
exposed to changes in interest rates on variable interest rate revolving lines
of credit. The Company believes an increase in short-term borrowing rates during
interest rate increases could have a material impact on interest expense. The
Company did not have any interest rate swaps outstanding at August 31, 2005. The
Company believes foreign currency exchange rate risk is nominal as of August 31,
2005. Foreign sales reporting during the year ended August 31, 2005 were less
than 4% of total Company sales.

The Control Group, which owns a substantial majority of the Company's Common
Stock, could through the exercise of its voting rights affect decisions which
could conflict with the interests of the public shareholders.

                                       27

<PAGE>

                         Off Balance Sheet Arrangements

The Company does not have any material off balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors. Two stockholders of the Company own a related party,
in which the principal assets are the buildings used by the Company and many of
the Company's subsidiaries. The Company does not guarantee the debt on the
building. The Company believes the related party which owns the Company's
operating facility is not a variable interest entity and is excluded from the
scope of Interpretation No. 46. The Company will continue to evaluate what
effect, if any, the recognition and measurement provisions will have on its
consolidated financial statements and related disclosures in future periods.

                           Forward-Looking Statements

This report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect," "estimate," "anticipate," "predict," "believe" and similar expressions
and variations thereof are intended to identify forward-looking statements.
These statements appear in a number of places in this report and include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers with respect to, among other things, trends
affecting the Company's financial condition or results of operations. The
readers of this report are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties
that could cause actual results to differ materially. Factors that might cause
or contribute to such differences, include, but are not limited to, the risks
and uncertainties that are discussed under the heading "Management's Discussion
and Analysis of Results of Operations and Financial Condition". The Company does
not ordinarily make projections of its future operating results and undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Readers
should carefully review the risk factors referred to above and the other
documents filed by the Company with the Securities and Exchange Commission.

ITEM 7. FINANCIAL STATEMENTS

See pages F-1 through F-37 following Item 14 below.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None

ITEM 8A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports we file pursuant
to the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and that
such information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's management, including the Chief Executive Officer and Chief Financial
Officer, does not expect the disclosure controls and procedures or internal
controls can prevent all error and all fraud. The Company's management also
recognizes that, because the design of any system of controls is based in part
upon certain assumptions about the likelihood of future events and also is
subject to other inherent limitations, any controls and procedures, no matter
how well designed and operated, can provide only reasonable, and not absolute,
assurance of achieving the desired objectives.

                                       28

<PAGE>

The Company carries out ongoing procedures under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, to evaluate the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of the period covered by this report. There have been no
significant changes in the Company's internal controls over financial reporting
or in other factors that are reasonably likely to significantly affect internal
controls over financial reporting.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

      Directors, Executive Officers, Promoters and Control Persons

(a) Executive Officers and Directors

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
    NAME               AGE      SINCE                    POSITION
    ----               ---      -----                    --------
<S>                    <C>      <C>       <C>
John F. Fisbeck        49        2005     Director, President and Chief Executive Officer

Carter M. Fortune      62        2002     Treasurer, Chairman of the Board

Amy E. Gallo           38        2002     Chief Financial Officer, Secretary,

Paul A. Rayl           33        2005     Independent Director, Chairman of
                                          the Audit Committee

David A. Berry         51        2002     Independent Director, Audit Committee Member

Nolan R. Lackey        82        2005     Independent Director, Audit Committee Member

Harlan M. Schafir      51        2003     Director, Chief Operating Officer
</TABLE>

The Company's current directors serve until the next annual meeting of
stockholders and until their respective successors are duly elected and
qualified.

Mr. Fisbeck was elected President and Chief Executive Officer on May 27, 2005.
Mr. Fisbeck was also elected as a Director of the Company on May 27, 2005. Prior
to and during the period from August 2000 through May, 2004, Mr. Fisbeck was
employed by Merrill Lynch as Senior Financial Advisor and after May 28, 2004 he
was employed by Wachovia Securities as Senior Financial Advisor/Branch Office
Manager.

Mr. Fortune became Chief Executive Officer and Chairman of the Board of the
Company as of January, 2002. Mr. Fortune resigned as Chief Executive Officer on
May 27, 2005 and was appointed Treasurer. Mr. Fortune has a BBA in Marketing
from the University of Cincinnati. He began his professional career at a leading
national food brands company where after five years he had ascended to the
position of Regional Marketing Manager. He was then hired as Director of
Marketing for a leading Insurance and Actuarial services provider where he
served for three years. Mr. Fortune then began a period of about fifteen years
where he was the owner and operator of a chain of retail stores. Concurrently
and through today he began investing, owning and operating numerous commercial
and residential real estate developments.

Amy E. Gallo was elected to the Board of Directors and became Chief Financial
Officer and Secretary in December 2002. Mrs. Gallo began working with Fortune
Diversified Industries, Inc. in January 2002 when DicksonHughes Group, LLC was
acquired by the Company. She worked for DicksonHughes Group, LLC from November
1999 to January 2002 as Chief Financial Officer and Controller over their
commercial real estate and telecommunications real estate acquisition divisions.
Prior to joining DicksonHughes Group, LLC, Mrs. Gallo was the financial
reporting manager for Tranex Credit Corp., an automobile finance company, from
May 1997 to November 1999. Mrs. Gallo is a certified public accountant and is a
member of the AICPA and Indiana CPA Society. She graduated with an accounting
degree from Indiana University.

                                       29

<PAGE>

Paul A. Rayl was elected to the Board of Directors on May 17, 2005. Mr. Rayl
also serves as Chairman of the Audit Committee. Mr. Rayl has served as the Chief
Financial Officer and Director of Operations for Technuity, Inc. since October
2002. From October 2000 to October 2002, he served as Controller and Vice
President of Finance of Technuity, Inc. Technuity, Inc. is a virtual
manufacturer of battery products and related accessories. Since its inception in
1999, the Company has experienced significant growth in the consumer electronics
retail channel and along with winning distinction as an Ernst & Young
Entrepreneur of the Year in 2002, was also named one of the 10 fastest growing
private companies in Indiana in both 2002 and 2003. Mr. Rayl has also served as
Chief Financial Officer of Batteries.com, LLC since its formation in December
2003. Batteries.com, LLC is a retailer of battery products and accessories to
the general public vie the internet. Prior to joining the Company., Mr. Rayl was
employed as a Certified Public Accountant by Ernst & Young, LLP where he
specialized in providing auditing and assurance services for fast growing
private and public start-up companies. Mr. Rayl graduated with honors with a
Bachelor of Science in accounting from Indiana University.

Nolan R. Lackey was elected to the Board of Directors on July 29, 2005. Mr.
Lackey also serves on the Company's audit committee. A native of Oklahoma, Mr.
Lackey holds a Bachelor's degree from Oklahoma Baptist University and a Master's
degree from Northwestern University and is a Fellow of the American College of
Healthcare Administrators. He was awarded an Honorary LLD degree by Franklin
College in 1967. In 1999, Mr. Lackey was proclaimed a Sagamore of the Wabash by
Indiana Gov. Frank O'Bannon. He has served on numerous Boards of Directors and
Licensing Councils throughout his career including the Board of Directors of
Blue Cross/Blue Shield and its Executive Committee prior to its reorganization.
Currently, Mr. Lackey is founder and President of Lackey Investments, LLC, since
2000.

David A. Berry was elected to the Board of Directors on November 1, 2002. Mr.
Berry also serves on the Company's Audit Committee. Mr. Berry began his
professional career by starting his own underground utility trenching company in
1978, for which he had grown into a national company when he sold it in 1984.
Mr. Berry then worked as an operations manager for two years for a major
national telecommunications utility until he started OSP Engineering, an outside
telephone and cable systems contractor. Mr. Berry again grew OSP into a national
company, with customers from Maine to California, until he sold it in 1990. Mr.
Berry then was one of the founding members of Citimark Communications, another
wire infrastructure development company, until he sold his interest to his
partners and formed Shared Telecom Services in 1995. Mr. Berry grew Shared
Telecom Services into a leading regional Competitive Local Exchange Carrier
(CLEC) and shared tenant provider, when he sold it in 2000 to a large national
utility.

Harlan M. Schafir was elected to the Board of Directors on October 1, 2003 and
continued as President of PSM. In 1991, Mr. Schafir founded PSM, one of the
first PEO's in the state of Indiana. Under his leadership, PSM has experienced
double-digit annual growth and now has offices in Richmond, IN, Indianapolis,
Indiana and Dayton, Ohio. Mr. Schafir has also helped PSM achieve annual client
retention rates consistently above 99%. He has been on the Board of Directors of
NAPEO (National Association of Professional Employer Organizations) and will
serve as Treasurer next year. He is also involved with numerous other
organizations.

(b) Significant Employees. None.

(c) Family Relationships. None.

(d) Involvement in Certain Legal Proceedings. None.

(e) Audit Committee Financial Expert. The Company's Board of Directors has
determined that one member of the Audit Committee, Paul A. Rayl, qualifies as an
"audit committee financial expert" as defined by Item 401(h) of Regulation S-K
adopted pursuant to the Securities Exchange Act of 1934, as amended. Mr. Rayl
has a bachelors degree in Accounting and over ten years of experience in
reading, interpreting and analyzing financial statements in his roles as more
fully described in the above biographical information. Mr. Rayl also qualifies
as "independent" as that term is used in Item 7(d)(3)(iv) of Schedule 14A of the
Securities Exchange Act of 1934, as amended.

                                       30

<PAGE>

              Section 16(A) Beneficial Ownership Compliance Report

Section 16(a) of the Exchange Act requires the Company's officers and directors,
and persons who own more than 10% of a registered class of the Company's equity
securities, to file an initial report of ownership of such securities on Form 3
and changes in ownership of such securities on Form 4 or 5 with the Commission.
Such officers, directors and 10% stockholders are required to furnish the
Company with copies of all Section 16(a) forms they file with the Commission.

Based solely on its review of the copies of such forms received by it, or
written representations from certain such reporting persons that no Form 5's
were required for such persons, the Company believes that, for the year ended
August 31, 2005, its officers, directors and 10% stockholders complied with all
applicable Section 16(a) filing requirements, except for one Form 4 that was
filed by John F. Fisbeck subsequent to the date such form was due and one Form 3
that was filed by Nolan R. Lackey subsequent to the date such form was due to be
filed.

                                 Code of Ethics

The Company has adopted a code of ethics that applies to the Company's principal
executive officer, principal financial officer, and employees. A copy of the
Code of Ethics is attached as Exhibit 14.1 to this Annual Report on Form 10-KSB.
A copy of the Company's Code of Ethics can be viewed on the Company's website at
www.ffi.net or obtained free of charge by sending a written request to the
attention of the Company's Chief Financial Officer, Amy Gallo, at 6402 Corporate
Drive, Indianapolis, Indiana 46278.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning the compensation
paid or accrued by the Company for services rendered during the Company's past
three fiscal years ended August 31, 2005 by the CEO and each of the Company's
other most highly compensated executive officers whose total annual compensation
for fiscal 2005, based on salary and bonus earned during fiscal 2005, exceeded
$100,000(the "Named Executive Officers"). (No other executive officers of the
Company received a salary and bonus for fiscal 2005 in excess of $100,000 so as
to require their inclusion in the table.)

                         Summary Compensation Table (1)

<TABLE>
<CAPTION>
                              Fiscal
                               Year        Annual Compensation
      Name and Principal      Ending      ----------------------    Other Annual
         Position             Aug. 31     Salary ($)   Bonus ($)  Compensation ($)
----------------------------  -------     ----------   ---------  ----------------
<S>                           <C>         <C>          <C>        <C>
John F. Fisbeck, President      2005      $  360,000       --            --
   and CEO(1)                   2004              --       --            --
                                2003              --       --            --

Carter M. Fortune(1)            2005      $        0       --            --
                                2004      $        0       --            --
                                2003      $        0       --            --

Harlan Schafir, Chief           2005      $  240,000       --            --
   Operating Officer and        2004      $  240,000       --            --
   President of PSM             2003              --       --            --

</TABLE>

(1) As noted earlier in this filing John F. Fisbeck was elected President and
Chief Executive Officer of the Company on May 27, 2005 and Carter M. Fortune
resigned as Chief Executive Officer on the same day.

                                       31

<PAGE>

      Options/SARS Grants in the Last Fiscal Year Ending August 31, 2005

No grants were made during the fiscal year ending August 31, 2005.

      Aggregated Option Exercises in the Fiscal Year Ending August 31, 2005
                          and Period-End Option Values

There were no option exercises during the fiscal year ended August 31, 2005 by
any of the named executive officers.

                       Report on Repricing of Options/SARS

No adjustments or amendments were made to the exercise price of stock options or
SARS.

                         Long Term Incentive Plan Awards

There were no Long Term Incentive Plan Awards granted to a named executive
officer during the last completed fiscal year.

                            Compensation of Directors

Directors who are also employees of the Company receive no compensation for
their services rendered as Directors. Mr. Berry received 20,000 shares of the
Company's common stock upon being appointed and also receives $1,000 per month.
Every director is reimbursed for out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors and other Company
business. Additionally, Paul A. Rayl receives $1,000 per month as compensation
for his services as a director and Nolan Lackey receives $250 per Board meeting
that he attends

               Employment Contracts and Termination of Employment
                       And Change-in-Control Arrangements

An Employment Agreement exists between Harlan Schafir and PSM. The Agreement was
effective October 1, 2003 and the term of the Agreement is until September 30,
2006, unless earlier terminated. The Agreement may also be renewed beyond that
initial term by the parties. Under the terms of the Agreement, Mr. Schafir is to
receive $120,000 in annual salary, which may be increased by mutual agreement of
the parties. Mr. Schafir is also, under the terms of the Agreement, entitled to
the same benefits offered to other employees of the Company.

Harlan Schafir is also a party to an Employment Agreement with Fortune
Diversified Industries, Inc. That Agreement was dated October 1, 2003 and its
term runs until September 30, 2006, unless earlier terminated or extended
pursuant to an agreement between the parties. Under the terms of the Agreement,
Mr. Schafir will receive $120,000 in annual salary, subject to increase by the
Board of Directors of the Company. Mr. Schafir is to receive the same benefits
as other Company employees.

The Company does not currently have any termination of employment agreements or
change-in-control arrangements with any of the Company's executive officers.

Report on Re-pricing of Options/SARS

No adjustments or amendments were made to the exercise price of stock options or
SARS.

                                       32

<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

                 Security Ownership of Certain Beneficial Owners

The following table sets forth information as of November 29, 2005 with respect
to the only persons or groups known to the Company who may be deemed to own
beneficially more than 5% of the Company's voting securities (i.e. Common
Stock).

