UNITED
        STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





Form
      10-K





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





For
      the
      fiscal year ended August 31, 2007





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




For
              the transition period from
            
            to




Commission
      file number: 0-19049


**Fortune
      Industries, Inc.**


*(Exact
      name of registrant as
      specified in its charter)*





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





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





(317)
      532-1374


*(Registrant’s
      telephone number, including area code)*





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





Common
                Stock ($0.10 par value per share) (“Common Stock”);
            
            American
                Stock ExchangeSeries A
                Cumulative Preferred Stock ($0.10 par value per share) (“Preferred
                Stock”)
            
            American
                Stock Exchange*(Title
                of Class)*
            
            *(Name
                of Exchange on Which
                Registered)*





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





None





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


Yes
£
      No þ





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


Yes
£
      No þ





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





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
      Exchange Act.  (Check one):




Large
                accelerated filer o
            
            Accelerated
                filer o
            
            Non-accelerated
                filer þ





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
















As
      of
      February 28, 2007, the last business day of the registrant’s most recently
      completed second fiscal quarter, the aggregate market value of the registrant’s
      Common Stock and Preferred Stock held by non-affiliates, based upon the closing
      price per share for the registrant’s common stock as reported on the American
      Stock Exchange, was approximately $8.3 million.





The
      number of shares of the registrant’s Common Stock, outstanding as of December 6,
      2007 was 11,391,823. The number of shares of the registrant’s Preferred Stock,
      outstanding as of December 6, 2007 was 66,180





For
      the
      purpose of calculating the aggregate market value of the Company’s Common Stock
      held by non-affiliates, the Company utilized the definition of “affiliates”
provided by Rule 12b-2 of the Exchange Act. In applying that definition, the
      Company has considered all individual members of the “Control Group” as
      designated in the Schedule 13D filed by the Company on August 7, 2000 and on
      any
      amendments thereto to be affiliates, as well as all then current directors
      and
      officers. As used for purposes of determining the aggregate market value of
      the
      Voting Common Stock held by non-affiliates, “beneficial ownership” of securities
      means the sole or shared power to vote, or to direct the voting of, such
      securities, or the sole or shared investment power with respect to such
      securities, including the power to dispose of, or to direct the disposition
      of,
      such securities. In addition, for purposes of this calculation, a person is
      deemed to have beneficial ownership of any security that such person had the
      right to acquire within 60 days after February 28, 2007. The Company then
      multiplied the beneficial ownership of the non-affiliates by the closing price
      of the Company’s Common Stock, as of the date stated above, to derive the market
      value, or ‘float.’





**DOCUMENTS
      INCORPORATED BY REFERENCE**





None


2


**TABLEOF
      CONTENTS**





**PART
                I**Item
                1.
            
            Business
            4Item
                1A.
            
            Risk
                Factors
            11Item
              1B.
            
            Unresolved
              Staff Comments
            16Item
                2.
            
            Properties
            17Item
                3.
            
            Legal
                Proceedings
            17Item
                4.
            
            Submission
                of Matters to a Vote of Security
                Holders
            17**PART
                II**Item
                5.
            
            Market
                for the Registrant’s Common Equity, Related
                Shareholder Matters and Issuer Purchases of Equity
                Securities
            18Item
                6.
            
            Selected
                Financial Data
            18Item
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            19Item
                7A.
            
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            37Item
                8.
            
            Financial
                Statements and Supplementary
                Data
            38Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            77Item
                9A.
            
            Controls
                and Procedures
            77Item
                9B.
            
            Other
                Information
            78**PART
                III**Item
                10.
            
            Directors
                and Executive Officers of the
                Registrant
            79Item
                11.
            
            Executive
                Compensation
            87Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Shareholder Matters
            85Item
                13.
            
            Certain
                Relationships and Related
                Transactions
            87Item
                14.
            
            Principal
                Accountant Fees and Services
            87**PART
                IV**Item
                15.
            
            Exhibits
                and Financial Statement
                Schedules
            89SIGNATURES
            90


3
 *Table
          of Contents*


**PART
      I**





**Item
      1.*****Business***





**General**





Fortune
      Industries, Inc. is a holding company of various product and service entities
      which operate in diverse market segments.  The terms “we”, “our”,
“us”, “the Company”, and “management” as used herein refers to Fortune
      Industries, Inc. and its subsidiaries unless the context otherwise
      requires.  We provide a variety of services and products for selected
      market segments, which are classified under five operating segments: Business
      Solutions; Wireless Infrastructure; Transportation Infrastructure; Ultraviolet
      Technologies; and Electronics Integration.





We
      have
      historically invested in businesses that we believe to be undervalued,
      underperforming, and /or poised for significant growth.  Management’s
      strategic focus is to support the revenues and earnings growth of its operations
      by creating synergies that can be leveraged to enhance the performance of our
      entities and investing capital to fund expansion.  Additionally, we
      continually seek and evaluate strategic acquisitions that expand core offerings
      and drive incremental revenue and earnings growth.





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





We
      were
      incorporated in the state of Delaware in 1988, restructured in 2000 and
      redomesticated to the state of Indiana in May 2005.  Prior to 2001, we
      conducted business mainly in the entertainment industry.  A
      description of our operating segments is as follows:





**Business
      Solutions Segment**





The
      Business Solutions segment is comprised of Professional Employer Organizations
      (PEOs) which provide full-service human resources outsourcing services through
      co-employment relationships with their clients.





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





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





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





The
      services rendered by this segment accounted for 44% of our consolidated revenues
      in fiscal year 2007, 28% of our consolidated revenues in 2006, and 25% of our
      consolidated revenues in 2005.


4
 *Table
          of Contents*


*Acquisitions*





The
      Company acquired all membership units of Precision Employee Management, LLC
      (PEM), an Arizona company, through a Unit Purchase Agreement entered into as
      of
      February 1, 2007 by and among PEM, Tom Lickliter, Larry Bailliere, Charmaine
      Hayes, the Company, Carter Fortune and John Fisbeck.





The
      Company also acquired all the shares of Employer Solutions Group, Inc., a Utah
      company, and its affiliated entities (ESG) through an Agreement and Plan of
      Share Exchange entered into effective March 1, 2007 by and among ESG Craig
      Allred, Garth Allred, Dee Henderson, David Dyches, Kurt Robinson and Kira Reisch
      and the Company.





The
      Company’s acquisitions of PEM and ESG enabled the Company to expand its
      geographic presence in the PEO marketplace.





Business
      Solutions services are performed by ESG, Professional Staff Management, Inc.
      and
      its affiliated entities (PSM), CSM, Inc. and its affiliated entities (CSM)
      and
      PEM.  PSM was acquired in October 2003, and CSM was acquired in April
      2005.  They are among the nation’s oldest PEOs, and are recognized
      leaders in outsourced human resources services.





*Customers*





Customers
      in this segment represent a wide variety of industries including healthcare,
      professional services, software development, manufacturing logistics,
      telemarketing and construction. Combined, these organizations provide
      co-employment services to over 17,200 employees in all 50 states. Management’s
      focus is on providing PEO services to small and medium-sized businesses with
      10
      to 1,000 employees.  The Business Solutions segment’s customer base is
      diverse with no significant customer or group of customers.  While
      worksite employees are located throughout the United States, the segment’s
      client operations are primarily headquartered in Utah, Colorado, Arizona,
      Indiana, and Tennessee.





*Competition*





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





*Vendor
      Relationships*





The
      companies in the Business Solutions segment provide employee benefits to
      worksite employees under arrangements with a variety of vendors. These companies
      provide group health insurance coverage to the customers’ worksite employees
      through a partially self-funded health plan using the vendor AIG (“AIG”) and
      other health networks, through a fully insured group health plan using
      Healthspring, Inc. (“Healthspring”) and through various other fully insured
      policies or service contracts.





Under
      the
      partially self-funded policy with AIG, our PEOs are liable for the first
      $180,000 of claims per individual, with AIG being liable for all excess claim
      amounts.  There is an additional limit for aggregate claims incurred
      based on the number of participants in the plan.





The
      companies in the Business Solutions segment also provide partially self-funded
      workers’ compensation insurance coverage for their customers’ worksite employees
      through Wausau Insurance (“Wausau”) and high deductible workers compensation
      insurance coverage through Lumberman’s Underwriting Alliance (“LUA”). Under the
      partially self-funded policy with Wausau, our PEOs are liable for the first
      $250,000 of claims per occurrence, with Wausau held liable for all excess
      claims.  Under the LUA policy, the Company is liable for the first
      $750,000 of claims per occurrence, with LUA held liable for all excess
      claims.  The LUA policy has no limit on the aggregate amount of all
      claims per policy year.  The Wassau and LUA workers compensation
      policies provide coverage in most all states with the exception of those states
      that are “monopolistic” in coverage and therefore require employers to use their
      respective state insurance funds for coverage.


5
 *Table
          of Contents*


*Government
      Regulation*





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





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





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





**Wireless
      Infrastructure Segment**





We
      have
      invested in wireless infrastructure businesses since July 2001, and have
      completed six acquisitions primarily related to infrastructure products and
      service offerings related to the development, marketing, management, maintenance
      and upgrading of wireless telecommunications sites.  In 2005, we began
      marketing the consolidated services of these subsidiaries under the Fortune
      Wireless name brand to promote our ‘turn-key’ service offerings whereby the
      companies in our Wireless Infrastructure segment assist with multiple areas
      of
      wireless infrastructure under integrated contracting arrangements, in addition
      to providing those services.  Wireless infrastructure services include
      site acquisition, engineering, architecture and design, construction management,
      and technical consulting.





In
      September 2006, we incorporated Fortune Wireless, Inc. (Fortune Wireless),
      and
      have since merged PDH, Inc. (PDH) and Innovative Telecommunications Consultants,
      Inc. (ITC) into the entity.  Subsidiaries now operating in the
      Wireless Infrastructure segment include Fortune Wireless, Magtech Services,
      Inc.
      (Magtech) and James Westbrook & Associates, LLC (JWA).  The
      services previously performed by Cornerstone Wireless Construction Services,
      Inc. and Innovative Telecommunications Consultants, Inc. were moved to the
      Transportation Infrastructure segment effective July 1, 2007 and November 1,
      2007, respectively.





The
      products and services rendered by this  segment accounted for 15% of
      our consolidated revenues in fiscal year 2007, 18% of or our consolidated
      revenues in fiscal year 2006, and 13% of our consolidated revenues in
      2005.





*Site
      Acquisition*





Site
      acquisition services are performed for the wireless telecommunications industry
      and include program management, site leasing, land use planning, architectural
      & engineering design, construction management, co-location facilitation,
      environmental services, lease renegotiation, site marketing and asset
      management.





*Engineering,
      Architecture and Design*





Engineering,
      architecture and design services are performed for the wireless,
      telecommunications, real estate development, municipal, and petroleum
      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.  Services also include structural analysis and design of
      improvements to telecommunications towers, the structural design and analysis
      of
      buildings, commercial and residential land development projects, including
      re-zoning of properties.





*Construction
      Management*





Construction
      management is performed for the telecommunications industry, primarily
      consisting of developing and upgrading wireless networks for wireless carriers.
      Services include: program and construction management; electrical, foundation,
      and tower installations; and antennae and line installations.


6
 *Table
          of Contents*


*Technical
      Consulting*





Technical
      consulting services are performed for wireless equipment manufacturers and
      service providers including switch and radio base station
      engineering.  Services include site, survey, delivery, installation
      and integration for the implementation of end user equipment offered by a wide
      range of wireless equipment manufacturers.





*Customers
      and Backlog*





Four
      customers accounted for approximately 50% of revenues in the Wireless
      Infrastructure segment in fiscal year 2007.  While not material to the
      consolidated Company, the loss of any of these customers could have a material
      adverse effect on the segment.  Our Wireless Infrastructure operations
      are primarily focused in the central United States, though a number of contracts
      are performed outside of that region or on a national basis.  Revenues
      and operating results may be subject to seasonal variations due mainly to
      weather and customer spending patterns.  The revenues in this segment
      are typically greatest in our first, third and fourth
      quarters.  Revenues are lowest in the second quarter due to adverse
      weather conditions, which may cause project delays. Additionally, the volume
      of
      revenues and operating results in the Wireless Infrastructure segment may be
      highly cyclical as a result of changes in geographic spending habits and the
      financial condition of our customers and their access to capital.





As
      of
      August 31, 2007 and 2006, the Wireless Infrastructure segment backlog was
      approximately $6.33 million and $5.3 million, respectively.  The
      Company currently anticipates completing backlog orders by August 31,
      2008.  Management defines backlog as the value of work to be done
      where the following conditions are met: (i) the price of the work to be
      done is fixed; (ii) the scope of the work (both in definition and amount)
      to be done is fixed (i.e. the number of sites has been determined); and
      (iii) there is a written contract, purchase order, agreement or other
      documentary evidence which represents a firm commitment by the customer to
      pay
      us for the work to be performed.  These backlog amounts may not result
      in actual receipt of revenue in the originally anticipated period or at
      all.  This segment has experienced variances in the realization of its
      backlog because of project delays or cancellations resulting from external
      market factors and economic factors beyond its control and we may experience
      such delays or cancellations in the future.





*Competition*





The
      wireless infrastructure industry is highly competitive and fragmented, requiring
      substantial resources and skilled and experienced personnel. Several competitors
      are large companies that have greater capital resources, larger customer bases,
      and more established industry relationships than we do. Additionally, there
      are
      numerous smaller regional competitors.  There are relatively few
      barriers to entry and, as a result, any organization that has adequate financial
      resources and access to technical expertise may become a
      competitor.





A
      significant portion of the Wireless Infrastructure segment’s revenues is derived
      from direct bidding on projects as well as unit price agreements, and price
      is
      often an important factor in the award of such business.  Accordingly,
      companies in this segment could be underbid by their competitors in an effort
      by
      them to procure such business. We believe that as demand for this
      segment’s  products and services increases, customers will
      increasingly consider other factors in choosing a provider, including technical
      expertise and experience, industry reputation and dependability. We believe
      that
      the companies in our Wireless Infrastructure segment will benefit when these
      factors are considered.




*Government
      Regulation*





Companies
      in our Wireless Infrastructure segment are subject to various federal, state
      and
      local laws and regulations including licensing requirements applicable to
      architects, electricians, engineers and other professionals; permitting and
      inspection requirements applicable to construction projects; and regulations
      relating to worker safety and environmental protection. Companies in this
      segment are also indirectly subject to Federal Communication Commission
      regulations and requirements related to their association with wireless
      networks.


7
 *Table
          of Contents*


**Transportation
      Infrastructure Segment**





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





The  products
      and services rendered by this segment accounted for 25% of our consolidated
      revenues in fiscal year 2007, 37% of our consolidated revenues in 2006, and
      41%
      of our consolidated revenues in 2005.





*Customers
      and Backlog*





Three
      customers accounted for 25% of revenues in the Transportation Infrastructure
      segment in fiscal year 2007. While not material to the consolidated Company,
      the
      loss of any of these customers could have a material adverse effect on the
      segment.  Revenues and operating results may be subject to seasonal
      variations due mainly to weather and customer spending
      patterns.   Revenues from this segment are typically greatest in
      the first, third and fourth quarters.  Revenues are lowest in the
      second quarter due to the nature of the construction industry and due to adverse
      weather conditions, which may cause project delays. Additionally, the volume
      of
      revenues and operating results in the Transportation Infrastructure segment
      may
      be highly cyclical as a result of changes in federal and state funding of
      highway construction projects.





The
      Transportation Infrastructure segment backlog was approximately $27 million
      and
      $34.5 million at August 31, 2007 and 2006, respectively.  The Company
      currently anticipates completing the majority of the backlog orders by
      August 31, 2008.





*Materials*





Companies
      in this segment purchase materials, including guardrail and other components
      that are contingent upon commodity pricing.  Certain materials used by
      this segment   are purchased from a limited number of sources;
      however, we do not anticipate experiencing any difficulties in procuring these
      materials.  The prices of these commodities have been subject to
      volatility in previous years and this trend is expected to
      continue.





*Competition*





The
      transportation infrastructure markets in which the companies in this segment
      operate are highly competitive, requiring substantial resources and skilled
      and
      experienced personnel. The companies in this segment compete with other
      companies in most of the geographic markets in which they operate. A majority
      of
      contracts are completed under unit price contracts and are derived from direct
      bidding on projects.





*Government
      Regulation*





Companies
      in the Transportation Infrastructure segment are subject to various federal
      and
      state laws and regulations for contractors including licensing requirements
      and
      regulations relating to worker safety and environmental protection.





**Ultraviolet
      Technologies Segment**





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


8
 *Table
          of Contents*


The
      products produced by this segment accounted for 8% of our consolidated revenues
      in fiscal year 2007, 8% of our consolidated revenues in 2006, and 10% of our
      consolidated revenues in 2005.





Research
      and development expenses are incurred within the Ultraviolet Technologies
      segment. These expenses primarily relate to research regarding improvements
      to
      existing ultraviolet inks and the development of new ultraviolet ink
      products.  The success or failure of research and development projects
      have a major impact on this segment’s revenues and operating income. It is
      essential that the segment’s ultraviolet ink products perform according to
      specifications and the customer’s expectations. Any failure to perform in
      accordance with specifications and expectations could result in decreased
      revenues and additional costs to remedy quality issues.





*Customers*





The
      customer base in this segment is diverse with no significant customer or group
      of customers.  While not material to the consolidated Company,
      thirty-one percent of Nor-Cote’s revenues are derived from overseas
      customers.  Sales to these customers are typically made through
      distributor relations or through European, Asian and Latin American sales office
      personnel.





*Competition*





Competition
      comes from new technologies and other suppliers of similar
      products.  The companies in this segment compete with numerous other
      ink-related companies that are located throughout the world.  Several
      competitors are large companies that have greater financial, technical and
      marketing resources than the companies in this segment.





*Raw
      Materials*





The
      companies in this segment use various resins and pigments in the manufacture
      of
      their ink products.  The companies in this segment are subject to
      risks including shortage and discontinuance of raw materials.  The
      companies in this segment purchase materials from a variety of sources which
      helps mitigate these risks.





*Intellectual
      Property*





The
      companies in the Ultraviolet Technologies segment have, through invention,
      license agreements or other means, gained various rights in intellectual
      property that create value.  In order to avoid public disclosure of
      details relating to these inventions and intellectual property, Nor-Cote and
      its
      subsidiaries have in many cases chosen to avoid the patent filing
      process.  Accordingly, it may be difficult to protect these various
      intellectual property rights from infringement or other degradation and the
      underlying intellectual property could thereby decrease in
      value.  Much of the intellectual property (including, but not limited
      to ultraviolet ink formulas used within the Ultraviolet Technologies segment)
      is
      treated as a trade secret; as such, it may not have the same protection as
      if it
      had been patented.





**Electronics
      Integration Segment**





The
      Electronics Integration segment sells and installs a variety of electronic
      products and equipment, including video, sound and security
      products.  Subsidiaries include Kingston Sales Corporation (Kingston),
      Commercial Solutions, Inc. (Commercial Solutions) and Audio-Video Revolution,
      Inc. (AVR).





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





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


9
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The
      products and services rendered by this segment accounted for 9% of our
      consolidated revenues in fiscal year 2007, 8% of our consolidated revenues
      in
      2006, and 11% of our consolidated revenues in 2005.





*Customers*





The
      customer base in this segment, on the distribution side, is primarily based
      in
      the hospitality market and the healthcare Industry.  We also market to
      resellers and other electronic integration companies.  There are no
      individually significant customers or group of customers in terms of revenue
      for
      this segment.





*Vendor
      Relationships*





Companies
      in the Electronics Integration segment have distributorship agreements with
      multiple vendors, including TTE Corporation (RCA), LG Electronics Inc. and
      Panasonic.  These agreements contain competitive pricing and channels
      of distribution that are critical to the on-going success of the segment’s
      operations*.*





*Competition*





There
      is
      a significant amount of competition with other distributors, service and retail
      providers.  In addition, there are relatively few barriers to entry
      into the industries in which the companies in this segment operate and, as
      a
      result, any organization that has adequate financial resources and access to
      technical expertise may become a competitor.





**Employees**





As
      of
      December 6, 2007, we employed approximately 503 full-time employees, of which
      approximately 126 were represented by union contracts within the Transportation
      Infrastructure segment.  Additionally, within the Business Solutions
      segment, we had approximately 17,290 co-employees under customer-contract
      relationships.  Our in-house staff is supplemented with contract
      personnel on an as-needed basis. Management believes that its relationships
      with
      its employees are generally satisfactory.





**Control
      Group**





At
      September 1, 2006, a Control Group held 80.3% or 8,456,134 shares of our
      outstanding common stock.  Members of the control group included our
      CEO, Mr. John F. Fisbeck, and our Chairman of the Board, Mr. Carter M. Fortune.
      Additionally, Mr. Harlan Schafir, Mr. Norman Wolcott, Jr. and 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”) were deemed members of the control
      group. Individually, each of the above persons or entities had the sole voting
      and dispositive power over the following number of shares of the Company’s
      Common Stock as of September 1, 2006: John F. Fisbeck, 1,637,701 (or 15.6%),
      Carter M. Fortune, 4,132,810 (or 39.3%), Harlan M. Schafir, 1,310,000 (or
      12.4%), Norman G. Wolcott, Jr., individually, 713,751 (or 6.8%), Norman G.
      Wolcott Jr., as Trustee of the Wolcott Trusts, 285,372 (or 2.7%). In addition
      to
      the above shares, Messrs. Fisbeck and Fortune shared dispositive control over
      376,500 (or 3.6%) shares of the Company’s Common Stock held by Fisbeck-Fortune
      Development, LLC.





As
      part
      of the merger agreements with PSM, the 1,350,000 shares of Company common stock
      held by Harlan Schafir and certain PSM employees were subject to various option
      agreements that gave Mr. Schafir and those PSM employees the option to put
      any
      or all of the Company stock received by them in the PSM acquisition to a group
      of individuals including the Company’s majority shareholder or to the Company,
      according to the terms of these option agreements.  The put price was
      dependent on PSM’s cumulative operating performance from October 1, 2003 through
      September 30, 2006.  The total value of the puts was approximately
      $8,500 as the shares achieved their maximum put value.  During the
      Company’s first and second fiscal quarters, Mr. Schafir and the PSM employees
      exercised their put sale rights and sold all of their Company shares to Carter
      Fortune and John Fisbeck.  1,250,000 of the shares were priced at
      $6.00 per share, and 100,000 of the shares were priced at $10.00 per
      share.





As
      part
      of the merger agreements with Nor-Cote, the approximately 1,139,000 shares
      of  Company common stock held by Norman Wolcott, Jr. and the Norman G.
      Wolcott, Sr. and Lucile H. Wolcott Revocable Trust of 1995 (the predecessor
      to
      the Wolcott Trusts) were subject to various option agreements.  The
      option agreements gave the shareholders the option to put some or all of the
      Company stock received by them to the Company’s majority shareholder and gave
      the Company’s majority shareholder the option to call some or all of the Company
      stock.  The put/call price was dependent on Nor-Cote’s cumulative
      operating performance from July 1, 2003 through June 30, 2006.  On or
      about March 3, 2005 Mr. Wolcott sold 240,000 shares of Common Stock to Fortune
      Real Estate Development, LLC (the former name of Fisbeck-Fortune Development,
      LLC) for $3.36 per share pursuant to the put/call rights.  On March 3,
      2007, Mr. Fortune exercised his call rights from Mr. Wolcott and the Wolcott
      Trusts to purchase an additional 899,000 shares and pursuant to a related
      agreement; Mr. Fisbeck purchased one-half of those shares.  The
      approximately 899,000 shares were priced at $3.05 per share.


10
 *Table
          of Contents*


As
      of
      August 31, 2007, the Control Group held 74.2% or 8,454,784 shares of our
      outstanding common stock.  Members of the Control Group as of this
      date include John F. Fisbeck and Carter M. Fortune.  Individually,
      each of the above persons had the sole voting and dispositive power over the
      following number of shares of the Company’s Common Stock as of August 31, 2007:
      John F. Fisbeck, 2,786,487 (or 24.5%) and Carter M. Fortune, 5,283,797 (or
      46.4%). In addition to the above shares, Messrs. Fisbeck and Fortune equally
      share dispositive control over 384,500 (or 3.4%) shares of the Company’s Common
      Stock held by Fisbeck-Fortune Development, LLC as of August 31,
      2007.




**Fisbeck-Fortune
        Development, LLC**
 
 In
        December 2003, the Financial Accounting Standards Board (“FASB”) issued
        Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN
        46R").
        FIN 46R requires a variable interest entity (VIE) to be consolidated by a
        company, if that company is subject to a majority of the risk of loss from
        the
        variable interest entity's activities or is entitled to receive a majority
        of
        the entity's residual returns, or both. FIN 46R also requires disclosures
        about
        variable interest entities that a company is not required to consolidate,
        but in
        which it has a significant variable interest.
 
 The
        Company leases a total of six facilities from Fisbeck-Fortune Development,
        LLC
        (“FFD”), a related-party referenced earlier whose primary purpose is to own and
        lease these properties to the Company. FFD has ownership of 384,500 shares
        of
        the Company’s stock and is wholly-owned equally by the Company’s Chairman of the
        Board and its Chief Executive Officer.  FFD does not have any other
        significant assets.  Although the Company does not have direct
        ownership interests in FFD, it is considered the primary beneficiary as
        interpreted by FIN 46R due to implicit interests generated from personal
        guarantees from the Company’s majority shareholders on certain debt instruments
        and leasing arrangements of FFD solely to the Company.
 
 For
        these
        reasons and as more fully explained in Note 2 of the accompanying consolidated
        financial statement, FFD is a variable interest entity.  As such,
        there has been a consolidation of FFD with the Company.


**Additional
      information with respect to the Company’s businesses**





The
      amounts of assets, revenues and earnings attributable to the aforementioned
      operating segments are included in Note 23 to the Company’s Consolidated
      Financial Statements contained in Item 8, Financial Statements and Supplementary
      Data.





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





**Item
      1A. *Risk Factors***





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





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





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





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





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





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


11
 *Table
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§
            providing
                benefits to worksite employees even if our costs to provide such
                benefits
                exceed the fees the client pays us.





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





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


As
        a
        major employer, our operations in the Business Solutions segment are affected
        by
        numerous federal, state and local laws and regulations relating to labor,
        tax
        and employment matters. By entering into a co-employer relationship with
        employees of our clients, , we assume certain obligations and responsibilities
        of an employer under these laws. However, many of these laws (such as ERISA
        and
        federal and state employment tax laws) do not specifically address the
        obligations and responsibilities of non-traditional employers such as PEOs,
        and
        the definition of “employer” under these laws is not uniform. In addition,
        some  of the states in which we operate have not addressed the PEO
        relationship for purposes of compliance with applicable state laws governing
        the
        employer/employee relationship. Any adverse application of these other federal
        or state laws to the PEO relationship with our worksite employees could have
        a
        material adverse effect on our results of operations or financial
        condition.   However, due to the strong legislative efforts of
        the National Association of Professional Employer Organizations (NAPEO),
        much of
        this risk is being mitigated, as NAPEO has put in place in many states, via
        legislation, regulations that satisfy most state legislatures.  These
        self-imposed industry regulations also help to clarify or define the PEO
        co-employment relationship in various areas of state employment law and have
        greatly reduced the risk of legislative change negatively affecting PEO’s at the
        state level.
 
 In
        the
        states of Utah, Colorado, and Arizona, NAPEO has taken an active role during
        2007 and will continue during 2008 to settle the legislative landscape in
        those
        states.
 
 While
        many states do not explicitly regulate PEOs, various states have passed or
        may
        be considering passing laws that have licensing or registration requirements
        for
        PEOs. Such laws vary from state to state, but generally provide for monitoring
        the fiscal responsibility of PEOs, and in some cases codify and clarify the
        co-employment relationship for unemployment, workers’ compensation and other
        purposes under state law. While we generally support licensing regulation
        because it serves to validate the PEO relationship, we typically satisfy
        licensing requirements or other applicable regulations for the states we
        currently operate in.  However,  there can be no assurance
        that we will be able to obtain licenses in all states.
 