<TABLE>
<CAPTION>
                        Name and Address of       Amount and Nature of      Percent
Title of Class            Beneficial Owner      Beneficial Ownership (1)   of Class
--------------        -----------------------   ------------------------   --------
<S>                   <C>                       <C>                        <C>
Common Stock          Fortune Diversified
                      Control Group
                      (in the Aggregate)               8,456,134 (2)         80.1
                      6402 Corporate Drive
                      Indianapolis, IN 46278

Common Stock          John F. Fisbeck                  1,825,951 (2)         17.3
                      6402 Corporate Drive
                      Indianapolis, IN 46278

Common Stock          Carter M. Fortune                5,855,555 (2)(4)      53.1
                      6402 Corporate Drive
                      Indianapolis, IN 46278

Common Stock          Norman G. Wolcott, Jr.             999,123 (3)          9.5
                      6402 Corporate Drive
                      Indianapolis, IN  46278

Common Stock          The Wolcott Trusts                 285,372              2.7
                      6402 Corporate Drive
                      Indianapolis, IN  46278

Common Stock          Harlan M. Schafir                1,310,000             12.4
                      6402 Corporate Drive
                      Indianapolis, IN 46278
</TABLE>

(1) As used in this table, "beneficial ownership" of securities means the sole
or shared power to vote, or to direct the voting of, such securities, or the
sole or shared investment power with respect to such securities, including the
power to dispose of, or to direct the disposition of, such securities. In
addition, for purposes of this table, a person is deemed to have "beneficial
ownership" of any security that such person had the right to acquire within 60
days after November 29, 2005. "Beneficial ownership" also includes that
ownership of shares that may be imputed to any control group of the Company.

(2) The Control Group, comprised of Messrs. John F. Fisbeck, Carter M. Fortune,
Norman G Wolcott, Jr., the Wolcott Trusts and Harlan M. Schafir may be deemed to
beneficially own, as defined in Footnote No.1 of this table, 8,456,134 shares of
Common Stock, as of November 29, 2005. Individually, each person within the
Control Group has sole dispositive and voting power over the following shares of
Common Stock: John F. Fisbeck, 1,637,701 (15.5%); Carter M. Fortune,
4,132,810(39.1%); Norman G. Wolcott, Jr., 713,751 (6.8%); Norman G. Wolcott, Jr.
as Trustee for the Wolcott Trusts, 285,372(2.7%); and Harlan M. Schafir,
1,310,000 (12.4%). Additionally, Messrs. Fortune and Fisbeck share dispositive
power over 376,500 shares of the Company's Common Stock held by Fisbeck -
Fortune Development, LLC.


                                       33

<PAGE>

(3) The beneficial holdings of Norman G. Wolcott, Jr. include the 285,372 shares
of Company Common Stock held by the Wolcott Trusts, of which Mr. Wolcott is
beneficiary.

(4) Subject to certain rights and restrictions contained in the Agreements and
Plans of Merger and Option Agreements to which Harlan Schafir is a party, Carter
M. Fortune has a contingent right to purchase 250,000 shares of the Company's
Common Stock owned by Mr. Schafir through a call option. Also, pursuant to an
Option Agreement by an among Norman G. Wolcott, Jr., the Wolcott Trust, Carter
Fortune, and the Company, Mr. Fortune has the right to purchase all of the
1,284,495 shares of the Company's Common Stock held by Mr. Wolcott and held by
the Wolcott Trusts. This purchase could be made through a call option held by
Mr. Fortune that is subject to the rights and restrictions stated in that Option
Agreement. Each of these contingent call rights is potentially exercisable
within 60 days from the date of this Report on Form 10KSB.

                        Security Ownership of Management

The following table sets forth information as of November 29, 2005 with respect
to (i) each current director, (ii) all individuals serving as the Company's
executive officers during the fiscal year ended August 31, 2005, and (iii) all
current directors and all such executive officers as a group. Unless otherwise
noted, each holder has sole voting and investment power with respect to the
shares of the listed securities. An asterisk (*) indicates beneficial ownership
of less than 1%.

<TABLE>
<CAPTION>
                  Name and Address of       Amount and Nature of     Percent
Title of Class     Beneficial Owner       Beneficial Ownership (1)  of Class
--------------  -----------------------   ------------------------  --------
<S>             <C>                       <C>                       <C>
Common Stock    John F. Fisbeck                  1,825,951  (3)       17.3
                6402 Corporate Drive
                Indianapolis, IN 46278

Common Stock    Carter M. Fortune                5,855,555  (2)(3)    53.1
                6402 Corporate Drive
                Indianapolis, IN 46278

Common Stock    David A. Berry                      20,000            *
                6402 Corporate Drive
                Indianapolis, IN 46278

Common Stock    Amy E. Gallo                        10,000            *
                6402 Corporate Drive
                Indianapolis, IN  46278

Common Stock    Harlan M. Schafir                1,310,000            12.4
                6402 Corporate Drive
                Indianapolis, IN  46278

Common Stock    Nolan R. Lackey                          0            *
                6402 Corporate Drive
                Indianapolis, IN 46278

Common Stock    Paul A. Rayl                             0            *
                6402 Corporate Drive
                Indianapolis, IN 46278

Common Stock    All current executive
                officers and directors
                as a group                       8,771,506            83.1
</TABLE>

                                       34

<PAGE>

(1) As used in this table, "beneficial ownership" of securities means the sole
or shared power to vote, or to direct the voting of, such securities, or the
sole or shared investment power with respect to such securities, including the
power to dispose of, or to direct the disposition of, such securities. In
addition, for purposes of this table, a person is deemed to have "beneficial
ownership" of any security that such person had the right to acquire within 60
days after November 29, 2005.

(2) Subject to certain rights and restrictions contained in the Agreements and
Plans of Merger and Option Agreements to which Harlan Schafir is a party, Carter
M. Fortune has a contingent right to purchase 250,000 shares of the Company's
Common Stock owned by Mr. Schafir through a call option. Also, pursuant to an
Option Agreement by an among Norman G. Wolcott, Jr., the Wolcott Trust, Carter
Fortune, and the Company, Mr. Fortune has the right to purchase all of the
1,284,495 shares of the Company's Common Stock held by Mr. Wolcott and held by
the Wolcott Trusts. This purchase could be made through a call option held by
Mr. Fortune that is subject to the rights and restrictions stated in that Option
Agreement. Each of these contingent call rights is potentially exercisable
within 60 days from the date of this Report on Form 10KSB.

(3) As interest holders in Fisbeck - Fortune Development, LLC, Carter M. Fortune
and John F. Fisbeck also have shared voting and dispositive power over 376,500
(3.6%) shares of Company Common Stock held by that entity, therefore 188,250
shares are included within the beneficial holdings of both Mr. Fisbeck and Ms.
Fortune in the above table.

                               Changes in Control

Except as described elsewhere in this item under "Security Ownership of Certain
Beneficial Owners", the Company knows of no arrangements the operation of which
may at a subsequent date result in a change of control.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See "Security Ownership of Certain Beneficial Owners and Management" for those
persons or groups known to the Company who may be deemed to own beneficially
more than 5% of the Company's voting securities (i.e. Common Stock).

See "Description of Business - Control Group" for certain relationships
regarding the Company's subsidiaries.

The Company has a $7.0 million long-term unsecured line of credit with Carter M.
Fortune, Chairman of the Board and member of the Control Group, available
through May 1, 2007. This line of credit replaced a previous $3.0 million line
of credit with Carter M. Fortune which was payable in July 2004. Interest on the
line is charged at 3% plus the one-month London Interbank Offered Rate
(one-month LIBOR). Outstanding borrowings amounted to $6.618 million and $6.268
million at August 31, 2005 and 2004, respectively.

During Fiscal Year 2004 the Company leased an office and warehouse facility in
Zionsville, Indiana from a limited liability company in which Robert J.
Kingston, former Director of the Company and former stockholder is a member.
This facility was the location of Kingston. The lease was terminated in May 2004
and the Company moved its office and warehouse.

The Company's PSM subsidiary leases an office building in Richmond, IN from
Harlan M. Schafir, Chief Operating Officer of the Company, President of PSM, and
stockholder listed in this Form 10KSB, is a member. The lease is for a period of
five years and provides for $2,000 monthly rent and expires in May 2008.

During March 2004, the Company entered into an operating lease agreement for
rental of a building with a related party, in which Carter M. Fortune, former
CEO and current Majority Shareholder and John F. Fisbeck, CEO have an interest.
All of the Company's subsidiaries, excluding JH Drew, Nor-Cote and PSM moved
into the new facility between the months of March 2004 through May 2004. The
lease agreement includes a five-year term with one option to extend the lease
term for a one-year period and provides for monthly rent of $42,000.

                                       35

<PAGE>
 On April 30, 2004, the Company's JH Drew subsidiary entered into an operating
lease agreement for rental of three buildings located in Indiana, Tennessee and
Missouri from a related party in which Carter M. Fortune, former CEO and current
Majority Shareholder, and John F. Fisbeck, CEO, have an interest. The lease
agreement includes a five-year term with one option to extend the lease term for
a one-year period and provides for monthly rent of $15,000.

As part of an arrangement, dated July 2003, entitled "Agreement for Purchase and
Sale of Real Estate" between the Company's Nor-Cote subsidiary and a party
controlled by a Company Shareholder, Nor-Cote purchased, in fiscal year 2005,
the office building in which the US administrative personnel are located. A
subsequent agreement was executed between Nor-Cote and a related party in which
Carter M. Fortune, former CEO and current Majority Shareholder, and John F.
Fisbeck, CEO, have an interest. No gain or loss was recorded on the transaction.
On September 1, 2005, Nor-Cote entered into an operating lease agreement
("Agreement") to rent the building from the same related party. The agreement
provides for base rent of $7,000 per month. 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.

<TABLE>
<CAPTION>
ITEM 13.   EXHIBITS.
<S>        <C>                                                              <C>
2.1        Agreement and Plan of Merger by and between the Company
           and the Shareholders of CSM, Inc. for purchase of CSM, Inc.,
           dated April 5, 2005.                                              (1)

3.1        Restated Certificate of Incorporation                             (2)

3.2        Restated Articles of Incorporation.                               (2)

3.3        Restated Bylaws                                                   (3)

14.1       Code of Ethics                                                    (4)

20         Definitive Information Statement on Schedule 14-C, dated
           May 10, 2005.                                                     (4)

21.1       List of subsidiaries                                              (4)

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.                                                  (4)

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.                                                     (4)

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.                                                  (4)

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.                                                     (4)
</TABLE>

Notes to Exhibits:

      (1)   This exhibit is incorporated by reference from the Company's Current
            Report on Form 8-K dated April 11, 2005.

      (2)   This exhibit is incorporated by reference from the Company's
            Definitive Information Statement on Schedule 14-C dated May 10,
            2005.

      (3)   This exhibit is incorporated by reference from the Company's Current
            Report on Form 8-K dated August 4, 2005.

      (4)   Attached hereto.

                                       36

<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The Audit Committee has pre-approval policies and procedures, pursuant to which
the Audit Committee approves the audit and permissible non-audit services
provided by Somerset CPAs, P.C. in 2005. The Audit Committee's pre-approval
policy is as follows: Consistent with the Audit Committee's responsibility for
engaging our independent auditors, all audit and permitted non-audit services
require pre-approval by the Audit Committee. All requests or applications for
services to be provided by the independent registered public accounting firm
that do not require specific approval by the Audit Committee will be submitted
to the Chief Financial Officer and must include a detailed description of the
services to be rendered. The Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the independent auditor. Request
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the independent
auditor and the Chief Financial Officer, and must include a joint statement as
to whether, in their view, the request or application is consistent with the
Securities and Exchange Commission's rules on auditor independence. The Chief
Financial Officer will immediately report to the chairman of the Audit Committee
any breach of this policy that comes to the attention of the Chief Financial
Officer or any member of management. Pursuant to these procedures the Audit
Committee approved the foregoing audit and permissible non-audit services
provided by Somerset CPAs, P.C. in 2005.

Audit Fees

The aggregate fees billed in each of the fiscal years ended August 31, 2005 and
2004 for professional services rendered by the principal accountant for the
audit of the Company's annual financial statements and review of the financial
statements included in the registrant's Form 10-QSB or services that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements for those fiscal years were $350,000 and $292,000,
respectively.

Audit - Related Fees

The aggregate fees billed in each of the fiscal years ended August 31, 2005 and
2004 for professional services rendered by the principal accountant for audit
related fees including, primarily, consultations on various accounting and
reporting matters were $100,000 and $23,000, respectively.

Tax Fees

The aggregate fees billed in each of the fiscal years ended August 31, 2005 and
2004 for professional services rendered by the principal accountant for tax
compliance and tax advise related to new acquisitions for those fiscal years
were $125,000 and $79,000, respectively.

All Other Fees

None

                                       37

<PAGE>

                      FORTUNE DIVERSIFIED INDUSTRIES, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                                       AND
                        REPORT OF INDEPENDENT REGISTERED
                             PUBLIC ACCOUNTING FIRM

                            August 31, 2005 and 2004

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                       Page
<S>                                                                    <C>
Report of Independent Registered Public Accounting Firm                F-1

Consolidated Balance Sheets                                            F-2

Consolidated Statements of Operations                                  F-3

Consolidated Statements of Stockholders' Equity                        F-4

Consolidated Statements of Cash Flows                                  F-5

Notes to Consolidated Financial Statements                             F-6
</TABLE>

<PAGE>

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Fortune Diversified Industries, Inc. and Subsidiaries
Indianapolis, IN 46278

We have audited the accompanying consolidated balance sheets of Fortune
Diversified Industries, Inc. and Subsidiaries as of August 31, 2005 and 2004 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinions. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fortune Diversified
Industries, Inc. and Subsidiaries as of August 31, 2005 and 2004, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.

/s/ Somerset CPAs, P.C.

Indianapolis, Indiana

November 29, 2005

                                       F-1
<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                         AS OF AUGUST 31, 2005 AND 2004

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      2005       2004
<S>                                                                 <C>        <C>
                             ASSETS
CURRENT ASSETS
 Cash and equivalents                                               $  3,787   $  3,527
 Restricted savings account                                            1,484        210
 Available for sale investments (Note 6)                               2,199      1,959
 Accounts receivable and contracts receivable, net (Note 3)           21,358     15,894
 Costs and estimated earnings in excess of billings
    on uncompleted contracts (Note 5)                                  2,681      1,879
 Inventory, net (Note 4)                                               8,315      9,746
 Deferred tax asset (Note 12)                                          1,014      1,014
 Prepaid expenses and other current assets                             1,790        815
                                                                    --------   --------
   Total Current Assets                                               42,628     35,044
                                                                    --------   --------

OTHER ASSETS
 Property, plant & equipment, net (Note 7)                             5,064      4,038
 Goodwill (Note 8)                                                    11,680     10,192
 Other intangible assets, net (Note 8)                                 4,705      2,111
 Accounts receivable and contracts receivable - long term (Note 3)       600          -
 Other long term assets                                                  409        184
                                                                    --------   --------
   Total Other Assets                                                 22,458     16,525
                                                                    --------   --------

   TOTAL ASSETS                                                     $ 65,086   $ 51,569
                                                                    ========   ========

              LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
 Lines of credit (Note 9)                                           $ 18,998   $  7,948
 Current maturities of long-term debt (Note 9)                         2,641      1,999
 Current maturities of long-term debt - related party (Note 9)            34         47
 Accounts payable                                                      7,095      4,699
 Health and workers' compensation reserves                             4,000      3,750
 Accrued expenses                                                      6,288      5,414
 Billings in excess of costs and estimated earnings on
   uncompleted contracts (Note 5)                                      2,101      1,912
 Other current liabilities                                               271        101
                                                                    --------   --------
   Total Current Liabilities                                          41,428     25,870
                                                                    --------   --------

LONG-TERM LIABILITIES

 Long-term debt, less current maturities (Note 9)                   $  4,838   $  6,254
 Line of credit - related party (Note 9)                               6,618      6,268
 Long-term debt - related party, less current maturities (Note 9)         60        106
 Other long-term liabilities                                              69        253
                                                                    --------   --------
   Total Long-term Liabilities                                        11,585     12,881
                                                                    --------   --------

   Total Liabilities                                                  53,013     38,751
                                                                    --------   --------

STOCKHOLDERS' EQUITY
 Common stock (Note 10)                                                1,046      1,008
 Additional paid-in capital and warrants outstanding                  17,340     15,893
 Accumulated deficit                                                  (6,406)    (4,089)
 Accumulated other comprehensive income (Note 13)                         93          6
                                                                    --------   --------
   Total Stockholders' Equity                                         12,073     12,818
                                                                    --------   --------

   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $ 65,086   $ 51,569
                                                                    ========   ========
</TABLE>

See Accompanying Notes to Consolidated Financial Statements

                                       F-2
<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  FOR THE YEARS ENDED AUGUST 31, 2005 AND 2004

                  (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                            2005        2004
<S>                                                       <C>         <C>
NET REVENUES BUSINESS SOLUTIONS SEGMENT (GROSS
              BILLINGS OF $193,136,000 LESS WORKSITE
              EMPLOYEE PAYROLL COST OF $164,678,000)      $  28,458   $  17,958
NET REVENUES WIRELESS INFRASTRUCTURE SERVICES                12,308       7,972
NET REVENUES WIRELESS INFRASTRUCTURE PRODUCTS                50,221      17,558
NET REVENUES MANUFACTURING AND DISTRIBUTION SEGMENT          22,109      23,394
                                                          ---------   ---------

TOTAL NET REVENUES                                          113,096      66,882
                                                          ---------   ---------

COST OF REVENUES BUSINESS SOLUTIONS SEGMENT                  21,646      13,854
COST OF REVENUES WIRELESS INFRASTRUCTURE SERVICES             9,159       6,227
COST OF REVENUES WIRELESS INFRASTRUCTURE PRODUCTS            45,277      14,803
COST OF REVENUES MANUFACTURING AND DISTRIBUTION SEGMENT      15,989      16,374
                                                          ---------   ---------

TOTAL COST OF REVENUES                                       92,071      51,258
                                                          ---------   ---------

GROSS PROFIT                                                 21,025      15,624

OPERATING EXPENSES
   Selling, general and administrative expenses              19,685      11,912
   Depreciation and amortization                              1,709       1,164
   Impairment on intangible assets (Note 8)                     636           -
                                                          ---------   ---------
              Total Operating Expenses                       22,030      13,076
                                                          ---------   ---------

OPERATING INCOME (LOSS)                                      (1,005)      2,548
                                                          ---------   ---------

OTHER INCOME (EXPENSE)
   Interest income                                               61           -
   Interest expense                                          (1,445)       (620)
   Gain (loss) on investments in marketable
      securities, net (Note 6)                                  (40)         36
   Exchange rate loss                                             -         (34)
   Other income (expense)                                       194          19
                                                          ---------   ---------
              Total Other Income (Expense)                   (1,230)       (599)
                                                          ---------   ---------

NET INCOME (LOSS) BEFORE PROVISION
  FOR INCOME TAXES                                           (2,235)      1,949

PROVISION FOR INCOME TAXES (NOTE 12)                             82        (453)
                                                          ---------   ---------

NET INCOME (LOSS)                                         $  (2,317)  $   2,402
                                                          =========   =========

BASIC INCOME (LOSS) PER SHARE                                 (0.22)  $    0.23
                                                          =========   =========

DILUTED INCOME (LOSS) PER SHARE                               (0.22)  $    0.23
                                                          =========   =========
</TABLE>

See Accompanying Notes to Consolidated Financial Statements

                                       F-3
<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>

                            ADDITIONAL
                             PAID-IN               ACCUMULATED
                             CAPITAL     ACCUMU-      OTHER      TOTAL   COMPRE-
                               AND        LATED      COMPRE-     STOCK-  HENSIVE
                   COMMON    WARRANTS    EARNINGS    HENSIVE    HOLDERS   INCOME
                    STOCK  OUTSTANDING  (DEFICIT)    INCOME      EQUITY   (LOSS)
<S>                <C>     <C>          <C>        <C>          <C>      <C>
BALANCE AT
AUGUST 31, 2003    $  802   $ 11,406    $ (6,491)    $  (63)    $5,654  $    52
                   ======   ========    ========     ======     ======  =======

Issuance 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    2,402
Translation
 adjustments,
 net of tax                                             208        208      208
Unrealized
 investments
 gains (losses),
 net of tax             -          -           -       (126)      (126)    (126)
Reclassification
 adjustment for
 realized gains
 losses
 included in
 net income,
 net of tax             -          -           -        (13)       (13)     (13)
                  -------   --------    --------   --------    -------  -------

BALANCE AT
AUGUST 31, 2004   $ 1,008   $ 15,893    $ (4,089)  $      6    $12,818  $ 2,523
                  =======   ========    ========   ========    =======  =======
Issuance 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 loss                -          -      (2,317)         -     (2,317)  (2,317)
Translation
 adjustments,
 net of tax             -          -           -        (17)       (17)     (17)
Unrealized
 investments
 gains, net
 of tax                 -          -           -         64         64       64
Reclassification
 adjustment for
 realized losses
 included in net
 loss, net of tax       -          -           -         40         40       40
                    -------  -------    --------   --------    -------  -------
BALANCE AT
AUGUST 31, 2005     $ 1,046  $17,340    $ (6,406)  $     93    $12,073  $(2,230)
                    =======  =======    ========   ========    =======  ========
</TABLE>

See Accompanying Notes to Consolidated Financial Statements

                                        F-4
<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  FOR THE YEARS ENDED AUGUST 31, 2005 AND 2004

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             2005        2004
                                                           --------    --------
<S>                                                        <C>         <C>
OPERATING ACTIVITIES
 Net income (Loss)                                         $ (2,317)   $  2,402
 Adjustments to reconcile net income (loss) to net
  cash provided by (used in) operating activities:
    Depreciation and amortization                             2,301       1,164
    Provision for losses on accounts receivable                 768          17
    Stock based compensation                                    264           -
    (Gain) loss on sale of investments                           40         (36)
    Loss on disposal of fixed assets                              5         122
    Deferred income taxes                                         -        (625)
    (Increase) decrease in certain operating assets
         (net of effects from business acquisitions):
        Restricted cash                                        (987)          -
        Accounts receivable                                  (5,560)     (2,355)
        Costs and estimated earnings in excess of
           billings on uncompleted contracts                   (802)        763
        Inventory                                             1,537      (1,913)
        Prepaid expenses and other current assets                29         (11)
        Other long term assets                                 (830)        (24)
    Increase (decrease) in certain
     operating liabilities:
        Accounts payable                                      1,109         623
        Accrued expenses and other current liabilities         (548)       (350)
        Billings in excess of costs and estimated
           earnings on uncompleted contracts                    189         252
        Health and workers' compensation reserves              (457)        479
                                                           --------    --------
           Net Cash Provided by (Used in)
              Operating Activities                           (5,259)        508
                                                           --------    --------

INVESTING ACTIVITIES
 Capital expenditures                                        (1,932)       (961)
 Purchases of available for sale securities                    (176)     (2,435)
 Proceeds from sale of available for sale securities              -         689
 Proceeds from sale of certificates of deposits                   -          24
 Acquisition of productive assets and businesses,
    net of cash received                                     (2,758)     (8,605)
                                                           --------    --------
           Net Cash Used In Investing Activities             (4,866)    (11,288)
                                                           --------    --------

FINANCING ACTIVITIES
 Borrowings on short term debt - related party                  800           -
 Payments to related party                                     (827)          -
 Net borrowings under line of credit                         11,050       6,910
 Borrowings on long-term debt                                 1,530       8,665
 Payments on long-term debt                                  (2,466)     (6,453)
 Borrowings on long-term debt - related party                   350       4,308
 Payments on long-term debt - related party                     (30)        (20)
 Other                                                           (5)       (201)
                                                           --------    --------
           Net Cash Provided by Financing Activities         10,402      13,209
                                                           --------    --------

           Effect of exchange rate changes on cash              (17)        213

NET INCREASE IN CASH AND EQUIVALENTS                            260       2,642

CASH AND EQUIVALENTS
 Beginning of Year                                            3,527         885
                                                           --------    --------

 End of Year                                               $  3,787    $  3,527
                                                           ========    ========

INTEREST PAID                                                 1,398         536

TAXES PAID                                                      116           -

SUPPLEMENTAL DISCLOSURES
 Noncash investing and financing activities:
    Unrealized net loss on marketable securities                 22         126

    Acquisitions (see Note 2)
        Cash and equivalents                                  2,704       4,496
        Restricted savings account                                -         246
        Accounts receivable                                     672       8,933
        Costs and estimated earnings in excess of
           billings on uncompleted contracts                      -       6,842
        Inventory                                               106       1,777
        Prepaid expenses and other current assets             1,303         147
        Other non-current assets                                195         431
        Accounts payable                                     (1,290)     (2,747)
        Accrued expenses and other current
           liabilities                                       (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            -       1,347
        Goodwill and other intangible assets                  4,982       4,831
                                                           --------    --------
                                                              4,551      18,514

        Common stock consideration                           (1,039)     (4,364)
                                                           --------    --------
        Cash paid                                          $  3,512    $ 14,150
                                                           ========    ========
</TABLE>

See Accompanying Notes to Consolidated Financial Statements

                                       F-5
<PAGE>

             FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                         AS OF AUGUST 31, 2005 AND 2004

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

Nature of Business: Fortune Diversified Industries, Inc. is a holding company
headquartered in Indianapolis, IN. The term "Company" as used herein refers to
Fortune Diversified Industries, Inc. and its subsidiaries unless the context
otherwise requires. The Company has conducted its business directly and through
wholly-owned subsidiaries.

The Company's current operating focus is achieved through its following twelve
subsidiaries (grouped by segment):

      -     Wireless Infrastructure Segment

            James H. Drew Corp. (JH Drew); PDH, Inc. (PDH); Magtech Services,
            Inc. (Magtech); Cornerstone Wireless Construction Services, Inc.
            (Cornerstone Construction); Innovative Telecommunications
            Consultants, Inc. (ITC); Telecom Technology Corp. (TTC); and
            StarQuest Wireless Services, Inc. (StarQuest)

      -     Manufacturing and Distribution Segment

            Nor-Cote International, Inc. (Nor-Cote); Kingston Sales Corporation
            (Kingston); Commercial Solutions, Inc. (Commercial Solutions)

      -     Business Solutions Segment

            Professional Staff Management, Inc., Professional Staff Management,
            Inc. II and Pro Staff, Inc. (collectively "PSM"); CSM, Inc. (CSM)

Effective May 31, 2005 the Company re-domesticated from Delaware to Indiana. On
April 26, 2005 the majority stockholders executed a written consent for a
1-for-10 common stock split, which became effective June 2, 2005. All references
in the consolidated financial statements and notes to the consolidated financial
statements related to share amounts, per share amounts and average shares
outstanding have been adjusted retroactively to reflect the 1-for-10 stock split
of our common stock effective June 2, 2005. On June 23, 2005, the Company moved
from the Over-The-Counter Bulletin Board to the American Stock Exchange.

Wireless Infrastructure Segment

The Company's Wireless Infrastructure segment is conducted through its JH Drew,
PDH, Magtech, Cornerstone Construction, ITC, TTC, and StarQuest subsidiaries. JH
Drew is a specialty contractor in the field of infrastructure, including fiber
optic, smart highway systems, traffic signals, street signs, high mast and
ornamental lighting, guardrail, wireless communications, and fabrications of
structural steel. JH Drew has been operating over fifty years serving
contractors and state departments of transportation throughout the Midwestern
United States.

PDH offers a full range of network infrastructure, real estate development
services to the telecommunications industry, among other types of real estate
network critical industries. PDH's full service list of network real estate
development services includes program management, site acquisition, land use
planning, architectural & engineering design, program management, construction
management, co-location facilitation, environmental services, lease
capitalization, lease renegotiation, site marketing and asset management.

Magtech specialize in providing engineering and architectural services for the
telecommunications and the traditional real estate development industries. The
telecommunications industry includes cellular, personal communication services
(PCS), specialized mobile radio (SMR), enhanced specialized mobile radio (ESMR),
microwave systems, fixed wireless, broadband and fiber optics technologies for
carriers, tower consolidators and utilities.

Cornerstone Construction offers construction services to the telecommunications
industry, primarily developing wireless networks for wireless carriers. Services
include program and construction management, electrical, foundation and tower
installations, as well as, antennae and line installations.

                                       F-6
<PAGE>

ITC provides technical services for wireless equipment manufacturers and
wireless service providers including switch and radio base station engineering
as well as providing the site, survey, delivery, installation and integration
process for the implementation of end user equipment offered by a wide range of
wireless equipment manufacturers.

TTC specializes in the design, engineering and installation of structured
cabling systems for the commercial marketplace and sells telephone and voice
mail systems. TTC provides the data cabinets, racks, cable trays, HUBS, patch
panels, computer furniture, cable management and any peripheral equipment
necessary for a complete voice and data-cabling infrastructure.

StarQuest is a provider of premium communication/ information services,
including digital satellite television and high speed (broadband) Internet, both
wired and wireless. These services are provided exclusively to the United States
multi-dwelling unit (MDU) marketplace.