 ***We
        may face additional liabilities as a result of increases in unemployment
        tax
        rates.***
 
 We
        record
        our state unemployment tax expense based on taxable wages and tax rates assigned
        by each state. State unemployment tax rates vary by state and are determined,
        in
        part, based on prior years’ compensation experience in each state. Should our
        claim experience increase, our unemployment tax rates could increase. In
        addition, states have the ability under law to increase unemployment tax
        rates
        to cover deficiencies in the unemployment tax fund. Some states have implemented
        retroactive cost increases.   Some client contractual
        arrangements limit our ability to incorporate such increases into service
        fees,
        which could result in a delay before such increases could be reflected in
        service fees.   The PEO contracts for the PEM office in Arizona
        limits their ability to pass on SUTA rate increases.   However,
        the financial position of the Arizona office is not material in relation
        to the
        Business Solutions Segment as a whole.  In addition these contracts
        are being revised with the provision being changed during the 2008
        year.  PEO Contracts for clients in the states of Utah and Colorado do
        not limit the PEOs ability to raise SUTA rates on an as needed
        basis.  PEO contracts in the States of Indiana and Tennessee are also
        non restrictive regarding the PEO’s ability to raise SUTA rates on an as needed
        basis   As a result, most increases to a PEOs SUTA rate can be
        past on to their clients and will not  have a material adverse effect
        on our financial condition or results of operations.


***Our
      operating results may vary significantly from
      quarter-to-quarter.***





During
      the winter months and at other times of year, demand for our services
      (including, but not limited to the services provided by the Wireless
      Infrastructure and Transportation Infrastructure segments) may be lower due
      to
      inclement weather.  In addition, inclement weather could cause delays
      in the issuance or completion of projects.  Further, our quarterly
      results may also be materially affected by:





§
            the
                timing and volume of work under new
                agreements;


§
            the
                termination of existing agreements;


§
            regional
                or general economic conditions;


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


§
            the
                budgetary spending patterns of
                customers;


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


§
            increases
                in construction and design costs;


§
            the
                availability of products to sell;


§
            changes
                to the cost of available products;


§
            changes
                in bonding requirements applicable to new
                agreements;


§
            losses
                experienced in our operations not otherwise covered by
                insurance;


§
            payment
                risk associated with the financial condition of our
                customers;


12
 *Table
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§
            costs
                we incur to support growth internally or through acquisitions or
                otherwise;


§
            the
                timing of acquisitions; and


§
            the
                magnitude of acquisition assimilation
                costs.





Accordingly,
      our 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.





***We
      may not be able to maintain appropriate staffing levels related to our billable
      workforce.***





If
      we
      maintain or increase billable staffing levels in anticipation of one or more
      projects and those projects are delayed, reduced or terminated, or otherwise
      do
      not materialize, we may underutilize these personnel, which could have material,
      adverse effects on our business, financial condition and results of
      operations.  This risk primarily affects our Wireless Infrastructure
      segment. In order to lessen this risk we deliberately reduced the size and
      scope
      of our wireless construction and wireless technical services businesses. In
      addition, we reduced our number of employees in this segment and increased
      the
      number of subcontractors.





***We
      bear the risk of cost overruns on a large percentage of our revenues that are
      derived from fixed price contracts.***





The
      concentration of a portion of our business among a number of fixed price
      contracts (including, but not limited to contracts in the Wireless
      Infrastructure and Transportation Infrastructure segments) increases our
      potential risk of loss. Under fixed price contracts, we provide specific tasks
      for a specific price and are typically paid on a milestone
      basis.  Such contracts involve greater financial risks because we bear
      the risk if actual project costs exceed the amounts we are paid under the
      contracts.





***Our
      unionized workforce could adversely affect our
      operations.***





As
      of
      August 31, 2007, approximately 75% of our employees within our Transportation
      Infrastructure segment were covered by multi-employer bargaining agreements.
      Although the majority of these agreements prohibit strikes and work stoppages,
      we cannot be certain that strikes or work stoppages will not occur in the
      future. Strikes or work stoppages would adversely impact our relationships
      with
      our customers and could cause us to lose business and decrease our
      revenue.





***We
      may incur liabilities or suffer negative financial impact relating to
      occupational health and safety matters.***





The
      services provided by us create a risk of serious injury or death for the
      employees performing the work and for other persons (including but not limited
      to cellular tower construction in the Wireless Infrastructure segment and
      highway construction work in the Transportation Infrastructure
      segment).  These risks can increase the Company’s exposure to
      liability and may result in increased insurance costs.  In addition,
      if our safety record were to substantially deteriorate over time, our customers
      could cancel our contracts and not award us future business.





***Our
      success is dependent on growth in the deployment of wireless networks and new
      technology upgrades, and to the extent that such growth slows, our business
      may
      be harmed.***





Telecommunications
      carriers, who are serviced by our Wireless Infrastructure segment, are
      constantly re-evaluating their network deployment plans in response to trends
      in
      the capital markets, changing perceptions regarding industry growth, the
      adoption of new wireless technologies, increasing pricing competition for
      subscribers and general economic conditions in the United States. If the rate
      of
      network deployment slows and carriers reduce their capital investments in
      wireless infrastructure or fail to expand into new geographic areas, our
      business may be significantly harmed.  The uncertainty associated with
      rapidly changing telecommunications technologies may also negatively impact
      the
      rate of deployment of wireless networks and the demand for our services.
      Telecommunications service providers face significant challenges in assessing
      consumer demand and in acceptance of rapidly changing enhanced
      telecommunications capabilities. If telecommunications service providers
      perceive that the rate of acceptance of next generation telecommunications
      products will grow more slowly than previously expected, they may, as a result,
      slow their development of next generation technologies. Moreover, increasing
      price competition for subscribers could adversely affect the profitability
      of
      carriers and limit their resources for network deployment. Any significant
      sustained slowdown will further reduce the demand for our services and adversely
      affect our financial results.


13
 *Table
          of Contents*


***The
      telecommunications industry has experienced significant consolidation, and
      this
      trend is expected to continue. It is possible that we and one or more of our
      competitors each supply products to the companies that have merged or will
      merge.***





This
      consolidation could result in delays in purchasing decisions by merged companies
      or in us playing a decreased role in the supply of products to the merged
      companies. Delays or reductions in wireless infrastructure spending could have
      a
      material adverse effect on demand for our products and services and,
      consequently, our results of operations.





***We
      may not be able to protect our intellectual property
      rights.***





We
      have,
      through invention, license agreements or other means, gained various rights
      in
      intellectual property that create value for us.  In order to avoid
      public disclosure of details relating to our inventions and intellectual
      property (especially with respect to our ultraviolet ink formulas within our
      Ultraviolet Technologies segment), we have in many cases chosen to avoid the
      patent filing process.  Accordingly, it may be difficult to protect
      these various intellectual property rights from infringement or other
      degradation and the underlying intellectual property could thereby decrease
      in
      value to us.  Much of our intellectual property (including, but not
      limited to ultraviolet ink formulas within our Ultraviolet Technologies segment)
      is treated as a trade secret; as such, it may not have the same protection
      as if
      it had been patented.





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





When
      we
      acquire a business, we record goodwill equal to the excess amount we pay for
      the
      business, including liabilities assumed, over the fair value of the tangible
      and
      intangible assets of the business we acquire. The Financial Accounting Standards
      Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets” which
      provides that goodwill and other intangible assets that have indefinite useful
      lives not be amortized, but instead must be tested at least annually for
      impairment, and intangible assets that have finite useful lives should continue
      to be amortized over their useful lives. SFAS 142 also provides specific
      guidance for testing goodwill and other non-amortized intangible assets for
      impairment. SFAS 142 requires management to make certain estimates and
      assumptions when allocating goodwill to reporting units and determining the
      fair
      value of reporting unit net assets and liabilities, including, among other
      things, an assessment of market conditions, projected cash flows, investment
      rates, cost of capital and growth rates, which could significantly impact the
      reported value of goodwill and other intangible assets. Fair value is determined
      using a combination of the discounted cash flow, market multiple and market
      capitalization valuation approaches. Absent any impairment indicators, we
      perform our impairment tests annually as of the end of the fourth quarter.
      Future impairments, if any, will be recognized as operating
      expenses.





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





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





***We
      may be unsuccessful at integrating companies.***





We
      may
      not successfully integrate the companies that we have acquired or that we may
      acquire with our 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 that we acquire, and our overall profitability could
      be adversely affected.  Integrating our acquired companies involves a
      number of special risks which could materially and adversely affect our
      business, financial condition and results of operations, including:





§
            failure
                of acquired companies to achieve the results that we
                expect;


§
            diversion
                of management's attention from operational
                matters;


§
            difficulties
                integrating the operations and personnel of acquired
                companies;


14
 *Table
          of Contents*


§
            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.





Further,
      if one of the acquired companies suffers customer dissatisfaction or performance
      problems, our reputation could be materially and adversely
      affected.





***Our
      substantial leverage could adversely affect our financial
      condition.***





Our
      substantial indebtedness could have significant negative consequences. For
      example, it could:





·
            increase
                our sensitivity to interest rate
                fluctuations;


·
            limit
                our ability to obtain additional financing to fund future working
                capital,
                capital expenditures, and other general corporate requirements, or
                to
                carry out other aspects of our business
                plan;


·
            require
                us to dedicate a substantial portion of our cash flows from operations
                to
                pay principal of, and interest on, our indebtedness, thereby reducing
                the
                availability of that cash flow to fund working capital, capital
                expenditures or other general corporate purposes, or to carry out
                other
                aspects of our business plan;


·
            limit
                our flexibility in planning for, or reacting to, changes in our
                business;


·
            cause
                our suppliers to institute more onerous payment terms generally or
                require
                us to purchase letters of credit for this
                purpose;


·
            limit
                our ability to pursue additional
                acquisitions;


·
            lead
                us to have less favorable credit terms which would increase the amount
                of
                working capital necessary to conduct our business;
                and


·
            place
                us at a competitive disadvantage compared to our competitors that
                have
                less debt.





In
      addition, our loan agreements contain financial and other restrictive covenants
      that may limit our ability to engage in activities that may be in our long-term
      best interests such as selling assets, strategic acquisitions, paying dividends,
      stock repurchases and borrowing additional funds. Our failure to comply with
      those covenants could result in an event of default which, if not cured or
      waived, could result in the acceleration of all of our debt which could leave
      us
      unable to meet some or all of our obligations. See the notes to the audited
      consolidated financial statements included elsewhere in this Form
      10-K.





***Our
      debt financing is guaranteed by our two major shareholders (our Chairman of
      the
      Board and our CEO).  A refusal to make additional guarantees by our
      Chairman of the Board could impact our borrowing
      capabilities.***





If
      our
      Chairman of the Board would not guarantee our debt, we may not be able to retain
      current borrowing capabilities, growth opportunities, or interest
      rates.





***The
      departure of key personnel could disrupt our business, and few of our key
      personnel are contractually obligated to stay with
      us.***





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





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





As
      described in Item 9A of this Report, certain control deficiencies constitute
      a
      material weakness in our internal control over financial reporting as of August
      31, 2007. In particular, we have concluded that (i) additional accounting
      personnel were needed both at the parent company level and at certain
      subsidiaries at August 31, 2007 to ensure that certain disclosure controls
      and
      procedures were operating effectively; (ii) greater segregation of duties was
      needed in the accounting functions; and (iii) certain procedures should be
      documented to ensure that personnel turnover does not result in a failure of
      those procedures.


15
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          of Contents*


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





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





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





As
      a
      public company we are subject to the reporting requirements of the Securities
      Exchange Act of 1934, the Sarbanes-Oxley Act and the rules of the American
      Stock
      Exchange (AMEX). The requirements of these rules and regulations have increased,
      and may further increase in the future, our legal and financial compliance
      costs, make some activities more difficult, time consuming or costly and may
      also place undue strain on our systems and resources. The Securities Exchange
      Act of 1934 requires, among other things, that we file annual, quarterly and
      current reports with respect to our business and financial condition. The
      Sarbanes-Oxley Act requires, among other things, that we report on the
      effectiveness of our disclosure controls and procedures, and internal controls
      over financial reporting. In order to maintain and improve the effectiveness
      of
      our disclosure controls and procedures, and internal controls over financial
      reporting, significant resources and management oversight will be required.
      In
      addition, beginning with our 2008 fiscal year, we will be required to comply
      with Section 404 of the Sarbanes-Oxley Act. As a result, management’s attention
      may be diverted from other business concerns, which could have a material
      adverse effect on our business, financial condition, results of operations
      and
      cash flows. These rules and regulations could also make it more difficult for
      us
      to attract and retain qualified independent members of our Board of Directors
      and qualified members of our management team.





***A
      control group owns a substantial majority of our common
      stock.***





As
      of
      August 31, 2007, the Control Group held 74.2% or 8,454,784 shares of our
      outstanding common stock.  Members of the Control Group as of this
      date include John F. Fisbeck and Carter M. Fortune.  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, 2007:
      John F. Fisbeck, 2,786,487 (or 24.5%) and Carter M. Fortune, 5,283,797 (or
      46.4%). In addition to the above shares, Messrs. Fisbeck and Fortune equally
      share dispositive control over 384,500 (or 3.4%) shares of the Company’s Common
      Stock held by Fisbeck-Fortune Development as of August 31,
      2007.





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





**Item
      1B**. ***Unresolved Staff
      Comments***





Not
      applicable.


16
 *Table
          of Contents*


**Item
      2. *Properties***





As
      of
      August 31, 2007, we maintained the following operating facilities:





Segment
            
            Location(s)
            
            Description
            
            Owned
                /
              Leased
            
            Approximate
              Square
              FootageCorporate
                and various  Wireless Infrastructure & Electronics
                Integration subsidiaries
            
            Indianapolis,
                IN
            
            Corporate
                offices, various subsidiary offices and warehouse
                facilities
            
            Leased
                (1)
            
            171,000Wireless
                Infrastructure
            
            Columbus,
                OH
            
            Offices,
                warehouse facility
            
            Leased
                (1), (2)
            
            11,000Cleveland,
                OH, Kansas City, MO, Richmond, VA, Ft. Wayne, IN and Atlanta,
                GA
            
            Offices,
                warehouse facilities
            
            Leased
            
            27,000Business
                Solutions
            
            Richmond,
                IN
            
            Offices
            
            Leased
                (3)
            
            10,000Indianapolis,
                IN
            
            Offices
            
            Leased
            
            7,000Brentwood,
                TN
            
            Offices
            
            Leased
            
            10,000Provo,
                UT
            
            Offices
            
            Leased
            
            15,500Tucson,
                AZ
            
            Offices
            
            Leased
            
            3,500Loveland,
                CO
            
            Offices
            
            Leased
            
            1,355Transportation
                Infrastructure
            
            Indianapolis,
                IN, Sedalia, MO, Knoxville, TN
            
            Offices,
                equipment yard, warehouse, storage and vehicle shop
            
            Leased
                (1)
            
            41,000
                (4)Ultraviolet
                Technologies
            
            Crawfordsville,
                IN
            
            Offices
            
            Leased
                (1)
            
            20,000Crawfordsville,
                IN
            
            Manufacturing
                facility
            
            Owned
            
            34,000United
                Kingdom, Singapore, Shenzhen, China and GuangDong, China
            
            Offices,
                warehouse and manufacturing facilities
            
            Leased
            
            11,000Atlanta,
                GA
            
            Offices,
                warehouse facility
            
            Leased
            
            5,000





(1)
            The
                leases on these properties are with a consolidated variable interest
                entity equally owned by the Company’s two major shareholders. Refer to the
                consolidated financial statements and notes thereto included elsewhere
                in
                this Form 10-K.


(2)
            The
                Columbus, OH property was sold by the consolidated variable interest
                entity on November 2, 2007, and the lease with the Wireless Infrastructure
                segment was terminated on this
                date.


(3)
            The
                leases on this property are with a limited liability company owned
                by the
                former Chief Operating Officer of the Company.  Refer to the
                consolidated financial statements and notes thereto included elsewhere
                in
                this Form 10-K.


(4)
            Represents
                total facility square footage.  Additionally, we have
                approximately 14 acres of yard
                space.





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





**Item
      3.*****Legal Proceedings***





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





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





No
      matters were submitted to a vote of the Company’s shareholders during the fourth
      quarter of fiscal 2007.


17
 *Table
          of Contents*


**PART
      II**





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





**Market
      Information**





The
      Common Stock of Fortune Industries, Inc. is traded on the American Stock
      Exchange (Symbol: FFI). As of December 6, 2007, there were 138 holders of record
      of the common stock.  This number does not include shareholders for
      whom shares were held in “nominee” or “street name”.  Prior to June
      23, 2005, our stock traded on the NASD OTC Bulletin Board under the symbol
      "FDVI" for the period June 17, 2001 through June 1, 2005 and under the symbol
      "FDVF" for the period June 2, 2005 through June 22, 2005. High and low
      quotations reported by the 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, markdowns
      or
      commissions and may not represent actual transactions. All share prices
      presented in this Annual Report on Form 10-K have been restated to reflect
      the
      1-for-10 stock split effective June 2, 2005.





**High**
            
            
            **Low**Fiscal
                Year Ending August 31, 2007Fourth
                Quarter
            
            $
            3.50
            
            
            $
            2.20Third
                Quarter
            
            
            5.13
            
            
            
            3.21Second
                Quarter
            
            
            6.40
            
            
            
            3.66First
                Quarter
            
            
            4.45
            
            
            
            3.52Fiscal
                Year Ending August 31, 2006Fourth
                Quarter
            
            $
            5.21
            
            
            $
            3.91Third
                Quarter
            
            
            5.00
            
            
            
            3.65Second
                Quarter
            
            
            5.00
            
            
            
            3.10First
                Quarter
            
            
            7.75
            
            
            
            4.50





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





**Unregistered
      Shares Issuances**





There
      were no issuances of unregistered shares of Company stock that were not reported
      by the Company in a Current Report on Form 8-K or in a Quarterly Report on
      Form
      10-Q during the fiscal year ended August 31, 2007.





**Item
      6.*****Selected Financial
      Data***





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





Year
                Ended August 31,2007
                (1)
            
            
            2006
            
            
            2005
                (2)
            
            
            2004
                (3)
            
            
            2003
                (4)(Dollars
                in thousands, except per share data)Total
                Revenues
            
            $
            158,349
            
            
            $
            157,113
            
            
            $
            113,096
            
            
            $
            66,882
            
            
            $
            15,470Net
                Income (Loss)
            
            
            (7,286
            )
            
            
            2,219
            
            
            
            (2,317
            )
            
            
            2,402
            
            
            
            115Net
                Income (Loss) Available to Common Shareholders
            
            
            (7,782
            )
            
            
            1,888
            
            
            
            (2,317
            )
            
            
            2,402
            
            
            
            115Net
                Income (Loss) per Share:Basic
            
            $
            (0.72
            )
            
            $
            0.18
            
            
            $
            (0.22
            )
            
            $
            0.23
            
            
            $
            0.01Diluted
            
            $
            (0.63
            )
            
            $
            0.16
            
            
            $
            (0.22
            )
            
            $
            0.23
            
            
            $
            0.01Weighted
                Average Shares Outstanding:Basic
            
            
            10,841
            
            
            
            10,582
            
            
            
            10,496
            
            
            
            10,209
            
            
            
            7,739Diluted
            
            
            12,394
            
            
            
            11,845
            
            
            
            10,501
            
            
            
            10,249
            
            
            
            7,829Consolidated
                Balance Sheet Data:Cash
                and Short-Term Investments
            
            $
            9,830
            
            
            $
            4,913
            
            
            $
            5,986
            
            
            $
            5,486
            
            
            $
            1,222Working
                Capital
            
            
            271
            
            
            
            23,383
            
            
            
            1,200
            
            
            
            9,174
            
            
            
            3,358Goodwill
                and Intangibles, net
            
            
            25,911
            
            
            
            16,283
            
            
            
            16,385
            
            
            
            12,303
            
            
            
            7,219Total
                Assets
            
            
            88,355
            
            
            
            74,285
            
            
            
            65,086
            
            
            
            51,569
            
            
            
            18,033Long-Term
                Obligations and Redeemable Preferred Stock
            
            
            31,172
            
            
            
            34,512
            
            
            
            11,585
            
            
            
            12,881
            
            
            
            7,210Shareholders’
                Equity
            
            
            14,089
            
            
            
            20,950
            
            
            
            12,073
            
            
            
            12,818
            
            
            
            5,654


18
 *Table
          of Contents*


(1)
            Includes
                the acquisition of Precision Employee Management, LLC in February
                2007 and
                Employer Solutions Group., Inc. in March
                2007.





(2)
            Includes
                the acquisition of CSM, Inc. in April
                2005.





(3)
            Includes
                the acquisition of Professional Staff Management, Inc. in October
                2003 and
                the James H. Drew Corp. in April
                2004.





(4)
            Includes
                the acquisition of Nor-Cote International, Inc. in July
                2003.





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





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





**Overview**





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





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





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





We
      classify our businesses under five operating segments:  Business
      Solutions; Wireless Infrastructure; Transportation Infrastructure; Ultraviolet
      Technologies; and Electronics Integration.





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





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





*Holding
      Company*





Management
      believes that its diversification among various businesses will improve
      long-term consistency in earnings.  It is our intent to continue to
      operate in selected market segments that may not directly relate to one another.
      Management’s strategy has been and continues to be to acquire and grow
      businesses that present consistent long-term growth opportunities.  To this
      extent, over the past five fiscal years, we have completed six key acquisitions
      furthering our growth strategy.  Four of these key acquisitions have
      been in the PEO industry.  In February 2007, the Company acquired PEM,
      a PEO located in Arizona.  In March 2007, the Company acquired ESG, a
      PEO located in Utah and Colorado.  The Company’s acquisition of PEM
      and ESG enabled the Company to expand its geographic presence in the PEO
      marketplace, and has made the Company one of the three largest public PEOs
      in
      the country.  In April 2005, we acquired CSM, a PEO located in
      Nashville, Tennessee.  This acquisition of the oldest PEO in the state
      expanded our Business Solutions segment service offerings.  In April
      2004, we acquired JH Drew, a construction installer of highway-products and
      commercial structural steel.  This acquisition allowed us to gain
      entry into the transportation infrastructure business in the Midwestern United
      States.  In October 2003 we acquired PSM, a PEO located in
      Indianapolis, Indiana.  This acquisition allowed us to gain entry into
      the PEO market.  In July 2003 we acquired Nor-Cote, a specialty ink
      manufacturer with worldwide distribution channels.  This acquisition
      allowed us to gain entry into the ultraviolet ink business.  We
      continue to pursue PEO acquisition opportunities as well as other acquisition
      opportunities as deemed appropriate.


19
 *Table
          of Contents*


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





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


§
            We
                have current and long-term debt liabilities of $47.6
                million.  Principal payments of $22.7 million and estimated
                interest payments of approximately $3.57 million are due within 12
                months.
                The ability to meet financing needs may affect future management
                strategies.


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


§
            Typically,
                the first, third and fourth quarter represent the best quarters for
                our
                consolidated financial results.  These results are attained due
                to our investment in the construction
                industry.


§
            We
                maintain a solid working relationship with all of our unions and
                good
                employee relations are a focus of our management.  Although we
                believe we have good employee relations, there can be no assurances
                that
                work stoppages can be avoided in future
                periods.


§
            A
                control group, which includes our two major shareholders, owns 74.2%
                of
                the outstanding Common Stock of the Company.  As a result, these
                persons could have a controlling influence in determining the outcome
                of
                any corporate matters submitted to our shareholders for approval,
                including mergers, consolidations, election of directors and any
                other
                significant corporate actions.  The interests of these
                shareholders may differ from the interests of the Company’s other
                shareholders and their stock ownership may thereby limit the ability
                of
                other shareholders to influence the management and affairs of the
                Company.





*Business
      Solutions*





We
      continue to expand service offerings in addition to our payroll services,
      including human resource outsourcing, employment training and
      testing.  While the majority of customer operations are concentrated
      in the Arizona, Colorado, Indiana, Tennessee and Utah markets, we intend to
      expand service offerings through acquisitions or new offices in the next twelve
      to twenty-four months.  We are in the process of installing a
      universal software platform among all of our PEOs.  We believe this
      universal platform will result in operational efficiencies sand save on audit
      and compliance fees.  Financial results may be affected by changes in
      the state regulatory environments, results under our partially self-funded
      health and partially self-funded workers compensation insurance plans, and
      economic conditions.





*Wireless
      Infrastructure*





We
      reduced the size and scope of our Wireless Infrastructure segment during the
      year ended August 31, 2007.  Some of these reductions will not become
      apparent until the year ending August 31, 2008.  Most of these
      reductions occurred in our wireless construction and wireless technical services
      businesses.  We deliberately reduced the size and scope of these
      businesses due to the large losses incurred by these businesses.  The
      losses were incurred primarily due to our inability to efficiently match our
      number of employees with the construction and technical services
      workload.  We did not receive the anticipated number of jobs and the
      jobs that we did receive were often delayed or cancelled.  After
      downsizing our wireless construction business, we transferred control of the
      remaining business to the Transportation Infrastructure segment effective July
      1, 2007.  Similarly, after downsizing our wireless technical services
      business, we transferred control of the remaining business to the Transportation
      Infrastructure segment effective November 1, 2007.  We made these
      transfers because the management of our Transportation Infrastructure segment
      has substantial expertise in managing construction projects.  We
      believe this expertise will allow them to exercise better control of the
      wireless construction and wireless technical services
      businesses.  Businesses remaining with the Wireless Infrastructure
      segment are our engineering and site acquisition businesses.  These
      businesses have performed successfully and we believe they will continue to
      grow
      in the future.


20
 *Table
          of Contents*


*Transportation
      Infrastructure*





Financial
      results continue to fluctuate as a result of federal and state funding for
      highway safety projects, changes in steel and fuel prices, market conditions
      and
      competition. Most of our jobs are competitively bid.  We face the
      continual challenge of being the lowest and best bidder in order to get the
      job.  We also face the challenge of not underbidding the job with the
      result that we lose money on the job or do not attain our desired profit
      margin.  The loss of even one big job due to us not being the lowest
      and best bidder can have a substantial impact on our revenues.  We are
      continuously affected by weather conditions and commodity price
      fluctuations.  Operations within this segment continue to expand
      beyond strictly highway safety products to commercial steel
      erection.  Although this segment is subject to significant volatility,
      we expect continued growth.





*Ultraviolet
      Technologies*





We
      expect
      continued growth in our Ultraviolet Technologies segment.  Future
      growth is dependent on raw material and product availability and pricing,
      research and development initiatives, attracting new customers with new
      products, and our ability to continue to deliver consistent, high-quality
      product.  The increased competition in our domestic and foreign
      markets requires us to stay price competitive.  We are also affected
      by our ability to attract and retain qualified management and other technical
      personnel.   We recently hired a new chemist to assist with some
      product quality issues.  In his short tenure, he has already made a
      positive impact.  We are also in the process of expanding our
      manufacturing capacity in Singapore.  We see major growth
      opportunities in China and Singapore.





*Electronics
      Integration*





We
      expect
      continued growth in our Electronics Integration segment although we had mixed
      results during our year ended August 31, 2007.  Commercial Solutions,
      which sells televisions primarily to the healthcare and lodging industries,
      had
      positive results.  Kingston Integration, which sells televisions
      primarily to integrators, other distributors and large restaurant chains, had
      a
      significant decrease in sales.  We have installed a new management
      team and believe that the results will improve.  AVR which installs
      commercial and residential electronics and home theaters has ended the year
      with
      a significant loss.  Again, we have installed new management and
      believe that results will improve.  During the year ending August 31,
      2008, we anticipate expanding our distribution business to include
      non-electronic products.  We have developed many contacts in China as
      a result of trips to China as part of our Ultraviolet Technologies business.
      We
      believe that we can import various products from China and sell these products
      using our existing distribution network.