Manufacturing and Distribution Segment

The Company's Manufacturing and Distribution Segment is conducted through its
Nor-Cote, Kingston, and Commercial Solutions subsidiaries. Nor-Cote is a
manufacturer of UV curable screen printing inks. Nor-Cote inks are printed on
many types of plastic, metals and other substrates that are compatible with the
UV curing process. Typical applications are plastic sheets, point-of-purchase
(POP) signage, banners, decals, cell phones, bottles and containers, CD and DVD
disks, rotary-screen printed labels, and membrane switch overlays for which
Nor-Cote provides conductive ink. Nor-Cote has operating facilities in the
United States, United Kingdom, Singapore, and Malaysia, with worldwide
distributors located in South Africa, Australia, Canada, China, Colombia, Hong
Kong, India, Indonesia, Italy, Japan, Korea, New Zealand, Poland, Spain, Taiwan,
Thailand, Latin America and the United States.

Kingston and Commercial Solutions are distributors for prominent national
companies in the electronic, sound, security, and video markets. Kingston and
Commercial Solutions offer the latest technology in TVs, sound systems,
electronic locking devices, wire, cable and fiber optics, and intercom systems,
selling to customers in lodging, healthcare, education, transportation and
retail industries.

Business Solutions Segment

The Company's Business Solutions segment is conducted through its PSM and CSM
subsidiaries. PSM and CSM, Professional Employer Organizations (PEO's), provide
cost-effective employee administrative solutions to companies in 37 states
nationwide. The PEO's provide services typically managed by internal human
resources and accounting departments - including payroll and tax processing and
management, worker's compensation and risk management, benefits administration,
unemployment administration, human resource compliance services, 401k and
retirement plan administration and employee assessments.

                                       F-7
<PAGE>

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. Nor-Cote
contains foreign subsidiaries from the United Kingdom, Singapore, and Malaysia,
which have been eliminated in consolidation at the Nor-Cote subsidiary level.
All significant inter-company accounts and transactions of the Company have been
eliminated.

Foreign Currency Translation: Assets and liabilities of the foreign subsidiaries
of the Company's wholly owned subsidiary Nor-Cote are translated into U.S.
dollars at the exchange rate in effect at the end of the period. Revenue and
expense accounts are translated at a weighted-average of exchange rates in
effect during the year. Translation adjustments that arise from translating the
subsidiaries financial statements from local currency to U.S. dollars are
accumulated and presented, net of tax, as a separate component of stockholders'
equity.

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

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

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

Revenue and Cost Recognition: In the Company's Manufacturing and Distribution
segment, revenue from the sale of products is recognized according to the terms
of the sales arrangement, which is generally upon shipment. Revenues are
recognized, net of estimated costs of returns, allowances and sales incentives,
title and principal ownership transfers to the customer, which is generally when
products are shipped to customers. Products are generally sold on open account
under credit terms customary to the geographic region of distribution. Ongoing
credit evaluations are performed on customers and the Company does not generally
require collateral to secure accounts receivable.

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

                                       F-8
<PAGE>

In its Business Solutions Segment, PSM and CSM, licensed Professional Employer
Organizations (PEO's), bill clients under their Professional Services Agreement,
which includes each worksite employee's gross wages, plus additional charges for
employment related taxes, benefits, workers' compensation insurance,
administrative and record keeping, as well as safety, human resources, and
regulatory compliance consultation. All wages, taxes and insurance coverages are
provided under PSM's and CSM's federal, state, and local or vendor
identification numbers. No identification or recognition is given to the client
when these monies are remitted or calculations are reported. All calculations or
amounts PSM and CSM owe the government and its employment insurance vendors are
based on the experience levels and activity of PSM and CSM with no consideration
to client detail. There is no direct relationship between what PSM and CSM pay
versus what is billed to a client. PSM and CSM bill the client their worksite
employees' gross wages plus an overall service fee that includes all components
of employment related taxes, employment benefits insurance, and administration
of those items. This service fee is intended to cover PSM's and CSM's cost of
those items and yield a profit to PSM and CSM. What is paid to the government
and vendors is different than what is charged to the client due to the different
methods of calculation as to what PSM and CSM owe those entities versus what the
client is charged. The component of the service fee related to administration
varies, in part, according to the size of the client, the amount and frequency
of payroll payments and the method of delivery of such payments. The component
of the service fee related to workers' compensation and unemployment insurance
is based, in part, on the client's historical claims experience. All charges by
PSM and CSM are invoiced along with each periodic payroll delivered to the
client.

PSM and CSM report revenues in accordance with Emerging Issues Task Force
("EITF") No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent. PSM and CSM report revenues on a gross basis, the total amount billed to
clients for service fees which includes health and welfare benefit plan fees,
workers' compensation insurance, unemployment insurance fees, and
employment-related taxes. PSM and CSM report revenues on a gross basis for such
fees because PSM and CSM are the primary obligor and deemed to be the principal
in these transactions under EITF No. 99-19. However, PSM and CSM report revenues
on a net basis for the amount billed to clients for worksite employee salaries
and wages. This accounting policy of reporting revenue net as an agent versus
gross as a principal has no effect on gross profit, operating income (loss), or
net income (loss).

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

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

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

                                       F-9
<PAGE>

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

Marketable Securities: Marketable securities include common stocks classified as
"available for sale" in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The securities are carried at fair value based on current
market quotations. Unrealized holding gains and losses, net of tax, are not
included in "net income", but are accounted for as "other comprehensive income"
and reflected as a separate component of the change in stockholders' equity. The
cost of securities used to compute realized gains and losses is based on
specifically identified securities. The fair value of investment securities is
determined by currently available market prices. Dividends on marketable equity
securities are recognized in income when declared.

Accounts Receivable: Accounts receivable is stated at the amount billable to
customers. The Company provides allowances for doubtful accounts and for returns
and sales allowances, which are based upon a review of outstanding receivables,
historical information and existing economic conditions. Accounts receivable are
ordinarily due 30-60 days after the issuance of the invoice. Delinquent
receivables are written off based on individual credit evaluation and specific
circumstances of the customer. The Company's policy is not to accrue interest on
past due trade receivables.

Inventories: Inventories of raw materials are recorded at the lower of cost
(primarily first-in, first-out) or market value. Inventories of work-in-process
and finished goods include estimated direct labor, indirect labor, and other
manufacturing expenses applied as a function of material costs. The Company
records finished goods inventory on an average cost basis.

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

Property, Equipment, and Depreciation: Property and equipment are carried at
cost and include expenditures for new additions and those, which substantially
increase the useful lives of existing assets. Depreciation is computed at
various rates by use of the straight-line method and certain accelerated
methods. Depreciable lives are generally ranging from 3 to 30 years.

Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of property or equipment retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts in the year
of disposal with the resulting gain or loss reflected in earnings or in the cost
of the replacement asset. The provision for depreciation amounted to $1,108,000
and $792,000 for the years ended August 31, 2005 and 2004, respectively.

Goodwill and Other Intangible Assets: During fiscal year August 31, 2003 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets". With the adoption of SFAS No. 142,
goodwill and other intangible assets with indeterminate lives are no longer
amortized but instead are assessed for impairment at least as often as annually
and as triggering events occurs. In making this assessment, management relies on
a number of factors including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and market place
data. There are inherent uncertainties related to these factors and management's
judgment in applying them to the analysis of both goodwill and other intangible
assets impairment. Since management's judgment is involved in performing
goodwill and other intangible assets valuation analyses, there is risk that the
carrying value of the goodwill and other intangible assets may be overstated or
understated.

The Company has elected to perform the annual impairment test of recorded
goodwill and other intangible assets not subject to amortization, as required by
SFAS 142 as of the end of fiscal fourth quarter. The results of this annual
impairment test indicated that the fair value of each of the reporting units as
of August 31, 2005, exceeded the carrying, or book value, including goodwill,
and therefore recorded goodwill and other intangible assets were not subject to
impairment.

                                      F-10
<PAGE>

Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. As discussed in Note 9, during 2005 the Company determined
that, based on estimated future cash flows, the carrying amount of non-compete
assets in the Company's manufacturing and distribution segment and in the
Company's Wireless Infrastructure segment exceeds its fair value by a combined
total of $272,000. The Company also determined in 2005, based on estimated
future cash flows, the carrying amount of customer list assets in the
Manufacturing and Distribution segment exceeds its fair value by $364,000.

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

Advertising Costs: Advertising costs including marketing, advertising,
publicity, promotion and other distribution costs, are expensed as incurred and
totaled $227,000 and $164,000 for the years ended August 31, 2005 and 2004,
respectively.

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

Stock-based Compensation: As allowed by SFAS Statement No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure" (FAS 148), which amends
SFAS Statement No. 123, "Accounting for Stock Based Compensation", the Company
has elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and to adopt the disclosure-only
provisions as required under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (FAS 123), and Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation
- Transition and Disclosure (SFAS No. 148). The Company accounts for stock
awards to nonemployees in accordance with the provisions of FAS 123 and FAS 148,
and Emerging Issues Task Force Consensus No. 96-18 "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" (EITF 96-18). Under FAS 123, FAS
148, and EITF 96-18, stock awards issued to nonemployees are accounted for at
their deemed fair value based on independent valuations or by using an
option-pricing model, as appropriate.

Income Per Common Share: Income per share has been computed in accordance with
SFAS No. 128, "Earnings Per Share." Under SFAS No. 128, basic income per share
is computed based on net income applicable to common stock divided by the
weighted average number of common shares outstanding for the period. Diluted
income per share is computed based on net income applicable to common stock
divided by the weighted average number of shares of common stock outstanding
during the period after giving effect to securities considered to be dilutive
common stock equivalents.

All references in the form 10-KSB, consolidated financial statements and notes
to the consolidated financial statements related to share amounts, per share
amounts and average shares outstanding have been adjusted retroactively to
reflect the 1-for-10 stock split of our common stock effective June 2, 2005.

                                      F-11
<PAGE>

Income Taxes: The Company accounts for income taxes under the provisions of SFAS
No. 109, "Accounting for Income Taxes." Accordingly, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates. Changes in deferred income tax assets and liabilities that are associated
with components of other comprehensive income, primarily unrealized investment
gains, are charged or credited directly to other comprehensive income.
Otherwise, changes in deferred income tax assets and liabilities are included as
a component of income tax expense. The Company files separate United States,
United Kingdom, Singapore, and Malaysia income tax returns.

Research and Development Costs: Research and development costs are expensed as
incurred and totaled $440,000 and $386,000 for the years ended August 31, 2005
and 2004, respectively. Research and development expense is recorded in the
Company's Nor-Cote subsidiary.

Self Insurance: The Company's Nor-Cote subsidiary has elected to act as a
self-insurer for certain costs related to employee health and accident benefit
programs. Costs resulting from non-insured losses are estimated and charged to
income when incurred. The Company has purchased insurance which limits its
annual exposure for individual claims to $40,000 and which limits its aggregate
annual exposure to approximately $500,000.

The Company's PSM subsidiary has elected to enter into a partially self-funded
arrangement related to worksite employees' health and accident benefit programs.
Under the insurance policy, PSM's self-funded liability is limited to $180,000
per employee, with an aggregate liability limit of approximately $11,110,000.
The liability limits are adjusted monthly, based on the number of participants.

The Company's PSM and CSM subsidiaries have elected to enter into a loss
sensitive workers' compensation insurance program. Under the insurance policy,
PSM and CSM's self funded liability is limited to $200,000 per employee, with an
aggregate liability limit of approximately $1,100,000 for CSM and $1,100,000 for
PSM.

New Accounting Pronouncements:

In September 2004, the Financial Accounting Standards Board's (FASB) Emerging
Issue Task Force ("EITF") reached a consensus on EITF Issue No. 04-08, "The
Effect of Contingently Convertible Instruments on Diluted Earnings per Share."
The Task Force reached a conclusion that Contingently Convertible Instruments
should be included in diluted earnings per share computations, if dilutive,
regardless of whether the market price trigger or other contingent features have
been met. Contingent stock resulting from various acquisitions over the last 3
years, not included in the Company's common stock outstanding at August 31,
2005; are included in the accompanying statements of operations and Note 16 in
diluted earnings per share.

In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) 151, "Inventory Costs". This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage), and requires that these items be recognized as
current-period charges. In addition, SFAS 151 is effective for the first quarter
of fiscal year 2006. The Company does not expect the impact of adopting this
standard to be material.

In December 2004, the FASB issued Statements No. 123R, "Share-Based Payment"
("FAS123R), an amendment of FASB Statements No. 123 and 95. Under FAS 123R, all
forms of share-based payment to employees, including employee stock options,
would be treated as compensation and recognized in the statement of operations.
This statement is effective for interim periods beginning after June 15, 2005.
The SEC has delayed implementation date to fiscal years beginning on or after
June 15, 2005. The Company anticipates adopting the provisions of FAS 123R
beginning September 1, 2005. The impact on future periods is not expected to be
material.

                                      F-12
<PAGE>

In May 2005, the FASB issued Statement SFAS No. 154 "Accounting Changes and
Error Corrections" (SFAS 154) which supersedes APB Opinion No. 20, Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements". SFAS 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes, unless impractible,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific
to the newly adopted accounting principle. The correction of an error in
previously issued financial statements is not an accounting change. However, the
reporting of an error correction involves adjustments to previously issued
financial statements similar to those generally applicable to reporting an
accounting change retroactively. Therefore, the reporting of a correction of an
error by restating previously issued financial statements is also addressed by
this Statement. SFAS 143 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company is in
the process of determining the impact of SFAS 154 on its consolidated results of
operations and financial condition.

NOTE 2 - ACQUISITIONS

During 2005, the Company had the following acquisitions:

Manufacturing and Distribution Segment

Ink Source, Inc.

The Company's Nor-Cote subsidiary acquired certain assets and assumed certain
liabilities of Ink Source through an asset purchase agreement entered into as of
September 30, 2004 by and among Ink Source, Inc. a Wisconsin corporation
("Seller"), Michael Sloan ("Shareholder") and Nor-Cote International, Inc., an
Indiana corporation ("Purchaser). Purchased assets in the agreement include, at
a minimum, goodwill, customer lists, customer deposits, proprietary property and
products, prepaid expenses, software, furniture, equipment, machinery and other
intellectual property. Nor-Cote's acquisition of Ink Source enabled Nor-Cote to
offer a wider range of ink products. Ink Source has focused on the Large Format
Point of Sale, Banner and Decal markets for screen printing UV curable inks.
Nor-Cote International, Inc has focused on Industrial Applications such as UV
Inks for CD/DVD's, Membrane Switch Overlays, Plastic Shampoo and Personal Care
products and Loose Leaf products. Ink source, Inc. operates under Nor-Cote's
name and is located in Nor-Cote's facilities in Crawfordsville, IN. Ink Source's
results of operations for the eleven months ended August 31, 2005 are included
in the Company's consolidated statement of operations.