Our
      future financial success will largely be dependent on our ability to maintain
      preferred pricing with our vendors, availability of products from our vendors,
      industry consolidation, economic conditions, and the ability to attract and
      retain qualified management and other personnel.





**Results
      of Operations**





Results
      of operations for the year ended August 31, 2007, 2006 and 2005 are as
      follows:




21
 *Table
          of Contents*





Net
                revenues for the year ended August 31,
            
            
            Operating
                income for the year ended August 31,2007
            
            
            2006
            
            
            2005
            
            
            2007
            
            
            2006
            
            
            2005(Dollars
                in thousands)Wireless
                Infrastructure
            
            $
            23,162
            
            
            $
            27,859
            
            
            $
            14,911
            
            
            $
            (4,211
            )
            
            $
            (124
            )
            
            $
            (603
            )Business
                Solutions
            
            
            69,170
            
            
            
            44,543
            
            
            
            28,458
            
            
            
            3,989
            
            
            
            3,423
            
            
            
            2,369Transportation
                Infrastructure
            
            
            40,110
            
            
            
            57,931
            
            
            
            46,549
            
            
            
            1,844
            
            
            
            2,970
            
            
            
            1,008Ultraviolet
                Technologies
            
            
            12,421
            
            
            
            12,437
            
            
            
            10,771
            
            
            
            129
            
            
            
            667
            
            
            
            (219
            )Electronics
                Integration
            
            
            13,450
            
            
            
            14,343
            
            
            
            12,407
            
            
            
            (575
            )
            
            
            (91
            )
            
            
            (1,095
            )Holding
                Company
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,494
            )
            
            
            (3,195
            )
            
            
            (2,465
            )Variable
                Interest Entity
            
            
            1,493
            
            
            
            -
            
            
            
            -
            
            
            
            1,244
            
            
            
            -
            
            
            
            -Variable
                Interest Entity Elimination
            
            
            (1,457
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Segment
                Totals
            
            $
            158,349
            
            
            $
            157,113
            
            
            $
            113,096
            
            
            
            (3,074
            )
            
            $
            3,650
            
            
            $
            (1,005
            )








**Year
      ended August 31, 2007 versus August 31, 2006**




Net
      loss
      allocable  to common stock shareholders was $7.8 million, or $(0.63)
      per diluted share on revenues of $158.3 million for the year ended August 31,
      2007 compared with net income of $1.9 million, or $0.16 per diluted share on
      revenues of $157.1 million for the year ended August 31, 2006.  This
      represents a 0.8% increase in revenues and a 510% decrease in net
      income.  The increase in revenues for the year was due to increases in
      our Business Solutions segment and the decrease in net income for the year
      was
      primarily due to losses in our Wireless Infrastructure segment.





The
      following factors contributed to the increases and decreases in revenues in
      fiscal year 2007:





§
            The
                Wireless Infrastructure decreases were due mainly to decreased demand
                for
                products and services offered by our companies and our decision to
                downsize this business.


§
            The
                Business Solutions increases were due to the acquisition of PEM in
                February 2007 and ESG in March 2007 as well as an increased customer
                base.


§
            The
                Transportation Infrastructure decreases were due to the inability
                to
                replace certain large jobs that existed in the prior year and the
                timing
                of the release of federal highway
                funds.


§
            The
                Ultraviolet Technologies lack of change was due to new product offerings
                offset by lost sales due to certain quality
                issues.


§
            The
                Electronics Integration decreases were due to personnel changes and
                decreased sales to integrators, distributors and restaurant
                chains.





The
      following factors contributed to the increases and decreases in net income
      in
      fiscal year 2007:





§
            Increased
                expenses relating to impairment charges on certain intangible assets
                of
                $1.815 million recognized in the Wireless Infrastructure segment
                and
                $0.212 million recognized in the Electronics Integration
                segment.


§
            Increased
                expenses resulting from the inability to match the number of employees
                with the work available in the Wireless Infrastructure
                segment.


§
            Increased
                expenses resulting from product quality issues in the Ultraviolet
                Technologies segment.


§
            Unfavorable
                claims experience related to our health and workers’ compensation plans in
                the Business Solutions segment.


§
            Increase
                in interest expense of approximately $1.0 million due to the funding
                of
                acquisitions, the funding of the Company’s net losses and rate
                increases.








**Year
      ended August 31, 2006 versus August 31, 2005**





Net
      income available to common stock shareholders was $1.9 million, or $0.16 per
      diluted share on revenues of $157.1 million for the year ended August 31, 2006
      compared with a net loss of ($2.3) million, or ($0.22) per diluted share on
      revenues of $113.1 million for the year ended August 31, 2005.  This
      represents a 39% increase in revenues and 182% percent increase in net
      income.  The increase in revenues and income for the year was due to
      increases across all operating segments.


22
 *Table
          of Contents*


The
      following factors contributed to the increase in revenues in fiscal year
      2006:





§
            The
                Wireless Infrastructure increases were mainly due to increased demand
                for
                products and services offered by our companies due to the cellular
                communication industry’s investment in expansion of their networks and
                increased marketing of our
                services.


§
            The
                Business Solutions increases were due to the acquisition of CSM in
                April
                2005 as well as increased customer
                base.


§
            The
                Transportation Infrastructure increases were due to improved market
                conditions due to the release of federal highway funds and due to
                favorable weather conditions.


§
            The
                Ultraviolet Technologies increases were due to new product offerings
                and
                expanded revenue streams in the Asian
                marketplace.


§
            The
                Electronics Integration increases were due to the acquisition of
                AVR in
                November 2005, which created our entry into the custom home theatre
                market.





The
      increase in net income in fiscal year 2006 was attributed to the increase in
      revenues discussed above.  Also, items which contributed to the
      increase in net income include the following:





§
            Decreased
                expenses relating to impairment charges on certain intangible assets
                of
                $0.6 million recognized in the Electronics Integration and Wireless
                Infrastructure segments in fiscal year
                2005.


§
            Increased
                productivity as a result of more favorable weather conditions and
                a change
                in job mix where we acted as general contractor in our Transportation
                Infrastructure segment.


§
            Expansion
                of television product offerings through new vendor relationships
                at more
                competitive pricing in our Electronics Integration
                segment.


§
            Implementation
                of a more stringent credit policy and an improved inventory management
                system in our Electronics Integration
                segment.


§
            Favorable
                claims experience related to our health and workers compensation
                plans in
                the Business Solutions segment.


§
            Income
                tax benefit of $0.5 million due to the release of a portion of our
                valuation allowance related to our net operating loss carryforward
                based
                on conservative projections of taxable earnings in fiscal
                2006.





Additionally,
      items which offset the increase in net income include the following
      items:





§
            Increase
                in expenses related to hiring of new management and sales personnel
                in the
                Wireless Infrastructure and Business Solutions
                segments.


§
            Increase
                in expenses related to new offices in the Wireless Infrastructure
                and
                Ultraviolet Technologies segments.


§
            Increase
                in interest expense of $1.0 million, or 72% mainly due to our issuance
                of
                a $7.5 million long-term convertible note payable in November 2005
                and
                financing of the CSM acquisition.  Additionally, interest
                expense increased approximately $0.6 million due to the changes in
                prime
                rate over the last fiscal year.





Results
      by segment are described in further details as follows:






**Business
      Solutions**





Business
      Solutions segment operating results for the years ended August 31, 2007, 2006
      and 2005 are as follows:


23
 *Table
          of Contents*




Year
                endedAugust
                31, 2007
            
            
            August
                31, 2006
            
            
            August
                31, 2005(Dollars
                in thousands)Net
                revenues
            
            
            69,170
            
            
            
            100
            %
            
            $
            44,543
            
            
            
            100
            %
            
            $
            28,458
            
            
            
            100
            %Cost
                of revenues
            
            
            54,824
            
            
            
            79.30
            %
            
            
            34,084
            
            
            
            76.5
            %
            
            
            21,646
            
            
            
            76.1
            %Gross
                profit
            
            
            14,346
            
            
            
            20.70
            %
            
            
            10,459
            
            
            
            23.5
            %
            
            
            6,812
            
            
            
            23.9
            %Operating
                expensesSelling,
                general and administrative
            
            
            9,365
            
            
            
            13.50
            %
            
            
            6,437
            
            
            
            14.5
            %
            
            
            4,107
            
            
            
            14.4
            %Depreciation
                and amortization
            
            
            992
            
            
            
            1.40
            %
            
            
            599
            
            
            
            1.3
            %
            
            
            336
            
            
            
            1.2
            %Total
                operating expenses
            
            
            10,357
            
            
            
            15.00
            %
            
            
            7,036
            
            
            
            15.8
            %
            
            
            4,443
            
            
            
            15.6
            %Segment
                operating income (loss)
            
            
            3,989
            
            
            
            5.80
            %
            
            $
            3,423
            
            
            
            7.7
            %
            
            $
            2,369
            
            
            
            8.3
            %








*Revenues*





Revenues
      for the year ended August 31, 2007 were $69.2 million, compared to $44.5 million
      for the year ended August 31, 2006, an increase of $24.7 million, or
      56%.  The primary reasons for the revenue increase were the
      acquisition of PEM in February 2007 and the acquisition of ESG in March
      2007.  We reported seven months of revenues for the year ended August
      31, 2007 of $3.7 million related to PEM and six months of revenues for the
      year
      ended August 31, 2007of $18.1 million related to ESG.  The remaining
      increase in revenues was due to an overall increase in the customers resulting
      in the total number of co-employees increasing 45% from 7,806 at August 31,
      2006
      as compared to 17,290 at August 31, 2007, including additions due to the
      aforementioned acquisitions.





Revenues
      for the year ended August 31, 2006 were $44.5 million, compared to $28.5 million
      for the year ended August 31, 2005, an increase of $16.0 million, or
      56%.  The primary reason for the revenue increase was the acquisition
      of CSM in April 2005.  We reported five months revenues for the year
      ended August 31, 2005 of $6.5 million and twelve months of revenues for
      year ended August 31, 2006 of $16.6 million related to this
      entity.  The remaining increase in revenues was due mainly to an
      increase in the customers resulting in the total number of co-employees
      increasing 13% from 6,886 at August 31, 2005 as compared to 7,806 at August
      31,
      2006.





*Gross
      Profit*





Gross
      profit for the year ended August 31, 2007 was $14.3 million, representing 20.7%
      of revenue, compared to $10.5 million, representing 24% of revenues for the
      year
      ended August 31, 2006, an increase of $3.8 million, or 37%.  The
      primary reasons for the gross profit increase were the acquisition of PEM in
      February 2007 and the acquisition of ESG in March 2007.  PEM reported
      gross profit of $.7 million for the seven months ended August 31, 2007 and
      ESG reported gross profit of $4.7 million for the six months ended
      August 31, 2007.  The increases in gross profit were offset
      somewhat by a $1.6 million reduction in health reserve credits at PSM and
      because one former client of PSM had over $1.0 million in uninsured
      claims.





Gross
      profit for the year ended August 31, 2006 was $10.5 million, representing 24%
      of
      revenue, compared to $6.8 million, representing 24% of revenues for the year
      ended August 31, 2005, an increase of $3.7 million, or 54%.  The
      primary reason for the increase in gross profit was the acquisition of CSM
      in
      April 2005.  CSM reported gross profit of $1.4 million for the five
      months ended August 31, 2005 as compared to $3.9 million for fiscal year
      ended August 31, 2006.  Gross profit also increased due to reduced
      claims and payment lag time related to our partially self-funded health
      insurance plan, resulting in approximately $0.5 million in
      earnings.  The remaining increase was due to the increase in revenues
      discussed above.





*Operating
      Income*





Operating
      income for the year ended August 31, 2007 was $4.0 million, compared to $3.4
      million for the year ended August 31, 2006, an increase of $0.6 million, or
      17%.  Operating income increased for the year ended August 31, 2007
      due to the acquisitions of PEM and ESG.  PEM reported seven months of
      operating income of $.03 million for the year ended August 31, 2007 and ESG
      reported six months of operating income of $1.6 million for the year ended
      August 31, 2007.  The increase in operating income due to the
      acquisitions was offset by a decrease in operating income at PSM that resulted
      from a large decrease in health reserve credits, and a decrease in operating
      income at CSM resulting from a catastrophic worker’s compensation
      claim.


24
 *Table
          of Contents*


Operating
      income for the year ended August 31, 2006 was $3.4 million, compared to $2.4
      million for the year ended August 31, 2005, an increase of $1.0 million, or
      42%.  CSM reported five months of operating income of $0.2 million for
      the year ended August 31, 2005 as compared to $0.8 million for the year ended
      August 31, 2006.  Operating income increased for the year ended
      August 31, 2006 mainly due to an increase in revenues and gross profits as
      discussed above offset somewhat by an increase in administrative and sales
      personnel expense.





**Wireless
      Infrastructure**





Wireless
      Infrastructure segment operating results for the year ended August 31, 2007,
      2006 and 2005 are as follows:





Year
                EndedAugust
                31, 2007
            
            
            August
                31, 2006
            
            
            August
                31, 2005(Dollars
                in thousands)Net
                revenues
            
            $
            23,162
            
            
            
            100
            %
            
            $
            27,859
            
            
            
            100
            %
            
            $
            14,911
            
            
            
            100
            %Cost
                of revenues
            
            
            18,919
            
            
            
            81.7
            %
            
            
            21,898
            
            
            
            78.6
            %
            
            
            11,597
            
            
            
            77.8
            %Gross
                profit
            
            
            4,243
            
            
            
            18.3
            %
            
            
            5,961
            
            
            
            21.4
            %
            
            
            3,314
            
            
            
            22.2
            %Operating
                expensesSelling,
                general and administrative
            
            
            6,337
            
            
            
            27.4
            %
            
            
            5,680
            
            
            
            20.4
            %
            
            
            3,496
            
            
            
            23.4
            %Depreciation
                and amortization
            
            
            302
            
            
            
            1.3
            %
            
            
            405
            
            
            
            1.5
            %
            
            
            202
            
            
            
            1.4
            %Impairment
                loss of intangible assets
            
            
            1,815
            
            
            
            7.8
            %
            
            
            -
            
            
            
            0.0
            %
            
            
            219
            
            
            
            1.5
            %Total
                operating expenses
            
            
            8,454
            
            
            
            36.5
            %
            
            
            6,085
            
            
            
            21.8
            %
            
            
            3,917
            
            
            
            26.3
            %Segment
                operating income (loss)
            
            $
            (4,211
            )
            
            
            -18.2
            %
            
            
            (124
            )
            
            
            -0.4
            %
            
            
            (603
            )
            
            
            -4.0
            %





*Revenues*





Revenues
      for the year ended August 31, 2007 were $23.2 million compared to $27.9 million
      for the year ended August 31, 2006, a decrease of $4.7 million, or
      17%.  The decrease in revenues was mainly due to the decline and/or
      suspension of capital budgets for some of our major clients, the acquisitions
      and mergers in the industry and our decision to downsize our
      operations.





Revenues
      for the year ended August 31, 2006 were $27.9 million compared to $14.9 million
      for the year ended August 31, 2005, an increase of $13.0 million, or
      87%.  The increase in revenues was mainly due to additional work
      procured from existing customers, geographic expansion and sales with new
      customers primarily within our construction services entity.  In 2006,
      we opened new offices in Missouri and Ohio allowing us to expand our regional
      presence.  In addition, we focused our marketing efforts on our
      ability to offer turnkey products and services which allowed us to secure
      contracts which benefited all of our wireless companies.





*Gross
      Profit*





Gross
      profit for the year ended August 31, 2007 was $4.2 million, representing 18%
      of
      revenues, compared to $6 million representing 21% of revenues for the year
      ended
      August 31, 2006, a decrease of $1.7 million, or 29%.  The gross profit
      decrease was due to decreased revenues and lower profit margins on available
      work.





Gross
      profit for the year ended August 31, 2006 was $6.0 million, representing 21%
      of
      revenues, compared to $3.3 million representing 22% of revenues for the year
      ended August 31, 2005, an increase of $2.7 million, or 82%.  The gross
      profit increase was mainly due to increased revenues offset somewhat by
      increased costs associated with geographic and branch expansion and hiring
      and
      training of new employees.





*Operating
      Income (Loss)*





There
      was
      an operating loss for the year ended August 31, 2007 of ($4.2) million, compared
      to an operating loss of ($0.1) million for the year ended August 31, 2006,
      an
      increase in operating loss of $4.1 million, or 3296%. Operating income decreased
      due to the decreased gross profits described above combined with the overall
      industry slowdown, resulting in a more competitive marketplace and lower
      margins.  The slow management reaction to the industry slow-down in
      release of work resulted in excess overhead costs and the impairment of certain
      receivables, inventory, fixed assets, goodwill and other intangible
      assets.  Charges were incurred by the Company related to the disposal
      of fixed assets, write down of inventory to fair market value and impairment
      of
      goodwill and other intangible assets as a result of the management changes
      and
      losses incurred within the Wireless Infrastructure segment.  As part
      of the operating loss, a non-recurring impairment charge on certain intangible
      assets of $1.8 million was recognized in the year ended August 31,
      2007.  Management has taken the following steps to improve operating
      performance in this segment: i) initiated management team changes; ii) aligned
      asset and labor base in line with market conditions; and iii) evaluated and
      adjusted ongoing customer contract negotiations and purchasing
      procedures.


25
 *Table
          of Contents*


There
      was
      an operating loss for the year ended August 31, 2006 of ($0.1) million, compared
      to an operating loss of ($0.6) million for the year ended August 31, 2005,
      a
      decrease in operating loss of $0.5 million, or 79%. The improvement in operating
      income was mainly due to the increased gross profits described above offset
      somewhat by increased selling, general and administrative expenses related
      to
      hiring of new management personnel and branch
      expansion.  Additionally, a non-recurring impairment charge on certain
      intangible assets of $0.2 million was recognized in the year ended
      August 31, 2006 due to restructurings of personnel.








**Transportation
      Infrastructure**





Transportation
      Infrastructure segment operating results for the year ended August 31, 2007,
      2006 and 2005 are as follows:





Year
                endedAugust
                31, 2007
            
            
            August
                31, 2006
            
            
            August
                31, 2005(Dollars
                in thousands)Net
                revenues
            
            $
            40,110
            
            
            
            100
            %
            
            $
            57,931
            
            
            
            100
            %
            
            $
            46,549
            
            
            
            100
            %Cost
                of revenues
            
            
            35,044
            
            
            
            87.40
            %
            
            
            51,137
            
            
            
            88.3
            %
            
            
            42,268
            
            
            
            90.8
            %Gross
                profit
            
            
            5,066
            
            
            
            12.60
            %
            
            
            6,794
            
            
            
            11.7
            %
            
            
            4,281
            
            
            
            9.2
            %Operating
                expensesSelling,
                general and administrative
            
            
            3,205
            
            
            
            8.00
            %
            
            
            3,340
            
            
            
            5.8
            %
            
            
            2,814
            
            
            
            6.0
            %Depreciation
                and amortization
            
            
            17
            
            
            
            0
            %
            
            
            484
            
            
            
            0.8
            %
            
            
            459
            
            
            
            1.0
            %Total
                operating expenses
            
            
            3,222
            
            
            
            8.00
            %
            
            
            3,824
            
            
            
            6.6
            %
            
            
            3,273
            
            
            
            7.0
            %Segment
                operating income (loss)
            
            $
            1,844
            
            
            
            4.60
            %
            
            $
            2,970
            
            
            
            5.1
            %
            
            $
            1,008
            
            
            
            2.2
            %








*Revenues*





Revenues
      for the year ended August 31, 2007 were $40.1 million compared to $57.9 million
      for the year ended August 31, 2006, a decrease of $17.8 million, or 31%.
      Revenues decreased mainly due to the completion of certain large jobs in one
      Midwestern geographic market in the prior fiscal year and the effects of lost
      maintenance contract revenues in another Midwestern geographic market to a
      foreign competitor.





Revenues
      for the year ended August 31, 2006 were $57.9 million compared to $46.5 million
      for the year ended August 31, 2005, an increase of $11.4 million, or 25%.
      Revenues increased mainly due to favorable weather conditions, increased market
      conditions in two Midwestern geographic markets, a change in job mix where
      we
      acted as general contractor, thereby having greater control over timing of
      completion and scheduling of construction crews, and improved market conditions
      due to the release of federal highway funds.





*Gross
      Profit*





Gross
      profit for the year ended August 31, 2007 was $5.1 million, representing 12.6%
      of revenues, compared to $6.8 million, representing 12% of revenues for the
      year
      ended August 31, 2006, a decrease of $1.7 million, or 25%. The decrease in
      gross
      profit was mainly due to the decrease in revenues.  Gross profit as a
      percentage of revenues increased due to improved results in one of our operating
      divisions and favorable closings of certain jobs within one of our operating
      divisions.





Gross
      profit for the year ended August 31, 2006 was $6.8 million, representing 12%
      of
      revenues, compared to $4.3 million, representing 9% of revenues for the year
      ended August 31, 2005, an increase of $2.5 million, or 58%. The increase in
      gross profit was mainly due to the revenues increase discussed
      above.  Gross profit as a percentage of revenues increased due to
      favorable weather conditions and change in job mix where we acted as general
      contractor both of which resulted in increased productivity.  These
      increases were offset somewhat by cost incurred in excess of contract prices
      on
      a project in one operating division.  In the year ended
      August 31, 2006, we took steps to help mitigate these types of losses
      through implementation of a new management team within this
      subsidiary.


26
 *Table
          of Contents*


*Operating
      Income*





Operating
      income for the year ended August 31, 2007 was $1.8 million, compared to
      operating income of $3.0 million for the year ended August 31, 2006, a decrease
      of $1.2 million, or 40%. Operating income for the year ending August 31, 2007
      as
      compared to the same periods ending August 31, 2006 decreased mainly due to
      the
      decrease in revenues discussed above.





Operating
      income for the year ended August 31, 2006 was $3.0 million, compared to
      operating income of $1.0 million for the year ended August 31, 2005, an increase
      of $2.0 million, or 200%. Operating income for the year ending August 31, 2006
      as compared to the same periods ending August 31, 2005 increased mainly due
      to
      the increase in gross profits discussed above.





**Ultraviolet
      Technologies**





Ultraviolet
      Technologies segment operating results for the year ended August 31, 2007,
      2006
      and 2005 are as follows:





Year
                endedAugust
                31, 2007
            
            
            August
                31, 2006
            
            
            August
                31, 2005(Dollars
                in thousands)Net
                revenues
            
            $
            12,421
            
            
            
            100
            %
            
            $
            12,437
            
            
            
            100
            %
            
            $
            10,771
            
            
            
            100
            %Cost
                of revenues
            
            
            7,419
            
            
            
            59.7
            %
            
            
            7,177
            
            
            
            57.7
            %
            
            
            5,934
            
            
            
            55.1
            %Gross
                profit
            
            
            5,002
            
            
            
            40.3
            %
            
            
            5,260
            
            
            
            42.3
            %
            
            
            4,837
            
            
            
            44.9
            %Operating
                expensesSelling,
                general and administrative
            
            
            4,580
            
            
            
            36.9
            %
            
            
            4,175
            
            
            
            33.6
            %
            
            
            4,663
            
            
            
            43.3
            %Depreciation
                and amortization
            
            
            293
            
            
            
            2.4
            %
            
            
            418
            
            
            
            3.4
            %
            
            
            393
            
            
            
            3.6
            %Total
                operating expenses
            
            
            4,873
            
            
            
            39.2
            %
            
            
            4,593
            
            
            
            36.9
            %
            
            
            5,056
            
            
            
            46.9
            %Segment
                operating income (loss)
            
            $
            129
            
            
            
            1.0
            %
            
            $
            667
            
            
            
            5.4
            %
            
            $
            (219
            )
            
            
            -2.0
            %








*Revenues*





Revenues
      for the year ended August 31, 2007 were $12.4 million compared to $12.4 million
      for the year ended August 31, 2006, with no overall net change in
      revenues.  By segment, sales in the Americas have increased primarily
      due to increased sales of POP/Decal products; sales in the UK have increased
      largely due to sales of conductive silver inks, as well as favorable currency
      exchange rates in fiscal 2007; and sales decreased in Asia due to a decline
      in
      sales of nameplate inks and a decline in sales of container inks.





Revenues
      for the year ended August 31, 2006 were $12.4 million compared to $10.8 million
      for the year ended August 31, 2005, an increase of $1.6 million, or
      15%.  The increase in revenues was mainly due to new and/or improved
      technologies and increased marketing efforts.  Domestic sales
      increased in fiscal 2006 due to proprietary product sales through a toll
      manufacturing agreement and sales of POP/ decal inks from our acquisition of
      Ink
      Source in fiscal year 2005.  International sales increased due to
      greater demand in the Asian marketplace including nameplate/ membrane switch
      product sales and a license agreement of products entered into in August 2006
      with a Japanese manufacturer.  Additionally, we increased prices
      across various product lines in July 2005 mainly due to increased costs of
      raw
      materials.  The increase in revenues was offset somewhat by lower U.S.
      sales to the loose leaf, tag and label and compact disk markets due to
      competition.


27
 *Table
          of Contents*


*Gross
      Profit*





Gross
      profit for the year ended August 31, 2007 was $5.0 million representing 40%
      of
      revenue, compared to $5.3 million representing 42% of revenues for the year
      ended August 31, 2006, a decrease of $0.3 million, or 5%.  Gross
      profit decreased slightly mainly due to increased sales of lower margin
      items.





Gross
      profit for the year ended August 31, 2006 was $5.3 million representing 42%
      of
      revenue, compared to $4.8 million representing 45% of revenues for the year
      ended August 31, 2005, an increase of $0.5 million, or 9%.  Gross
      profit increased slightly mainly due to price increases that were offset
      somewhat by additional costs related to opening a new blending facility in
      July
      2005 and to an increase in claims related to our partially self-funded health
      plan.  Gross profit as a percentage of revenues decreased slightly due
      to increased sales of lower margin items.





*Operating
      Income*





Operating
      income for the year ended August 31, 2007 was $0.1 million, compared to $0.7
      million for the year ended August 31, 2006, a decrease of $0.6 million, or
      86%.
      The decrease in operating income was due to increased expenses relating to
      product quality issues and increased expenses, including trade show and
      personnel expenses.





Operating
      income for the year ended August 31, 2006 was $0.7 million, compared to an
      operating loss of ($0.2) million for the year ended August 31, 2005, an increase
      of $0.9 million, or 405%. The increase in operating income was due to the
      increase in gross profits described above and a decrease in personnel, mainly
      in
      sales.  This was partially offset by an increase in research and
      development costs.





**Electronics
      Integration**





Electronics
      Integration segment operating results for the year ended August 31, 2007, 2006
      and 2005 are as follows:





Year
                endedAugust
                31, 2007
            
            
            August
                31, 2006
            
            
            August
                31, 2005(Dollars
                in thousands)Net
                revenues
            
            $
            13,450
            
            
            
            100
            %
            
            $
            14,343
            
            
            
            100
            %
            
            $
            12,407
            
            
            
            100
            %Cost
                of revenues
            
            
            11,608
            
            
            
            86.3
            %
            
            
            11,913
            
            
            
            83.1
            %
            
            
            10,626
            
            
            
            85.6
            %Gross
                profit
            
            
            1,842
            
            
            
            13.7
            %
            
            
            2,430
            
            
            
            16.9
            %
            
            
            1,781
            
            
            
            14.4
            %Operating
                expensesSelling,
                general and administrative
            
            
            2,103
            
            
            
            15.6
            %
            
            
            2,397
            
            
            
            16.7
            %
            
            
            2,243
            
            
            
            18.1
            %Depreciation
                and amortization
            
            
            102
            
            
            
            0.8
            %
            
            
            124
            
            
            
            0.9
            %
            
            
            216
            
            
            
            1.7
            %Impairment
                loss of intangible assets
            
            
            212
            
            
            
            1.6
            %
            
            
            -
            
            
            
            0.0
            %
            
            
            417
            
            
            
            3.4
            %Total
                operating expenses
            
            
            2,417
            
            
            
            18.0
            %
            
            
            2,521
            
            
            
            17.6
            %
            
            
            2,876
            
            
            
            23.2
            %Segment
                operating income (loss)
            
            $
            (575
            )
            
            
            -4.3
            %
            
            $
            (91
            )
            
            
            -0.6
            %
            
            $
            (1,095
            )
            
            
            -8.8
            %








*Revenues*





Revenues
      for the year ended August 31, 2007 were $13.5 million compared to $14.3 million
      for the year ended August 31, 2006, a decrease of $0.9 million, or
      6%.  Revenues decreased mainly due to less sales to integrators,
      distributors and restaurant chains.  These declines were somewhat
      offset by increased sales to hospitals and lodging facilities.