                                      F-13
<PAGE>

Nor-Cote accepted and assumed $239,747 of accounts payable and bank debt. In
addition to the assumed liabilities, the consideration given for the acquired
assets was $220,000, which includes a non-compete agreement with Michael Sloan.
Additionally 40,000 restricted shares of the Company's common stock vest per the
employment agreement with Michael Sloan in two years based upon certain sales
volume criteria within the Ink Source division as detailed in the agreement. The
value of the contingent shares are not included as a component of the purchase
price at August 31, 2005, as management deemed the contingent consideration is
tied to employment under Emerging Issues Task Force 95-8, "Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a
Purchase Business Combination".

The following is a condensed balance sheet disclosing the amount assigned to
each major asset and liability caption of Ink Source at the acquisition dates
(amounts in thousands):

<TABLE>
<S>                             <C>
    Accounts receivable, net    $  66
    Inventory , net               106
    Property and equipment         57
    Goodwill                       13
    Intangible assets             342
                                -----
                                  584
                                -----

    Accounts payable               80
    Notes payable                 160
    Other accrued liabilities     124
                                -----
                                  364
                                -----
                                $ 220
                                =====

Cash consideration              $ 220
                                -----
                                $ 220
                                =====
</TABLE>

The impact of this acquisition was not material in relation to the Company's
consolidated financial statements at August 31, 2005.

Wireless Infrastructure Segment

MAGTECH Services, Inc.

The Company acquired all of the assets and certain liabilities of Magtech
pursuant to an Asset Purchase Agreement effective November 1, 2004. The acquired
assets include all fixed assets, accounts receivable, certain intangible assets,
sales proposals and like documents and contracts. The addition of MAGTECH
provides the Company with the ability to offer enhanced services in the Wireless
Infrastructure Industry. Using Magtech's experienced management, engineering and
drafting personnel, the Company is able to promote in house turnkey services to
the industry. The suite of services include architecture and engineering
(Magtech); Site Acquisition and Network Deployment Services (PDH, Inc.);
Construction (Cornerstone Construction); & Wireless Installation and Integration
Services (ITC). Magtech's results of operations for the ten months ended August
31, 2005 are included in the Company's consolidated statement of operations.

                                      F-14
<PAGE>

The Company accepted and assumed accounts payable and all of the sellers' rights
and executory obligations under the Assumed Contracts to be performed after the
Closing Date (as defined in the Asset Purchase Agreement). In addition to the
assumed liabilities, the consideration given for the acquired assets was
$417,213 cash and 48,450 restricted shares of the Company's common stock. Of the
48,450 shares, 8,450 shares vested immediately in the seller and the remaining
40,000 shares are contingent upon certain EBIT requirements through the period
November 1, 2004 to October 31, 2006, as defined in the agreement. The 48,450
shares are valued at the closing price of the Company's stock on the date of
purchase at $7.00 share. The contingent stock consideration is included as a
component of the purchase price in accordance with Emerging Issues Task Force
95-8, "Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination," under arrangements not
affected by employment termination. The consideration is included in permanent
equity under SFAS 141 as management of the Company deems likelihood that payment
of such contingent consideration is beyond a reasonable doubt.

The following is a condensed balance sheet disclosing the amount assigned to
each major asset and liability caption of Magtech at the acquisition date
(amounts in thousands):

<TABLE>
<S>                                        <C>
    Accounts receivable, net               $ 304
    Other current assets                      13
    Property and equipment                     6
    Goodwill                                 437
    Intangible assets                        102
                                           -----
                                             862
                                           -----

    Accounts payable                          64
    Other accrued liabilities                 42
                                           -----
                                             106
                                           -----
                                           $ 756
                                           =====

Cash consideration                           417
Fair value of common stock consideration     339
                                           -----
                                           $ 756
                                           =====
</TABLE>

EI Solution, Inc.

The Company's ITC subsidiary acquired all of the assets of EI Solution, Inc.
pursuant to an Asset Purchase Agreement effective February 28, 2005. The
acquired assets include personnel, certain intangible assets, sales proposals
and like documents and contracts. ITC acquired EI Solution, Inc. in order to
expand its customer base by adding experienced personnel certified to work on
different customer's equipment. EI Solution operates under ITC's name and
management team. EI Solution's results of operations for the six months ended
August 31, 2005 are included in the Company's consolidated statement of
operations.

The consideration given for the acquired assets was $175,000 cash and 45,000
restricted shares of the Company's common stock. Of the 45,000 shares, 25,000
shares vested immediately in the seller and the vesting of the remaining 20,000
shares is contingent upon certain sales requirements through the period March 1,
2005 to February 28, 2006, as defined in the agreement. The 25,000 shares are
valued at the closing price of the Company's stock on the date of purchase at
$4.00 share. Vesting of the contingent stock consideration is deemed remote and
is not included as a component of the purchase price in accordance with
SFAS 141, "Business Combination".

                                      F-15
<PAGE>

The following is a condensed balance sheet disclosing the amount assigned to
each major asset and liability caption of EIS at the acquisition date (amounts
in thousands):

<TABLE>
<S>                                        <C>
    Goodwill                               $  31
    Intangible assets                        250
                                           -----
                                             281
                                           -----

    Other accrued liabilities                  6
                                           -----
                                               6
                                           -----
                                           $ 275
                                           =====

Cash consideration                           175
Fair value of common stock consideration     100
                                           -----
                                           $ 275
                                           =====
</TABLE>

The impact of this acquisition was not material in relation to the Company's
consolidated financial statements at August 31, 2005.

Business Solutions Segment

CSM, Inc.

On April 5, 2005 the Company acquired CSM, Inc. ("CSM") and its subsidiary
companies pursuant to an Agreement and Plan of Merger (the "Agreement") by and
between the Company, CSM, CSM Merger Corporation (a Tennessee corporation and
wholly-owned subsidiary of the Company), Carter M. Fortune, Marc Fortune, Greg
Daily, Harbinger Mezzanine Partners, L.P., Doug Altenbern, Jeff Gould, Bob
Boston, and Don Denbo. CSM is the holding company for Century II Staffing, Inc.
("Century II") and other related subsidiary entities. Founded in 1985, CSM
serves over 200 company locations, representing over 3,100 employees in more
than 24 states. The Company acquired CSM in order to facilitate our acquisition
strategy in the human resource market space. CSM joins PSM in the Company's
Business Solutions Segment. CSM operates under its own management team with
Harlan Schafir, President and CEO of the Company's PSM subsidiary, on CSM's
Board of Directors. The effective date of the acquisition for accounting
purposes was April 1, 2005. The results of operations for the five months ended
August 31, 2005 are included in the Company's consolidated statement of
operations.

The terms of the Agreement include, among other things, the payment of
approximately $2,000,000 by the Company to retire certain debts owed by CSM and
the payment of approximately $700,000 in cash by the Company to the shareholders
of CSM and the issuance of 150,000 restricted shares of the Company's common
stock to be held in escrow until such time as the shares may be earned by the
shareholders of CSM upon the achievement of certain financial performance
measures by CSM.

Per the agreement the 150,000 restricted shares will vest over the three year
period from April 1, 2005 through March 31, 2008 based upon annual EBITDA
calculations. For every $1.70 of EBITDA in excess of $850,000 during each twelve
month period, one share of common stock will vest. Vesting is limited to 50,000
shares annually and no carryover of excess earnings is permitted. The vested
shares of common stock can be put to Carter M. Fortune during the period June 1,
2008 to September 30, 2008 at $10.33 per share. In addition, any holder of
vested shares may only exercise his/ her Put if the Company's common stock is
not listed on the OTC Bulletin Board or any national securities exchange during
the thirty day period preceding the exercise period or if the average bid price
per share during the thirty day period preceding the exercise period is less
than the put price. The 150,000 shares are valued at the closing price of the
Company's stock on the date of purchase at $4.00 share. The contingent stock
consideration is included as a component of the purchase price in accordance
with SFAS 141, "Business Combinations" and Emerging

                                      F-16
<PAGE>

Issues Task Force 95-8, "Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase Business Combination,"
under arrangements not affected by employment termination. The consideration is
included in permanent equity under SFAS 141 as management of the Company deems
likelihood that payment of such contingent consideration is beyond a reasonable
doubt.

The following is a condensed balance sheet disclosing the amount assigned to
each major asset and liability caption of CSM at the acquisition date (amounts
in thousands):

<TABLE>
<S>                                               <C>
      Cash                                        $ 2,704
      Accounts receivable, net                        302
      Prepaid expenses and other current assets     1,290
      Property and equipment                          132
      Goodwill                                        707
      Intangible assets                             3,100
                                                  -------
                                                    8,235
                                                  -------

      Accounts payable                              1,146
      Other accrued liabilities                     2,257
      Deferred revenue                              1,361
      Other current liabilities                       171
                                                  -------
                                                    4,935
                                                  -------
                                                  $ 3,300
                                                  =======

Cash consideration                                $ 2,700
Fair value of common stock consideration              600
                                                  -------
                                                  $ 3,300
                                                  =======
</TABLE>

During 2004, the Company had the following acquisitions:

Wireless Infrastructure Segment

James H. Drew Corporation

On April 30, 2004, the Company acquired all of the outstanding shares of common
stock, no par value, of James H. Drew Corporation and its wholly-owned
subsidiary, Tennessee Guardrail, Inc. (collectively "JH Drew") pursuant to the
agreement entitled "Stock Purchase Agreement" by and between Cemex, Inc.,
("Seller") and Fortune Diversified Industries, Inc. ("Buyer"). The Stock
Purchase Agreement's terms include, among other things, the exchange of all of
the outstanding shares of James H. Drew Corporation ("JH Drew") for $13,150,000,
of which $11,500,000 was paid in cash at closing and the remaining $1,650,000
plus $57,000 interest was paid to seller on December 15, 2004. In calculating
the purchase price the parties considered, among other factors: JH Drew's
consolidated accounts receivable, costs and estimated earnings in excess of
billings on uncompleted contracts, inventories, accounts payable and other
current assets and current liabilities. The funds constituting the purchase
price were derived from the combination of a loan from Fifth Third Bank and a
loan to the Company from its former Chief Executive Officer and majority
shareholder Carter M. Fortune.

The purchase price includes $434,000 of contingent stock consideration. This
amount consists of 43,000 shares valued at the closing price of the Company's
stock on the date of purchase at $10.10 share. The contingent stock
consideration is included as a component of the purchase price in accordance
with Emerging Issues Task Force 95-8, "Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination," under arrangements not affected by employment termination. The
consideration is included in permanent equity under SFAS 141 as management of
the Company deems likelihood that payment of such contingent consideration is
beyond a reasonable doubt.

                                      F-17
<PAGE>

The following is a condensed balance sheet disclosing the amount assigned to
each major asset and liability caption of JH Drew at the acquisition
date(amounts in thousands):

<TABLE>
<S>                                                                 <C>
     Contracts receivable, net                                        8,277
     Cost and estimated earnings in excess of billings                6,842
     Inventory, net                                                   1,777
     Prepaid expenses                                                    23
     Deferred tax asset                                                 389
     Property and equipment                                           1,327
     Acquired goodwill                                                  152
                                                                    -------
                                                                     18,787
                                                                    -------

     Accounts payable                                                 2,628
     Accrued expenses and other current liabilities                     914
     Billings in excess of costs and estimated earnings               1,661
                                                                    -------
                                                                      5,203
                                                                    -------
                                                                    $13,584
                                                                    =======

Cash consideration                                                  $13,150
Fair value of common stock consideration                                434
                                                                    -------
                                                                    $13,584
                                                                    =======
</TABLE>

Innovative Telecommunications Consultants, Inc.

On May 11, 2004 the Company acquired all of the outstanding shares of common
stock of Innovative Telecommunications Consultants, Inc. ("ITC"), pursuant to a
Stock Purchase Agreement dated May 11, 2004 and effective April 30, 2004. The
purchase price of $501,000 includes cash paid by the Company of $400,000 and
issuance of 10,000 shares of the Company's common stock valued at the closing
price of the Company's stock on the date of purchase at $10.10 per share. The
acquisition was part of the Company's strategy to provide turnkey service
solutions to the wireless communications industry. During the year ended August
31, 2005; the Company recorded an additional $300,000 to goodwill due to
resolution of certain contingencies as defined in the agreement.

The following is a condensed balance sheet disclosing the amounts assigned to
each major asset and liability caption of ITC at the acquisition date(amounts in
thousands):

<TABLE>
<S>                                      <C>
     Cash                                    $ 148
     Accounts receivable, net                   76
     Property and equipment                     15
     Goodwill                                  721
     Intangible assets                         150
                                             -----
                                             1,110
                                             -----

     Accounts payable                          260
     Other accrued liabilities                  49
                                             -----
                                               309
                                             -----
                                             $ 801
                                             =====

Cash consideration                           $ 700
Fair value of common stock consideration       101
                                             -----
                                             $ 801
                                             =====
</TABLE>

                                      F-18
<PAGE>

Professional Staff Management, Inc.

On October 1, 2003, the Company acquired all of the outstanding shares of common
stock, no par value, of Professional Staff Management, Inc., Professional Staff
Management, Inc. II, and Pro Staff, Inc. pursuant to the following agreements:

      AGREEMENT AND PLAN OF MERGER entered into the 1st day of October, 2003, by
      and among Professional Staff Management, Inc., an Indiana corporation, PSM
      Acquisition, Inc., an Indiana corporation and wholly owned subsidiary of
      the Company and Harlan M. Schafir.

      AGREEMENT AND PLAN OF MERGER entered into the 1st day of October, 2003 by
      and among Professional Staff Management, Inc. II, an Indiana corporation,
      PSM Acquisition II, Inc., an Indiana corporation and wholly owned
      subsidiary of the Company and Harlan M. Schafir.

      AGREEMENT AND PLAN OF MERGER entered into the 1st day of October, 2003 by
      and among Pro Staff, Inc., an Indiana corporation, PSM Acquisition III,
      Inc., an Indiana corporation and wholly owned subsidiary of the Company
      and Harlan M. Schafir.

For tax purposes, the agreements were intended to qualify as a "reorganization"
pursuant to the provisions of Section 368 of the Internal Revenue Code and
specifically as a reverse-triangular merger under Code Section 368(a)(2)(E). For
accounting purposes the business combination is being accounted for as a
purchase under SFAS No. 141, "Business Combinations".

The Company acquired PSM in order to gain entry into the PEO industry. The
Merger Agreements' terms include, among other things, the exchange of all of the
outstanding shares of Professional Staff Management, Inc. (125 shares);
Professional Staff Management, Inc., II (500 shares); and Pro Staff, Inc. (500
shares), all held by Harlan M. Schafir, for a total of 1,310,000 shares of the
Company's common shares. The Company formed three wholly-owned subsidiaries, PSM
Acquisition, Inc.; PSM Acquisition II, Inc.; and PSM Acquisition III, Inc. The
Company's shares were exchanged at the following ratios: Six Thousand, Six
Hundred Two (6,602) shares of The Company's common stock for each share of
Professional Staff Management, Inc.; Four Hundred Forty Four (445) shares of The
Company's common stock for each share of Professional Staff Management, Inc. II;
and, Five Hundred Twenty Four (524) shares of The Company's common stock for
each share of Pro Staff, Inc. The Company exchanged a total of 1,310,000 shares
as follows: Eight Hundred, Twenty Five Thousand Three Hundred (825,300) shares
for the shares of Professional Staff Management, Inc.; Two Hundred Twenty Two
Thousand Seven Hundred (222,700) shares for the shares of Professional Staff
Management, Inc. II; and Two Hundred Sixty Two Thousand (262,000) shares for the
shares of Pro Staff, Inc.