Revenues
      for the year ended August 31, 2006 were $14.3 million compared to $12.4 million
      for the year ended August 31, 2005, an increase of $1.9 million, or 15%.
      Revenues increased mainly due to the acquisition of AVR in November 2005, which
      had ten-month revenues of $1.3 million.  This acquisition created our
      entry into the custom home theatre market.  Additionally, we expanded
      our television product offerings through new vendor relationships which created
      more competitive pricing.  These increases were offset somewhat by the
      loss of a master distributor agreement with a major electronics manufacturer
      in
      May 2005.


28
 *Table
          of Contents*


*Gross
      Profit*





Gross
      profit for the year ended August 31, 2007 was $1.8 million representing 14%
      of
      revenue, compared to $2.4 million representing 17% of revenues for the year
      ended August 31, 2006, a decrease of $0.6 million, or 24%.  Gross
      profit decreased mainly due to changes in the product mix and decreases in
      revenues.





Gross
      profit for the year ended August 31, 2006 was $2.4 million representing 17%
      of
      revenue, compared to $1.8 million representing 14% of revenues for the year
      ended August 31, 2005, an increase of $0.6 million, or 33%.  Gross
      profit and gross profit as a percentage of revenues increased as a result of
      the
      acquisition of AVR in November 2005.





*Operating
      Income (Loss)*





There
      was
      an operating loss for the year ended August 31, 2007 of ($0.6) million, compared
      to an operating loss of ($0.1) million for the year ended August 31, 2006,
      an
      increased loss of ($0.5) million, or 532%.   Additional charges
      incurred by the Company related to the disposal of fixed assets, write down
      of
      inventory to fair market value and impairment of goodwill and other intangible
      assets as a result of the management changes and losses incurred within the
      Electronics Integration segment.  As part of the operating loss, a
      non-recurring impairment charge on certain intangible assets of $0.212 million
      was recognized in the year ended August 31, 2007.





There
      was
      an operating loss for the year ended August 31, 2006 of ($0.1) million, compared
      to an operating loss of ($1.1) million for the year ended August 31, 2005, a
      decreased loss of $1.0 million, or 91%.  The change in operating loss
      was due to the change in gross profits described above as well as a reduction
      in
      administrative and sales personnel.  Additionally, operating loss
      decreased $0.4 million in fiscal year 2006 versus fiscal year 2005 due to
      impairment on certain intangible assets in fiscal 2005. The restructure resulted
      in a change to our customer base and changes in key employees with non-compete
      agreements.





**Holding
      Company**





*Operating
      Expense*





The
      Holding Company does not have any income producing operating assets. As such,
      the operating loss was 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, 2007 were
      $5.5
      million, compared to $3.2 million for the year ended August 31, 2006, an
      increase of $2.3 million, or 72%. The increase was mainly due to the hiring
      of  additional corporate executive and accounting personnel; as well
      as increased audit, accounting and legal expenses primarily resulting from
      Company growth.





Operating
      expenses for the year ended August 31, 2006 were $3.2 million, compared to
      $2.5
      million for the year ended August 31, 2005, an increase of $0.7 million, or
      28%.
      The increase was due mainly to increased fees associated with our move to the
      American Stock Exchange from the OTC Bulletin Board, additional corporate
      executive and accounting personnel; as well as increased audit, accounting
      and
      legal expenses primarily resulting from Company growth.





*Interest
      Expense*





Interest
      expense was $3.5 million for the year ended August 31, 2007, compared to $2.5
      million for the year ended August 31, 2006, an increase of $1.0 million, or
      40%.  The increase was due mainly to bank financing of the PEM and ESG
      acquisitions in February 2007 and March 2007, respectively, additional
      borrowings under our line of credit for capital expenditures and other expenses
      ****incurred as a result of the Company’s operating
      losses. Interest
      expense was $2.5 million for the year ended August 31, 2006, compared to $1.4
      million for the year ended August 31, 2005, an increase of $1.1 million, or
      79%.  The increase was due mainly to partial bank financing of the CSM
      acquisition in April 2005, additional borrowings under our line of credit for
      capital expenditures and other funding to support wireless infrastructure
      growth, federal increase of prime rate interest, and issuance of a convertible
      term note in November 2005 for working capital needs.  This was offset
      by a decrease in $0.3 of interest expense resulting from the conversion of
      a
      shareholder note payable to preferred stock in fiscal 2006.


29
 *Table
          of Contents*


*Income
      Taxes*





There
      was
      $0.2 million of income tax expense for the year ended August 31,
      2007.  There was $0.4 million of income tax benefit for the year ended
      August 31, 2006.  A valuation allowance is necessary to reduce the
      deferred tax assets, if the Company had a federal tax operating loss and based
      on the weight of the evidence, it is more likely than not that some portion
      or
      all of the deferred tax assets will not be realized.  Management has
      determined that a $4.0 million valuation allowance at August 31, 2007 is
      necessary to reduce the deferred tax assets to the amount that will more likely
      than not be realized.  The change in the valuation allowance for the
      current period is $2.2 million.





There
      was
      $0.4 million of income tax benefit for the year ended August 31,
      2006.  There was $0.1 million of income tax expense for the year ended
      August 31, 2005.  Federal income tax expense was offset through the
      release of our valuation allowance to the extent of current period earnings
      and
      the release of the valuation allowance from prior years net operating losses
      of
      $0.5 million based on conservative projections of taxable earnings in fiscal
      2007.  At August 31, 2006, management deemed the likelihood of
      incurring taxable income for fiscal year ending August 31, 2007, in excess
      of
      the deferred tax benefit of $0.5 million, to be more likely than
      not.





**Liquidity
      and Capital Resources**





Our
      principal sources of liquidity include cash and equivalents, marketable
      securities and proceeds from debt borrowings.  We had $9.8 million,
      $4.9 million, and $6.0 million of cash and equivalents and marketable securities
      at August 31, 2007, 2006, and 2005, respectively.  At August 31, 2007
      we had $0.0 million available on our line of credit with the bank.





We
      had
      working capital of $.3 million at August 31, 2007 compared with $23.4 million
      at
      August 31, 2006. The decrease in working capital was due mainly to the inclusion
      of the variable interest entity line of credit, the reclassification of the
      bank
      line of credit from long-term to current, the , increase in health and workers’
compensation reserves, an increase in accrued expenses, a decrease in accounts
      receivable, a decrease in costs and estimated earnings in excess of billings
      on
      uncompleted contracts and a decrease in marketable equity
      securities.  These decreases were somewhat offset by decreases in
      billings in excess of costs and estimated earnings on uncompleted contracts,
      a
      decrease in other current liabilities, an increase in cash and equivalents
      and
      an increase in prepaid expenses and other current assets.  We had $1.2
      million in working capital at August 31, 2005.  Current assets are
      composed primarily of cash and equivalents, net accounts receivable,
      inventories, and costs & estimated earnings in excess of billings on
      uncompleted contracts.





Total
      debt at August 31, 2007 was $47.6 million including a $5.7 million convertible
      term note,$33.6 million in bank debt, $1.0 million in debt to a related party
      and $7.3 million in the variable interest entity’s debt.  Total debt
      at August 31, 2006 was $31.2 million.  The increase in debt was due to
      the new debt to a related party, the inclusion of the variable interest entity’s
      debt and the full use of the Company’s line of credit with the
      bank.  Total debt at August 31, 2005 was $33.2 million. On August 31,
      2006, we negotiated a $35 million credit facility with Fifth Third
      Bank.  Under terms of this loan agreement, the term loan component was
      personally guaranteed by our two major shareholders, while the revolving note
      was secured by assets of the Company.  On October 18, 2007, we amended
      some of the terms of this loan agreement.  Under the new agreement,
      the term loan component and the revolving note are both personally guaranteed
      by
      our two major shareholders.





The
      bank
      debt includes a $20 million term loan evidenced by a term loan note, which
      matures on August 31, 2011 and a $15 million line of credit evidenced by a
      revolving line of credit promissory note, which matures on August 31, 2008.
      Availability under the Revolving Loan is the lesser of $15 million or the
      borrowing base amount, which is calculated monthly as a percentage of our
      eligible assets. Interest was charged on the loans at LIBOR plus 1.75%, which
      could have decreased to LIBOR plus 1.5% if we had met certain performance
      criteria. After the amendment of the loan agreement, interest is charged at
      LIBOR plus 2.00% which may decrease to LIBOR plus 1.75% if we meet certain
      performance criteria.  Outstanding borrowings under our line of credit
      amounted to $15 million at August 31, 2007. Under
      the
      terms of our loan agreement, the bank may call the loan if we are in violation
      of any restrictive covenants.  Due to the consolidation of the
      variable interest entity described in Note 2 of the accompanying consolidated
      financial statements, at August 31, 2007, we are in breach of (a) the Minimum
      Shareholders’ Equity covenant requirement of $15,000 and (b) the Maximum Funded
      Debt/Total Capitalization Ratio covenant of .75 to 1.00.  We are
      currently in preliminary discussions with the bank regarding these
      matters.  As of this date, based on preliminary discussions, we
      believe that we can obtain a waiver from the bank regarding these
      matters.





On
      November 21, 2005, we issued a convertible term note, in the principal amount
      of
      $7.5 million to Laurus Master Fund LTD. The convertible term note is convertible
      into shares of our common stock at an initial fixed conversion price of $5.50
      per share. We also issued to Laurus a warrant, to purchase up to 272,727 shares
      of our common stock at an exercise price of $6.60 per share with a term of
      five
      years. In connection with the Laurus financing, we also issued to CB Capital
      Partners, Inc. (“CB Capital”) a warrant to purchase up to 13,636 shares of our
      common stock at an exercise price of $6.60 per share with a term of five years
      on January 25, 2006.


30
 *Table
          of Contents*


The
      convertible term note has a term of three years and accrues interest at the
      prime rate plus 3% per year. Interest on the principal amount is payable
      monthly, in arrears, on the first business day of each consecutive calendar
      month thereafter until the maturity date. Under the terms of the convertible
      term note, the monthly principal payment is payable either in cash at 102%
      of
      the respective monthly amortization amounts or, if certain criteria are met,
      in
      shares of our common stock. See Note 10 to the consolidated financial statements
      for additional discussion of the terms of the financing with
      Laurus.





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





During
      the year ended August 31, 2007, we completed two major
      acquisitions.  These acquisitions were PEM and ESG.  In
      addition, we experienced a significant net loss.  Each of these
      occurrences resulted in a significant use of funds.  The source of
      these funds has mainly been additional borrowings from the bank.





***Cash
      Flows***





Cash
      flows provided by operating activities for the year ended August 31, 2007 was
      $5.8 million as compared to cash flows used in operating activities of $1.2
      million at August 31, 2006. This increase in operating cash flows was mainly
      due
      to a decrease in our accounts receivable, a decrease in costs and estimated
      earnings in excess of billings on uncompleted contracts, and an increase in
      impairment on intangible assets offset somewhat by our net loss.  Cash
      flows used in  operating activities was $5.3 million for the year
      ended August 31, 2005.





Net
      cash
      flow used in investing activities was $7.1 million for the year ended August
      31,
      2007 compared to $2.4 million for the year ended August 31, 2006.  The
      increase was due mainly to the acquisition of PEM and ESG offset somewhat by
      our
      reduction in capital expenditures. Cash flows used in investing activities
      was
      $4.9 million for the year ended August 31, 2005.





Net
      cash
      flow provided by financing activities was $7.4 million for the year ended August
      31, 2007 compared to $3.4 million for the year ended August 31,
      2006.  The increase was mainly the result of increased borrowings on
      our line of credit.  Cash flows provided by financing activities was
      $10.4 million for the year ended August 31, 2005.





**Contractual
      Obligations and Commercial Commitments**





The
      following table summarizes our contractual obligations as of August 31,
      2007:





Payments
                Due ByContractual
                obligation
            
            Total
            
            
            Less
                than
              1
                year
            
            
            1-2
                years
            
            
            3-5
                years
            
            
            More
                than
              5
                years(Dollars
                in thousands)Debt
                and capital lease obligations
            
            $
            47,564
            
            
            $
            23,679
            
            
            $
            8,837
            
            
            $
            15,048
            
            
            $
            0Operating
                lease (1)
            
            
            18,324
            
            
            
            3,304
            
            
            
            2,446
            
            
            
            5,761
            
            
            
            6,813Total
            
            $
            65,888
            
            
            $
            26,983
            
            
            $
            11,283
            
            
            $
            20,809
            
            
            $
            6,813





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





Excluded
      from the above table is interest associated with borrowings under our line
      of
      credit and term loan with the bank and our convertible note payable with Laurus
      because both the amount borrowed and applicable interest rate are
      variable.