In addition to the exchanges described above, Mr. Schafir received a total of
one million dollars ($1,000,000) in cash. The cash was allocated as follows: Six
Hundred Thirty Thousand Dollars ($630,000) for Professional Staff Management,
Inc.; One Hundred Seventy Thousand ($170,000) for the Professional Staff
Management, Inc. II; and Two Hundred Thousand Dollars ($200,000) for Pro Staff,
Inc.

The principle followed in determining the amount of consideration paid was the
ongoing value of the three companies, with adjustments thereto for certain
aspects of the transaction, including earnings benchmarks as defined by the
Agreement. Professional Staff Management, Inc., Professional Staff Management,
Inc. II, and Pro Staff, Inc. were acquired through the parties identified above.
Prior to the Merger Agreements, there was no material relationship between the
Company or any of its subsidiaries and the exchanging parties identified above.

The source of the Company's consideration included the Company's shares, and
cash held by the Company prior to the Agreement. The fair market value of the
1,310,000 Company's common shares issued was $3.93 million (which was based upon
the quoted market price of the Company's stock traded for a reasonable period
before and after the acquisition. The stock price was discounted due to
historical trading volume being significantly lower than shares issued in the
transaction) and was included as part of the purchase price. In addition to the
assumed liabilities, the aggregate purchase price of the acquisition was
$4,930,000 of which $4,679,000 consists of goodwill and other intangible assets.

                                      F-19
<PAGE>

The following is a condensed balance sheet disclosing the amount assigned to
each major asset and liability caption of PSM at the acquisition date (amounts
in thousands):

<TABLE>
<S>                                             <C>
Cash and cash equivalents                       $ 4,496
Restricted savings account                          246
Accounts receivable, net                            656
Interest receivable                                   3
Prepaid expense                                     121
Property and equipment, net                          20
Other assets                                         42
Goodwill                                          3,580
Customer list                                       700
Non-Compete agreement                               399
                                                -------
                                                 10,263
                                                -------

Current maturities of notes payable                   4
Accounts payable                                    119
Payroll taxes and withholdings                      525
Accrued worksite employee payroll cost              240
Health and workers' compensation reserves         3,271
Other accrued compensation                          545
Due to shareholder                                    7
Customer deposits                                   106
Other accured liabilities                           516
                                                -------
                                                  5,333
                                                -------
                                                $ 4,930
                                                =======

Cash consideration                              $ 1,000
Fair value of common stock consideration          3,930
                                                -------
                                                $ 4,930
                                                =======
</TABLE>

                                      F-20
<PAGE>

The following unaudited pro forma data (amounts in thousands) summarize the
results of operations for the periods indicated as if the PSM, JH Drew, CSM,
ITC, Ink Source, Magtech, and EI Solution acquisitions had been completed as of
the beginning of the periods presented. The pro forma data gives effect to
actual operating results prior to the acquisitions and adjustments to interest
expense and income taxes. No effect has been given to cost reductions or
operating synergies in this presentation. These pro forma amounts do not purport
to be indicative of the results that would have actually been achieved if the
acquisition had occurred as of the beginning of the periods presented or that
may be achieved in the future.

<TABLE>
<CAPTION>
                                                                 Year Ended   Year Ended
                                                                 August 31,   August 31,
                                                                    2005         2004
                                                                 ----------   ----------
<S>                                                              <C>          <C>
Net revenue                                                      $  121,815   $  110,749
Cost of revenues                                                     99,472       89,592
                                                                 ----------   ----------

Gross profit                                                     $   22,343   $   21,157
Operating expenses                                                   23,959       17,661
                                                                 ----------   ----------

Operating income                                                     (1,616)       3,496
Other income (expenses)                                              (1,322)      (1,123)
                                                                 ----------   ----------

Net income before provision for income taxes                     $   (2,938)  $    2,373
                                                                 ==========   ==========

Basic Income Per Share (before provision for income tax)         $    (0.28)  $     0.23
                                                                 ==========   ==========

Diluted Income Per Share (before provision for income tax)       $    (0.28)  $     0.23
                                                                 ==========   ==========

Shares Outstanding:
     Basic weighted average number of common shares outstanding  10,495,814   10,495,814
     Dilutive effect of conversion of options                             -            -
                                                                 ----------   ----------
Total Shares Outstanding                                         10,495,814   10,495,814
                                                                 ==========   ==========
</TABLE>

At August 31, 2005, all common stock equivalents were anti-dilutive.

NOTE 3 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE

Accounts receivable and contracts receivable include the following at August
31(amounts in thousands):

<TABLE>
<CAPTION>
                                        2005       2004
                                      --------   --------
<S>                                   <C>        <C>
Amounts currently due                 $ 16,778   $ 12,005
Contracts in process
  Progress billing                       5,075      4,560
  Retainages                             1,752        576
                                      --------   --------
                                        23,605     17,141

Less allowance for doubtful accounts    (1,512)    (1,112)
Less allowance for sales returns          (135)      (135)
                                      --------   --------
                                      $ 21,958   $ 15,894
                                      ========   ========
</TABLE>

                                      F-21
<PAGE>

NOTE 4 - INVENTORIES

Inventories include the following at August 31(amounts in thousands):

<TABLE>
<CAPTION>
                         2005      2004
                        -------   -------
<S>                     <C>       <C>
Raw materials           $   757   $   559
Work-in-process              39        12
Finished goods            7,896     9,425
Less inventory reserve     (377)     (250)
                        -------   -------

                        $ 8,315   $ 9,746
                        =======   =======
</TABLE>

NOTE 5 - CONTRACTS IN PROGRESS

Information related to contracts in progress is as follows (amounts in
thousands):

<TABLE>
<CAPTION>
                                                         2005      2004
                                                       --------   -------
<S>                                                    <C>        <C>
Costs incured on uncompleted contracts                 $ 25,744   $24,475
Estimated earnings recognized to date on uncompleted
     contracts                                            5,412     5,502
                                                       --------   -------
                                                         31,156    29,977

Less billings on uncompleted contracts                  (30,576)  (30,010)
                                                       --------   -------
                Net                                    $    580   $   (33)
                                                       ========   =======
</TABLE>

The net amount is included in the accompanying consolidated balance sheets under
the following captions (amounts in thousands):

<TABLE>
<CAPTION>
                                                        2005    2004
                                                       ------  -------
<S>                                                    <C>     <C>
Costs and estimated earnings in excess of billings on
     uncompleted contracts                             $2,681  $ 1,879
Billings in excess of costs and estimated earnings on
     uncompleted contracts                              2,101    1,912
                                                       ------  -------

                                                       $  580  $   (33)
                                                       ======  =======
</TABLE>

                                      F-22
<PAGE>

NOTE 6 - INVESTMENTS IN MARKETABLE EQUITY SECURITIES

The amortized cost and approximate fair values of available-for-sale securities
held at August 31 are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                      2005
                   -----------------------------------------
                                  Net Unrealized  Estimated
                   Amortize Cost   Gain (Loss)    Fair Value
                   -------------  --------------  ----------
<S>                <C>            <C>             <C>
Equity securities  $       2,221  $          (22) $    2,199
                   =============  ==============  ==========
</TABLE>

<TABLE>
<CAPTION>
                                      2004
                   -----------------------------------------
                                  Net Unrealized  Estimated
                   Amortize Cost   Gain (Loss)    Fair Value
                   -------------  --------------  ----------
<S>                <C>            <C>             <C>
Equity securities   $    2,085    $         (126) $    1,959
                   =============  ==============  ==========
</TABLE>

The net tax effect of the unrealized gain (loss) after consideration of the
valuation allowance is insignificant and is not included in deferred tax asset
or accumulated other comprehensive income. Realized gains and losses from the
sale of available-for-sale securities are summarized as follows (amounts in
thousands):

<TABLE>
<CAPTION>
                  2005    2004
                 ------   -----
<S>              <C>      <C>
Realized Gains   $    -   $  36
Realized Losses     (40)      -
                 ------   -----
                 $  (40)  $  36
                 ======   =====
</TABLE>

NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment, including capital leases, is comprised of the following
at August 31(amounts in thousands):

<TABLE>
<CAPTION>
                                 2005       2004
                               --------   --------
<S>                            <C>        <C>
Land and building              $  1,951   $  1,903
Machinery and equipment           5,615      5,181
Research equipment                  420        380
Office equipment                  4,131      2,943
Vehicles                          3,067      3,631
Leasehold improvements              145        151
                               --------   --------
                               $ 15,329   $ 14,189

Less accumulated depreciation   (10,265)   (10,151)
                               --------   --------

                               $  5,064   $  4,038
                               ========   ========
</TABLE>

                                      F-23
<PAGE>

NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the years ended August 31,
2005, as reclassified for the adoption of SFAS 142, are as follows (amounts in
thousands):

<TABLE>
<CAPTION>
                       MANUFACTURING
             BUSINESS      AND            WIRELESS      HOLDING   SEGMENT
            SOLUTIONS  DISTRIBUTION    INFRASTRUCTURE   COMPANY    TOTALS
            ---------  -------------   --------------   -------   --------
<S>         <C>        <C>             <C>              <C>       <C>
Goodwill
at August
31, 2004    $   3,580  $       5,957   $          655   $     -   $ 10,192

Goodwill
Acquired          707             13              768         -      1,488

Impairment
losses              -              -                -         -          -
            ---------  -------------   --------------   -------   --------
Goodwill
at August
31, 2005    $   4,287  $       5,970   $        1,423   $     -   $ 11,680
            =========  =============   ==============   =======   ========
</TABLE>

The total amount of goodwill that is deductible for tax purposes is $1,839,000
at August 31, 2005.

The following table sets forth the gross carrying amount and accumulated
amortization of the Company's intangible assets (amounts in thousands):

<TABLE>
<CAPTION>
                       AT AUGUST 31, 2005              AT AUGUST 31, 2004
                -------------------------------  -------------------------------
                                       WEIGHTED                         WEIGHTED
                 GROSS                  AVERAGE   GROSS                  AVERAGE
                CARRYING   ACCUMULATED   AMORT   CARRYING   ACCUMULATED   AMORT
                 AMOUNT   AMORTIZATION   PERIOD   AMOUNT   AMORTIZATION   PERIOD
                --------  ------------  -------  --------  ------------  -------
<S>             <C>       <C>           <C>       <C>       <C>           <C>
Customer
 Relationships  $  3,222  $        352  10 YRS   $  1,824  $        239   10 YRS
Non-compete            -             -   4 YRS        234           122    4 YRS
Non-compete        1,229           222   5 YRS        399            73    5 YRS
Non-compete          100            44   3 YRS        100            12    3 YRS
Non-compete          200            18  10 YRS          -             -    0 YRS
                --------  ------------  --------  --------  ------------  ------

Intangible
  assets
  subject to
  amortization  $  4,751  $        636    8 YRS   $  2,557  $        446   7 YRS
                --------  ------------  --------  --------  ------------  ------

Tradename            590             -        -          -             -       -
                --------  ------------  --------  --------  ------------  ------

Intangible
  assets not
  subject to
  amortization       590             -        -          -             -       -
                --------  ------------  --------  --------  ------------  ------

Total              5,341           636    8 YRS      2,557           446   7 YRS
                ========  ============  ========  ========  ============  ======
</TABLE>

                                      F-24
<PAGE>

The Company determined that it had 100% impairment on the customer relationships
and non-compete intangible assets in the Manufacturing and Distribution segment,
related to its' Kingston subsidiary, resulting in write off of the assets net of
related accumulated amortization of $417,000. The customer relationship
impairment was the result of lost customers due mainly to discontinued product
lines. The non-compete impairment was based on expected competition between
terminated employees and the Company despite the existence of a non-compete
agreement with such terminated employees. The Company also determined that it
had 100% impairment on a non-compete intangible asset in the Wireless
Infrastructure segment, related to its ITC subsidiary's purchase of EI
Solutions, resulting in write off of the assets net of related accumulated
amortization of $219,000.

Intangible asset amortization expense for the year ended August 31, 2005 was
$601,000 which includes $30,000 of amortization related to loan origination
fees. Intangible asset amortization expense for the year ended August 31, 2004
was $372,000 which includes $55,000 of amortization related to loan origination
fees.

Amortization expense on intangible assets currently owned by the Company for
each of the next five fiscal years are approximately as follows (amounts in
thousands):

<TABLE>
<CAPTION>
Year Ending August 31,
----------------------
 <S>                               <C>
         2006                         621
         2007                         602
         2008                         588
         2009                         515
         2010                         439
 2011 and thereafter                1,350
                                   ------

        Total                      $4,115
                                   ======
</TABLE>

NOTE 9 - LINES OF CREDIT AND DEBT ARRANGEMENTS

Lines of Credit:

The Company has a $19,000,000 line of credit facility available through February
28, 2006. Interest on the line is charged at .5% less than the credit facility's
Prime Rate. Outstanding borrowings amounted to $18,998,000 at August 31, 2005.
Cumulative outstanding balances on lines of credits amounted to $7,948,000 at
August 31, 2004.

Covenants under the line of credit require the Company maintain a specified net
worth position and certain other financial ratios. The line of credit is secured
by substantially all assets of the Company and personal guarantees of the
Company's majority stockholder and a different stockholder. As of August 31,
2005, the Company was not in compliance with certain covenants; however, the
bank has granted a waiver of default remedies with respect to noncompliance as
of that date.

The Company also has a $7,000,000 long-term unsecured line of credit with a
stockholder available through May 1, 2007. Interest on the line is charged at 3%
plus the one-month London Interbank Offered Rate (one-month LIBOR). Outstanding
borrowings amounted to $6,618,000 million at August 31, 2005 and $6,268,000 at
August 31, 2004.

Total unused lines of credit amounted to approximately $384,000 at August 31,
2005.

Long-term debt arrangements:

Long-term debt consisted of the following at August 31 (amounts in thousands
except description data):

                                      F-25
<PAGE>

<TABLE>
<CAPTION>
         Description of Debt Outstanding:                      2005      2004
---------------------------------------------------------   --------   -------
<S>                                                         <C>        <C>
Notes payable to financial institutions:

     Due in monthly installment of $40,000 plus
     interest at .5% less than the credit facility's
     Prime Rate through maturity date, July 15, 2009.
     The loan is secured by the business assets of the
     Company, with a second lien on assets
     pledged by a stockholder.                              $  1,920   $ 2,400

     Due in monthly installment of $33,000 plus
     interest at .5% less than the credit facility's
     Prime Rate through maturity date, July 15, 2009.
     The loan is secured by the business assets of the
     Company, with a second lien on assets pledged
     by a stockholder.                                         1,567     2,000

     Due in monthly installment of $32,000 plus
     interest at .5% less than the credit facility's
     Prime Rate through maturity date, April 30, 2009.
     The loan is secured by the business assets of the
     Company, with a second lien on  assets pledged
     by a stockholder.                                         1,466     1,853

     Due in monthly installment of $55,000 plus
     interest at .5% less than the credit facility's
     Prime Rate through maturity date, April 30, 2007.
     The loan is secured by the business assets of the
     Company, with a second lien on assets pledged
     by a stockholder.                                         1,210     1,879

     Due in monthly installment of $50,000 plus
     interest at .5% less than the credit facility's
     Prime Rate through maturity date, April 30, 2007.
     The loan is secured by the business assets of the
     Company, with a second lien on assets pledged by
     a stockholder.                                              950         0

     Due in monthly installments of $5,000, including
     interest at ranges from 4.9% to 9.03% through
     April 2010.  Secured by vehicles and equipment.             233        23

Debt with stockholder:

     Due in monthly installments of $3,000 including
     interest at 4.00% through September 2008.
     Secured by vehicles and equipment.                           94       153

Capital Leases:

     Due in monthly installments of $6,000, including
     interest at ranges from 2.3% to 11.6% through
     June 2010. Secured by computers and equipment.               133        98
                                                             --------   -------
                                                                7,573     8,406
     Less current maturities                                   (2,675)   (2,046)
                                                             --------   -------
                                                             $  4,898   $ 6,360
                                                             ========   =======
</TABLE>

                                      F-26
<PAGE>
Principal payments due on long-term debt outstanding at August 31, 2005 are
approximately as follows (amounts in thousands):

<TABLE>
<S>                                    <C>
2006                                     2,675
2007                                     2,331
2008                                     1,360
2009                                     1,177
2010                                        30
                                       -------
                                       $ 7,573
                                       =======
</TABLE>

NOTE 10 - STOCKHOLDERS' EQUITY

Common Stock:
-------------

During the year ended August 31, 2005, the Company declared a 1-for-10 stock
split to stockholders of record, effective June 2, 2005. The details of the
Company's common stock as of August 31, 2005 and 2004 are as follows:

<TABLE>
<CAPTION>
                                                  Number of Shares
                                       -------------------------------------
                                       Authorized     Issued     Outstanding    Amount
                                       -----------   ----------  -----------   --------
<S>                                    <C>           <C>         <C>           <C>
August 31, 2005 (Audited)
Common stock, $0.10 par value (1)      150,000,000   10,559,843  10,559,843    $  1,046
                                                                               ========

August 31, 2004 (Audited)
Common stock, $0.10 par value (2)      150,000,000   10,238,644  10,238,644    $  1,008
                                                                               ========
</TABLE>

Preferred Stock:
----------------
<TABLE>
<CAPTION>
                                                  Number of Shares
                                       -------------------------------------
                                       Authorized     Issued     Outstanding    Amount
                                       -----------   ----------  -----------   --------
<S>                                    <C>           <C>         <C>           <C>
August 31, 2005 (Audited)
Preferred stock, $0.10 par value       1,000,000         -           -         $      -
                                                                               ========

August 31, 2004 (Audited)
Preferred stock, $0.10 par value       1,000,000         -           -         $      -
                                                                               ========
</TABLE>

(1)   As a part of a transaction pursuant to an Agreement and Plan of Merger
      (the "Agreement") by and between the Company, CSM, CSM Merger Corporation
      (a Tennessee corporation and wholly-owned subsidiary of the Company),
      Carter M. Fortune, Marc Fortune, Greg Daily, Harbinger Mezzanine Partners,
      L.P., Doug Altenbern, Jeff Gould, Bob Boston, and Don Denbo., the Company
      exchanged 150,000 shares of the Company's common stock, in part, in return
      for 774,000 shares of common stock of CSM, constituting all the
      outstanding shares of seller.

(2)   As a part of a transaction pursuant to the terms of a Stock Purchase
      Agreement by and among the Company, Professional Staff Management, Inc.,
      Staff Management, Inc. II, Pro Staff, Inc., and Harlan M. Schafir, the
      Company exchanged 1,310,000 shares of the Company's common stock, in part,
      in return for 125 shares of Professional Staff Management, Inc.; 500
      shares of Professional Staff Management, Inc., II; and 500 shares of Pro
      Staff, Inc., constituting all the outstanding shares of seller.

                                      F-27
<PAGE>

NOTE 11 - STOCK OPTIONS AND OTHER STOCK COMPENSATION

Transactions related to the Company's stock compensation arrangements are as
follows:

<TABLE>
<CAPTION>
                                             Weighted                 Weighted
                                              Average                  Average
                                Year Ended   Exercise    Year Ended   Exercise
                                August 31,    Price      August 31,     Price
                                  2005       Per Share      2004      Per Share
<S>                             <C>          <C>         <C>          <C>
Options outstanding
 at beginning of period            35,000    $   4.10        35,000       $4.10
Options exercised                 (20,000)       4.10             -           -
Options issued                          -           -             -           -
Options canceled                  (15,000)       4.10             -           -
                                ----------   ---------   ----------   ---------

Options outstanding at
 end of period                           -           -       35,000   $    4.10
                                ==========   =========   ==========   =========
</TABLE>

The Company accounts for employee stock-based transactions under Accounting
Principles Board Opinion No. 25. Accordingly, no compensation cost has been
recognized for options issued with an exercise price equal to the market value
of the common stock at the date of grant. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS 148, which defines a fair value method of accounting for
stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Management believes that had compensation cost been determined based on
the fair value at the grant dates consistent with the provisions of SFAS No. 123
and SFAS No. 148, there would have been no material effect on the Company's net
income (loss) and its income (loss) per common share for the periods ended
August 31, 2005 and August 31, 2004.

The Company agreed to grant 5,000 warrants to the Company's former CEO on
September 1, 2000. Each warrant is convertible into one share of common stock at
an exercise price of $10.00 per share exercisable June 30, 2002 through June 30,
2008. No warrants have been exercised at August 31, 2005 and 2004.

NOTE 12 - INCOME TAXES

The reconciliation for 2005 and 2004 of income tax expense (benefit) computed at
the U.S. Federal statutory tax rate to the Company's effective income rate is as
follows:

<TABLE>
<CAPTION>                                         2005    2004
                                                  ----    ----
<S>                                              <C>     <C>

Tax at U.S. federal statutory rate               34.00%  34.00%
State and local taxes, net of federal benefit      5.6     5.8
Other                                                -     1.4
Change in valuation allowance                    (39.6)  (73.3)
                                                ------   -----
                                                     -   (32.1)%
                                                ======   =====
</TABLE>

                                      F-28
<PAGE>

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

<TABLE>
<CAPTION>
                                                 2005     2004
                                                ------   ------
<S>                                             <C>      <C>
Current:
      Federal                                   $  (41)  $  690
      State                                         72      172
                                                ------   ------
                                                    31      862
                                                ------   ------

Deferred:
      Federal                                     (567)     (55)
      State                                       (318)      (3)
                                                ------   ------
                                                  (854)     804
                                                ------   ------
Change in valuation allowance                      936   (1,257)
                                                ------   ------
Net income tax (benefit)                        $   82   $ (453)
                                                ======   ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                             (amounts in thousands)
                                                            August 31,     August 31,
                                                              2005           2004
                                                            ----------     ----------
<S>                                                         <C>            <C>
Deferred Tax Assets:
      Current:
           Allowances for doubtful accounts and inventory   $      850     $      156
           Accrued liabilities and other                           524            446
      Noncurrent:
           Amortization of intangible assets                       304             50
           Depreciation                                            (91)           170
           Net operating losses and other carryforwards          2,458          2,287
                                                            ----------     ----------
                                                                 4,045          3,109
      Valuation allowance                                       (3,031)        (2,095)
                                                            ----------     ----------
                                                                 1,014          1,014
                                                            ==========     ==========

Deferred tax liabilities:                                            -              -
                                                            ----------     ----------
                                                            $    1,014     $    1,014
                                                            ==========     ==========
</TABLE>

                                      F-29
<PAGE>

SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, at August 31, 2005, the Company had a federal tax operating loss
and based on the weight of the evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $3,031,000 valuation allowance at August 31, 2005 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$936,000. At August 31, 2005 the Company has federal net operating loss
carryforwards of $4,547,000 million which expire during the years of 2020, 2021,
2022, 2023 and 2025. The state tax operating loss carryforwards approximated $0.
The difference between federal and state net operating loss carryforwards
represents a change in business venue in a prior period. The Company's capital
loss carryforward is $933,000 and it expires in the fiscal year ending August
31, 2007. The Company also incurred net operating losses related to European
operations that can be carried forward indefinitely.

NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  2005
                                                ---------------------------------------
                                                                   Tax
                                                    Before-Tax   (Expense)   Net-of-Tax
                                                      Amount      Benefit      Amount
<S>                                                 <C>          <C>         <C>
Unrealized gain (loss) on securities                $       64   $       -   $       64

Reclassification adjustment for realized (gains)
 losses included in net income                              40           -           40

Foreign currency adjustments                               (17)          -          (17)
                                                    ----------   ---------   ----------

Accumulated other comprehensive income (loss)       $       87   $       -   $       87
                                                    ==========   =========   ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                  2004
                                                    -----------------------------------
                                                                   Tax
                                                    Before-Tax   (Expense)   Net-of-Tax
                                                      Amount      Benefit      Amount
<S>                                                 <C>          <C>         <C>
Unrealized gain (loss) on securities                $     (126)  $       -   $     (126)

Reclassification adjustment for realized (gains)
 losses included in net income                             (13)          -          (13)

Foreign currency adjustments                               208           -          208
                                                    ----------   ---------   ----------

Accumulated other comprehensive income (loss)       $       69   $       -   $       69
                                                    ==========   =========   ==========
</TABLE>

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

                                      F-30
<PAGE>

Significant components of accumulated other comprehensive income (loss) are as
follows (amounts in thousands):

<TABLE>
<CAPTION>
                                               Reclassification   Accumulated
                                Unrealized       of realized         other
                    Foreign        Gains        gains(losses)     comprehensive
                   Currency       (Losses)       included in         Income
                  Adjustments   on Securties      net income         (Loss)
                  -----------   ------------   ----------------   -------------
<S>               <C>           <C>            <C>                <C>
Balance at
August 31, 2004   $       132   $       (113)  $            (13)  $           6

  Period change           (17)            64                 40              87
                  -----------   ------------   ----------------   -------------

Balance at
August 31, 2005   $       115   $        (49)  $             27   $          93
                  ===========   ============   ================   =============
</TABLE>

NOTE 14 - PER SHARE DATA

The following presents the computation of basic income (loss) per share and
diluted income (loss) per share (amounts in thousands except per share data):

<TABLE>
<CAPTION>
                                                        Year Ended   Year Ended
                                                        August 31,   August 31,
                                                           2005         2004
                                                       ------------  ----------
<S>                                                    <C>           <C>
Net Income (Loss)                                       $    (2,317)  $    2,402
Dividends                                                         -            -
                                                       ------------   ----------

Net Income Available for
Common Stockholders                                     $    (2,317)  $    2,402
                                                       ============   ==========

Basic Income Per Share                                 ($      0.22)  $     0.23

Diluted Income Per Share:                              ($      0.22)  $     0.23

                                                       ------------   ----------
Shares Outstanding:
  Basic weighted average number of
    common shares outstanding                            10,495,794   10,208,544
  Dilutive effect of conversion of options                    5,000       40,000
                                                       ------------   ----------

      Total Shares Outstanding                           10,500,794   10,248,544
                                                       ============   ==========
</TABLE>

At August 31, 2005, all common stock equivalents were anti-dilutive.

                                      F-31
<PAGE>
NOTE 15 - OPERATING LEASE COMMITMENTS

In March 2004 the Company entered into an operating lease agreement
("Agreement") to rent one of its office and warehouse facilities from a related
party in which two members of the Control Group have an interest. The Agreement
expires in February 2009. The Agreement provides for monthly base rent of
$42,000. 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. The building is occupied by Fortune
Diversified Industries, Inc. (the "Holding Company") and several subsidiaries
including Kingston, Commercial Solutions, TTC, StarQuest, PDH, ITC, Magtech, and
Cornerstone Construction. 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.

As part of an arrangement, dated July 2003, entitled "Agreement for Purchase and
Sale of Real Estate" between the Company's Nor-Cote subsidiary and a party
controlled by a Company Shareholder, Nor-Cote purchased, in fiscal year 2005,
the office building in which the US administrative personnel are located. A
subsequent agreement was executed between Nor-Cote and a related party in which
two members of the Control Group have an interest for the sale of that building.
No gain or loss was recorded on the sale. In fiscal year 2005, Nor-Cote entered
into an operating lease agreement to rent the building from a related party. The
agreement provides for monthly base rent of $7,000 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.

Additionally, Nor-Cote leases office and warehouse space in the UK, Singapore
and Malaysia under various operating lease arrangements expiring in various
years through 2015 with monthly rent of approximately $8,000. In fiscal year
2005, Nor-Cote entered into an agreement to lease office and warehouse space in
Atlanta, GA as part of an operating lease through May 2007. The agreement
provides for monthly base rent of approximately $3,000 and three one-year
renewal options.

PSM leases an office building in Richmond, IN from a related party. The lease is
for a period of five years and expires May 2008. The lease provides for a base
rent of $2,000 per month with nominal annual increases. The lease also includes
one renewal option, which allows the Company to extend the lease term for an
additional year.

Additionally, PSM leases an office building in Indianapolis, Indiana under a
lease agreement which expires in December 2008. There is no option to renew the
lease. The lease amount is approximately $5,000 a month.

On April 30, 2004, JH Drew entered into an operating lease agreement to rent
three buildings located in Indiana, Tennessee and Missouri from a related party
in which two members of the Control Group have an interest. The lease agreement
includes a five-year term with an 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. 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.

On November 1, 2004, the asset acquisition of Magtech created sublease
obligations. In Indianapolis, Indiana the obligation is $1,500 a month from
November 1, 2004 through June 30, 2006. In Fort Wayne, Indiana the obligation is
$2,600 a month from November 1, 2004 through December 31, 2010.

CSM leases office space in Brentwood, TN, under an agreement which expires in
January 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.

                                      F-32
<PAGE>
Rent expense under these agreements amounted to $976,000 and $487,000 for the
year ended August 31, 2005 and 2004.

The Company is also committed to vehicle and office equipment leases, which
expire in various years through 2009. Lease expense under all agreements
amounted to approximately $734,000 and $236,000 for the years ended August 31,
2005 and 2004, respectively. The Company's JH Drew subsidiary, which was
acquired on May 1, 2004, leases equipment and vehicles under an operating lease
which provides for a one year term per vehicle with an option to purchase or
continue leasing on a month-to-month basis.

Future minimum commitments under these agreements are as follows at August 31,
2005 (in thousands):

<TABLE>
<CAPTION>
                                          Vehicles
Year Ending August 31,    Facilities    And Equipment
----------------------    ----------    -------------
<S>                       <C>           <C>
    2006                  $    1,145    $         612
    2007                       1,104               37
    2008                       1,057               17
    2009                         618                5
2010 & after                     367               12
                          ----------    -------------

                          $    4,291    $         683
                          ==========    =============
</TABLE>

NOTE 16 - RELATED PARTY TRANSACTIONS

The Company has a $7,000,000 long-term unsecured line of credit with the
majority stockholder. Borrowings amounted to $6,618,000 at August 31, 2005 and
$6,268,000 at August 31, 2004, respectively. The line of credit bears interest
at 3.0% plus the one-month London Interbank Offered Rate (one-month LIBOR).
Interest expense booked on the line of credit was approximately $392,000 and
$187,000 for the years ended August 31, 2005 and 2004 respectively.

The Company's PSM subsidiary leases an office building in Richmond, IN from a
related party. The lease is for a period of five years and expires in May 2008.
The agreement provides for base rent of $2,000 per month with nominal annual
increases. The Company recognized expense of $24,000 for the year ended August
31, 2005.

The Company makes principal and interest payments to a stockholder for the
purchase of vehicles and equipment. The loans are secured by the assets. The
Company recognized interest of approximately $5,000 for the year ended August
31, 2005.

During March 2004, the Company entered into an operating lease agreement for
rental of a building with a related party. All of the Company's subsidiaries,
excluding JH Drew, Nor-Cote and PSM moved into the new facility between the
months of March 2004 through May 2004. 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 $42,000 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. The
Company recognized expense of approximately $461,000 for the year ended August
31, 2005.

On April 30, 2004, the Company's JH Drew subsidiary entered into an operating
lease agreement for rental of three buildings located in Indiana, Tennessee and
Missouri with the same 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. The Company recognized expense of
approximately $180,000 for the year ended August 31, 2005.

                                      F-33
<PAGE>
Nor-Cote purchased in fiscal year 2005, the office building in which the US
administrative personnel are located from a party controlled by a Company
Shareholder. A subsequent agreement was executed between Nor-Cote and a related
party for the sale of that building. No gain or loss was recorded on the sale.
In fiscal year 2005, Nor-Cote entered into an operating lease agreement to rent
the building from the related party. The agreement provides for monthly base
rent of $7,000 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. The
Company recognized expense of approximately $78,000 for the year ended August
31, 2005.

Following is a summary of all related party assets and (liabilities) included in
the consolidated balance sheets at August 31, 2005 and August 31, 2004 (amounts
in thousands):

<TABLE>
<CAPTION>
                                                    August 31,   August 31,
                                                       2005         2004
                                                    ----------   ----------
<S>                                                 <C>          <C>
Due to shareholders, included in accounts payable            -          (29)
Long-term line of credit                                (6,618)      (6,268)
Installment notes payable                                  (94)        (153)
                                                    ----------   ----------

Net liabilities                                     $   (6,712)  $   (6,450)
                                                    ==========   ==========
</TABLE>

NOTE 17 - CONCENTRATION OF CREDIT RISK

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

NOTE 18 - COMMITMENTS AND CONTINGENCIES

As part of the merger agreements with PSM, two Option Agreements substantially
restrict the Company's shares held by Mr. Schafir. The first is an Option
Agreement entered into the 1st day of October 2003 by and between Harlan M.
Schafir and Carter M. Fortune and Robert J. Kingston (collectively,
"Shareholders"); the second is an Option Agreement entered into the 1st day of
October 2003 by and between Harlan M. Schafir, and the Company (collectively,
"Option Agreements"). Mr. Schafir shall have the option to put any or all of the
Company's Stock received by him to the Shareholders or the Company, according to
the terms of these Agreements.

Exercise of Put Options: If Schafir desires to sell any or all of the Schafir
Distributed Stock, Schafir shall simultaneously make demand upon Carter M.
Fortune, Robert J. Kingston, and the Company:

                                      F-34
<PAGE>

(i)   Within ten (10) days of demand, Carter M. Fortune and Robert J. Kingston
      shall comply with the terms of the Option Agreement
      (Fortune/Kingston/Schafir);

(ii)  If Carter M. Fortune and Robert J. Kingston fail to comply with the terms
      of the Option Agreement (Fortune/Kingston/Schafir) then to the extent of
      Carter M. Fortune's and Robert J. Kingston's non-compliance within twenty
      (20) days of demand, the Company shall comply with the terms of the Option
      Agreement (Company/Schafir);

(iii) If the Company fails to comply with the terms of the Option Agreement
      (Company/Schafir) then to the extent of the Company's non-compliance
      within thirty (30) days of demand, Schafir may then execute upon personal
      asset accounts of the shareholders as defined in the Agreement.

The put price shall be dependent upon PSM, PSM II, and ProStaff combined
(collectively "PSM") cumulative EBITDA during the three-year period October l,
2003 to September 30, 2006 ("Regular Test Period").

      (A) With respect to 1,000,000 shares of the Company's common stock: a) if
PSM's combined cumulative EBITDA during the Regular Test Period is (i) greater
than $3,600,000 the put price per share shall be $6.00; (ii) greater than
$3,000,000 but less than or equal to $3,600,000, the put price per share shall
be $5.00; or(iii) greater than $2,400,000 but less than or equal to $3,000,000,
the put price per share shall be $4.00; and b) if PSM's combined cumulative
EBITDA during the Regular Test Period is less than or equal to $2,400,000,
Schafir shall not have any put rights.

      (B) With respect to 250,000 shares of the Company's common stock, if PSM's
combined cumulative EBITDA during the Regular Test Period is (i) greater than
$3,600,000, the put price per share shall be $6.00, and (ii) greater than $0.00
but less than or equal to $3,600,000, the put price per share shall be $5.00.

      (C) With respect to 60,000 shares of the Company's common stock: a) if
PSM's combined cumulative EBITDA during the Regular Test Period is (i) greater
than $3,000,000, the put price per share shall be $10.00; (ii) greater than
$2,000,000 but less than or equal to $3,000,000, the put price per share shall
be $7.50; and (iii) greater than $1,000,000 but less than or equal to
$2,000,000, the put price per share shall be $5.00; and b) if PSM's combined
cumulative EDITDA during the Regular Test Period is less than or equal to
$1,000,000, Schafir shall not have any put rights.

      (D) If there is a Triggering Event (as hereinafter defined) prior to the
completion of the Regular Test Period, the Shareholders shall give Schafir
prompt written notice thereof and, Schafir may exercise the put options for the
1,310,000 shares of Company's stock based upon a shorter test period pursuant to
the terms of this paragraph. The put price shall be dependent upon PSM's
combined cumulative EBITDA during the period beginning on October 1, 2003 and
ending on the last day of the month preceding the month in which the Triggering
Event occurs ("Short Test Period"). The income thresholds described in the three
(3) previous paragraphs relating to the Regular Test Period shall be reduced
proportionately based upon the number of months contained in the Short Test
Period versus the number of months contained in the Regular Test Period (36
months).

                                      F-35
<PAGE>

NOTE 19 - SIGNIFICANT ESTIMATES

Significant estimates have been made by management with respect to the
realizability of the Company's deferred tax assets. Actual results could differ
from these estimates making it reasonably possible that a change in these
estimates could occur in the near term. The net change in the valuation
allowance for deferred income tax assets was $0 and $625,000 at August 31, 2005
and 2004, respectively. The valuation allowance relates primarily to net
operating loss carryforwards, tax credit carryforwards, and net deductible
temporary differences. The Company evaluates a variety of factors in determining
the amount of the deferred income tax assets to be recognized pursuant to SFAS
No. 109, including the number of years the Company's operating loss and tax
credits can be carried forward, the existence of taxable temporary differences,
the Company's earnings history and the Company's near-term earnings
expectations. 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.

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

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

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

NOTE 20 - RETIREMENT PLAN

The Company maintains a profit-sharing plan that covers all employees who meet
the eligibility requirements set forth in the plan. Company contributions are
made at management's discretion and are allocated based upon each participant's
eligible compensation.

The plan includes a 401(k) savings plan whereby employees can contribute and
defer taxes on compensation contributed to the plan. The Company is not required
to contribute to the plan but may make a discretionary contribution.

                                      F-36
<PAGE>

NOTE 20 - SUBSEQUENT EVENTS

On November 21, 2005, the Company procured $7.5 million in cash minus certain
transaction related fees per the terms of a Securities Purchase Agreement with
an investment company. The terms of the agreement include the issuance of a
Convertible Term Note. The note is due on or before November 2008. Subject to
the terms of the note, the note is payable in cash or is convertibles into
shares of the Company's common stock. The Company also issued common stock
warrants to purchase up to 272,727 shares of the Company's common stock. The
Company intends to use the proceeds for general working capital purposes.

NOTE 21 - SEGMENT INFORMATION

The operations of the Company are organized around the following segments:

-     Business Solutions

-     Manufacturing and Distribution

-     Wireless Infrastructure Segment

-     Holding Company

<TABLE>
<CAPTION>
                                     MANUFACTURING   WIRELESS
                         BUSINESS         AND         INFRA-  HOLDING   SEGMENT
                        SOLUTIONS     DISTRIBUTION  STRUCTURE COMPANY    TOTALS
<S>                     <C>           <C>            <C>      <C>      <C>
YEAR ENDED
AUGUST 31, 2005
Net revenues              $ 28,458      $ 22,109    $ 62,529  $     -  $113,096
Cost of revenues            21,646        15,989      54,436        -    92,071
                          --------      --------    --------  -------  --------
Gross profit                 6,812         6,120       8,093        -    21,025
Operating expenses
  Selling, general and
    administrative
    expenses                 4,107         6,386       6,830    2,362    19,685
  Impairment loss of
    intangible assets            -           417         219        -       636
  Depreciation and
    amortization               336           581         689      103     1,709
                          --------      --------    --------  -------  --------
     Total operating
     expense                 4,443         7,384       7,738    2,465    22,030
                          --------      --------    --------  -------  --------

Segment operating
  income (loss)           $  2,369      $ (1,264)   $    355  $(2,465) $ (1,005)
                          ========      ========    ========  =======  ========

AS OF AUGUST 31, 2005
Cash                      $  3,103      $    399    $    414  $  (129) $  3,787
Restricted savings
  account                    1,484             -           -        -     1,484
Available for
  sale investments           2,199             -           -        -     2,199
Accounts receivable          1,304         3,315      16,736        3    21,358
Costs and estimated
  earnings in excess
  of billing of
  billing on
  uncompleted
  contracts                      -             -       2,681        -     2,681
Inventory, net                  15         4,120       4,180        -     8,315
Prepaid expenses
  and other current
  assets                       421           198         940      231     1,790
Deferred tax asset             563             -         451        -     1,014
Property and
  equipment, net               306         2,212       2,077      469     5,064
Goodwill                     4,287         5,970       1,423        -    11,680
Other intangible
  assets, net                3,773           740         192        -     4,705
Accounts receivable -
  long term                      -             -         600        -       600
Other long term
  assets                        18            55           -      336       409
                          --------      --------    --------  -------  --------

Total Segment Assets      $ 17,473      $ 17,009    $ 29,694  $   910  $ 65,086
                          ========      ========    ========  =======  ========
YEAR ENDED
AUGUST 31, 2004
Net revenues              $ 17,958      $ 23,394    $ 25,530  $     -  $ 66,882
Cost of revenues            13,854        16,374      21,030        -    51,258
                          --------      --------    --------  -------  --------
Gross profit                 4,104         7,020       4,500        -    15,624
Operating expenses
  Selling, general and
    administrative
    expenses                 1,937         5,882       2,861    1,232    11,912
  Depreciation and
    amortization               157           634         341       32     1,164
                          --------      --------    --------  -------  --------

    Total operating
    expense                  2,094         6,516       3,202    1,264    13,076
                          --------      --------    --------  -------  --------

Segment operating
  income (loss)           $  2,010         $ 504    $  1,298  $(1,264) $  2,548
                          ========      ========    ========  =======  ========

AS OF AUGUST 31, 2004
Cash                      $  2,836      $    633    $     50  $     8  $  3,527
Restricted savings
  account                      210             -           -        -       210
Available for
  sale investments           1,959             -           -        -     1,959
Accounts receivable            844         3,601      11,442        7    15,894
Costs and estimated
  earnings in excess
  of billing of
  billing on
  uncompleted
  contracts                      -             -       1,879        -     1,879
Inventory, net                  11         3,253       6,482        -     9,746
Prepaid expenses and
  other current assets         227           198         358       32       815
Deferred tax asset             563             -         451        -     1,014
Property and
  equipment, net                37         2,121       1,649      231     4,038
Goodwill                     3,580         5,957         655        -    10,192
Other intangible
  assets, net                  962         1,012         137        -     2,111
Other long term
  assets                        43            94          19       28       184
                          --------      --------    --------  -------  --------

Total Segment Assets      $ 11,272      $ 16,869    $ 23,122  $   306  $ 51,569
                          ========      ========    ========  =======  ========


</TABLE>

                                      F-37
<PAGE>

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                      FORTUNE DIVERSIFIED INDUSTRIES, INC.

Date:  November 29, 2005              By: /s/ John F. Fisbeck
                                          --------------------------------------
                                          John F. Fisbeck,
                                          Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.

Date:  November 29, 2005              /s/ John F. Fisbeck
                                      ------------------------------------------
                                      John F. Fisbeck, Chief Executive Officer
                                      and Director

Date:  November 29, 2005              /s/ Amy E. Gallo
                                      ------------------------------------------
                                      Amy E. Gallo, Principal Financial Officer

Date:  November 29, 2005              /s/ Harlan M. Schafir
                                      ------------------------------------------
                                      Harlan M. Schafir, Chief Operating Officer
                                      and Director

Date:  November 29, 2005              /s/ Carter M. Fortune
                                      ------------------------------------------
                                      Carter M. Fortune, Chairman of the Board

Date:  November 29, 2005              /s/ Paul A. Rayl
                                      ------------------------------------------
                                      Paul A. Rayl, Director

Date:  November 29, 2005              /s/ David A. Berry
                                      ------------------------------------------
                                      David A. Berry, Director

Date:  November 29, 2005              /s/ Nolan R. Lackey
                                      ------------------------------------------
                                      Nolan R. Lackey, Director

                                       76