31
 *Table
          of Contents*


**Off
      Balance Sheet Arrangements**





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





*Transactions
      with Related Parties*





We
      have
      entered into various acquisition agreements over the past four  years
      that  contain option agreements between the sellers and our majority
      shareholder, Mr. Carter Fortune, related to the Company’s stock obtained by the
      sellers through the acquisitions.  The option agreements provide for
      put/call options on the Company’s common stock held by the
      sellers.  The put/call options range in price from $1 to $10 per
      common share.  Harlan Schafir and certain PSM employees exercised
      their  put sale rights by executing the sale of his shares of Company
      stock to Mr. Fortune and Mr. Fisbeck during the first and second fiscal quarters
      of the 2007 fiscal year. Norman Wolcott and the former shareholders of Magtech
      Services, Inc. sold shares of Company Common Stock to Carter M. Fortune and
      John
      Fisbeck pursuant to option rights associated with the Nor-Cote and Magtech
      acquisitions.  The members of PEM currently have put rights in regards
      to 258,824 shares.  The put price is $3.75 per share.  Upon
      exercise, the Company’s two major shareholders must purchase t he
      shares.  Similarly, the Company’s two major shareholders have call
      rights in regards to the same shares at a price of $6.00 per
      share.  The shareholders of CSM currently have put rights in regards
      to approximately 150,000 shares.  The exact number depends on a
      vesting schedule.  The put price is $10.33 per share.  Upon
      exercise, the Company’s major shareholder must purchase the
      shares.  Refer to Note 3 of the accompanying consolidated financial
      statements for detailed information regarding the put/call rights.





As
      of
      August 31, 2007, we leased six facilities from Fisbeck-Fortune Development,
      LLC,
      a variable interest entity equally owned by the Company’s two major
      shareholders.  The primary purpose of this entity is to own and lease
      these properties to the Company.   When these leases were
      originally executed, the leases contained provisions whereby the rental rates
      could be adjusted to fair market value.  Effective February 1,
      2007, the Company and the variable interest entity agreed to an adjustment
      in
      the rental rates.  In the future, the Company may incur additional
      expense as rental rates are further adjusted to fair market
      rates.  Subsequent to August 31, 2007, one of the leases was
      terminated at the Company’s request because the Company no longer had a need for
      the facility.  On November 2, 2007, the variable interest entity sold
      the facility.  Refer to Note 17 of the accompanying consolidated
      financial statements for detailed information regarding the Company’s lease
      obligations.





*Guaranties*





A
      significant portion of our debt and surety bonds are personally guaranteed
      by
      the Company’s Chairman of the Board and Chief Executive Officer.  It
      is very unlikely that the Company could have obtained such debt without the
      personal guarantees.  If the Chairman of the Board and Chief Executive
      Officer decide not to continue their personal guarantees or decide not to make
      additional personal guarantees, it will significantly limit the Company’s
      ability to obtain financing and would have a material adverse effect upon the
      Company.     As of August 31, 2006, the Chairman of the
      Board and the Chief Executive Officer had personally guaranteed Company debt
      in
      the amount of $27.8 million.  As of August 31, 2007, the Chairman of
      the Board and the Chief Executive Officer had personally guaranteed Company
      debt
      in the amount of $24.3 million.  Subsequent to August 31, 2007, the
      Chairman of the Board and the Chief Executive Officer agreed to guarantee an
      additional $15 million of Company debt.  Prior to August 31, 2006, the
      Company had not paid any guarantee fees to the Chairman of the Board or the
      Chief Executive Officer for their personal guarantees of Company
      debt.  During the fiscal year ended August 31, 2007, the Board
      approved the payment of certain guarantee fees to the Chief Executive
      Officer.  Subsequent to payment, and in response to the Company’s
      lower than expected operating results, the Chief Executive Officer voluntarily
      agreed to repay the full amount of the guarantee fees ($394,465).  All
      of these guarantee fees have been repaid.  The Company, the Chairman
      of the Board and the Chief Executive Officer are in continuing discussions
      as to
      the amount, if any, of guarantee fees that should be paid during the fiscal
      year
      ending August 31, 2008.





*Restricted
        Cash*





Certain
        states and vendors require us to post letters of credit to ensure payment
        of
        taxes or payments to our vendors under health insurance and workers compensation
        contracts and to guarantee performance under our contracts. Such letters
        of
        credit are generally issued by a bank or similar financial institution. The
        letter of credit commits the issuer to pay specified amounts to the holder
        of
        the letter of credit if the holder demonstrates that we have failed to perform
        specified actions. If this were to occur, we would be required to reimburse
        the
        issuer of the letter of credit. Depending on the circumstances of such a
        reimbursement, we may also have to record a charge to earnings for the
        reimbursement. We do not believe that it is likely that any claims will be
        made
        under a letter of credit in the foreseeable future.  As of
        August 31, 2007, we had approximately $5.1 million in restricted cash
        primarily to secure obligations under our PEO contracts in the Business
        Solutions segment.


32
 *Table
          of Contents*


*Payment
        and Performance Bonds*





Within
        our Wireless Infrastructure and Transportation Infrastructure segments, certain
        customers, particularly in connection with new construction, require us to
        post
        payment or performance bonds issued by a financial institution known as a
        surety. These bonds provide a guarantee to the customer that we will perform
        under the terms of a contract and that we will pay subcontractors and vendors.
        If we fail to perform under a contract or to pay subcontractors and vendors,
        the
        customer may demand that the surety make payments or provide services under
        the
        bond. We must reimburse the surety for any expenses or outlays it incurs.
        Under
        our continuing indemnity and security agreement with the surety, we have
        posted
        letters of credit in the amount of $5 million in favor of the surety and,
        with the consent of our lenders under our credit facility; we have granted
        security interests in certain of our assets to collateralize our obligations
        to
        the surety. We expect this letter of credit in favor of the surety to be
        reduced
        in the future. To date, we have not been required to make any reimbursements
        to
        the surety for bond-related costs. We believe that it is unlikely that we
        will
        have to fund claims under our surety arrangements in the foreseeable future.
        As
        of August 31, 2007, an aggregate of approximately $5 million in original
        face amount of bonds issued by the surety were outstanding.





**Control
      Group**





As
      of
      August 31, 2007, the Control Group held 74.2% or 8,454,784 shares of our
      outstanding common stock.  Members of the Control Group as of this
      date include John F. Fisbeck and Carter M. Fortune.  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, 2007:
      John F. Fisbeck, 2,786,487 (or 24.5%) and Carter M. Fortune, 5,283,797 (or
      46.4%). In addition to the above shares, Messrs. Fisbeck and Fortune equally
      share dispositive control over 384,500 (or 3.4%) shares of the Company’s Common
      Stock held by Fisbeck-Fortune Development, LLC as of August 31,
      2007.





**Critical
      Accounting Policies**





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





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





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


33
 *Table
          of Contents*


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





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





The
      PEOs
      account for their revenues using the accrual method of accounting. Under the
      accrual method of accounting, revenues are recognized in the period in which
      the
      worksite employee performs work. The PEOs accrue revenues for service fees,
      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. The PEOs 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
      period, such costs are paid and the related service fees are
      billed.





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





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




34
 *Table
          of Contents*




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


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





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





**Valuation
      of Accounts Receivable and Inventory Reserves:**





Collectability
      of accounts receivable is evaluated for each subsidiary based on the
      subsidiary’s industry and current economic conditions. Other factors include
      analysis of historical bad debts, projected losses, and current past due
      accounts. Inventories are valued at lower of cost or market using the first-in,
      first-out method based on average cost. The Company’s valuation of inventory
      includes both a markdown reserve for inventory that will be sold below original
      cost, and a usage reserve. The reserve values are evaluated by each subsidiary
      based upon historical information and assumptions about future demand and market
      conditions. The usage reserve value is based on historical information and
      assumptions as to usage of current product in inventory and related usage
      trends. The Company’s accounts receivable and inventory reserves decreased by
      $0.2 million and increased by ($0.1) million respectively, at August 31, 2007
      compared to August 31, 2006. It is possible that changes to the markdown and
      usage reserves could be required in future periods due to changes in market
      conditions.





**Goodwill
      and Other Intangible Assets:**





The
      Company has adopted SFAS No. 142. With the adoption of SFAS 142, material
      goodwill included in the Company’s Wireless Infrastructure, Business Solutions,
      Transportation Infrastructure, Ultraviolet Technologies and Electronics
      Integration 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, 2007, exceeded the carrying, or book value,
      including goodwill, and therefore recorded goodwill was not subject to
      impairment.





In
      the
      fiscal year ended August 31, 2007, the Company recognized impairment on certain
      other intangible assets in its Wireless Infrastructure segment of $1.8 million
      and its Electronics Integration segment of $0.2 million. Management determined
      the assets were impaired based upon violation of non-compete agreements with
      certain terminated employees and a substantial change in the customer mix within
      the Electronics Integration segment.


35
 *Table
          of Contents*


**Impairment
      of Long-Lived Assets:**





The
      Company evaluates the recoverability of its long-lived assets in accordance
      with
      SFAS 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. 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 its 2005
      loss
      and estimated increase in budgeted operating expenses related to expected
      implementation of certain provisions of the Sarbanes Oxley Act of 2002 at that
      time.  In 2006, the Company released 20% of the valuation allowance
      totaling $0.5 million. This amount was a release of 40% of the Transportation
      Infrastructure segment and 60% of the Business Solutions segment.  In
      2007, the Company recorded a 100% valuation allowance on additions to net
      deferred tax assets due to renewed uncertainty regarding future profitability
      of
      the Company based on its 2007 loss.  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 2007 would not have a
      material effect in the carrying value of the net deferred tax assets or
      liabilities.




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





**Accrued
      Insurance and Workmen’s Compensation Reserves:**





The
      Company’s Business Solutions segment recognizes significant reserves in relation
      to its partially self-funded worksite employees’ health and partially
      self-funded workers compensation programs based on (a) the amount of past claims
      incurred and (b) the estimated time lag to report and pay such claims. The
      Company’s policy for its partially self-funded health plan is to accrue
      estimated unpaid claims incurred during the fiscal year based on the weighted
      average historical claims paid over a 2-month to 3-month lag period. PSM is
      insured for losses under its health plan in excess of approximately $0.20
      million per person with an aggregate liability limit of approximately $13.6
      million at August 31, 2007. Our deductible under our workers compensation
      insurance is $0.25 million with an aggregate liability limit of approximately
      $1.3 million.  The combined reserve recognized for unpaid health and
      workers’ compensation benefits on the Company’s consolidated balance sheet is
      $5.1 million (for which approximately $5.1 million of cash is restricted on
      the
      Company’s consolidated balance sheet) for the year ended August 31,
      2007.





**New Accounting
      Pronouncements**





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards No. 154, “Accounting Changes and Error
      Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”
(“SFAS 154”). SFAS 154 was effective in our current fiscal year. There was no
      impact of adoption in fiscal 2007 as there were no accounting changes or
      corrections of errors.





In
      June
      2006, the FASB issued Interpretation, or FIN, No. 48,*Accounting for
      Uncertainty in Income Taxes — an Interpretation of
      SFAS No. 109,*  or FIN 48. FIN 48 clarifies
      the accounting for uncertain taxes recognized in an enterprise’s financial
      statements in accordance with SFAS No. 109,*Accounting for Income
      Taxes.*  FIN 48 prescribes a recognition threshold and
      measurement of a tax position taken or expected to be taken in an enterprise’s
      tax return. In addition, FIN 48 provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods and
      disclosure related to uncertain income tax positions. FIN 48 is effective
      for the fiscal years beginning after December 15, 2006 for all public
      companies. The adoption of FIN 48 will not have a material impact on its
      consolidated financial statements.


36
 *Table
          of Contents*


In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on
      how the effects of the carryover or reversal of prior year misstatements should
      be considered in quantifying a current year misstatement. SAB 108 was effective
      in current fiscal year 2007.  The adoption of this statement did not
      have a material impact on our financial position or results of operations in
      fiscal 2007.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
      value, establishes a formal framework for measuring fair value and expands
      disclosures about fair value measurements. The Statement is effective beginning
      in fiscal 2009. We are in the process of determining the effect, if
      any, that the adoption of SFAS 157 will have on our financial
      statements.





In
      November 2006, the FASB ratified the consensuses of Emerging Issues Task Force
      (EITF) Issue No. 06-6, “Debtor’s Accounting for a Modification (or
      Exchange) of Convertible Debt Instruments” (EITF 06-6). This consensus
      supersedes EITF Issue No. 05-7, “Accounting for Modifications to Conversion
      Options Embedded in Debt Instruments and Related Issues and applies to
      modifications or exchanges of debt instruments that occur during interim or
      annual reporting periods for our fiscal year beginning September 1, 2008.
      We are currently evaluating the impact of EITF 06-6 on our consolidated
      financial statements. We do not anticipate that the adoption of this
      pronouncement will have a material effect on our consolidated financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with
      an option to report selected financial assets and financial liabilities at
      fair
      value. Unrealized gains and losses on items for which the fair value option
      has
      been elected are reported in earnings at each subsequent reporting date. SFAS
      159 is effective for fiscal years beginning after November 15, 2007, our
      fiscal 2009. We are in the process of determining the effect, if any, that
      the adoption of SFAS 159 will have on our financial statements.





FASB
      statement No. 160 “Noncontrolling Interests in Consolidated Financial
      Statements—an amendment of ARB No. 51” was issued December of 2007. This
      Statement establishes accounting and reporting standards for the noncontrolling
      interest in a subsidiary and for the deconsolidation of a subsidiary. The
      guidance will become effective as of the beginning of a company’s fiscal year
      beginning after December 15, 2008. The Company believes that this new
      pronouncement will have an immaterial impact on the Company’s financial
      statements in future periods.





**Forward-Looking
      Statements:**





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





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





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





We
      are
      exposed to certain market risks arising from adverse changes in interest rates,
      due primarily to the potential effect of such changes on our variable rate
      line
      of credit and term note with the bank and our convertible term note as described
      in Note 10 to the consolidated financial statements.  Almost all of
      the Company’s debt as of August 31, 2007 bears interest at variable rates. At
      August 31, 2007 and 2006, we have no outstanding interest rate swap
      agreements.  Based on amounts outstanding at August 31, 2007, if the
      interest rate on the Company’s variable debt were to increase by 1.0%, annual
      interest expense would be higher by approximately $0.5 million.


37
 *Table
          of Contents*


Cash
      and
      cash equivalents as of August 31, 2007 was $9.8 million and is primarily
      invested in money market interest bearing accounts. A hypothetical 10% adverse
      change in the average interest rate on the Company’s investments would not have
      had a material effect on net income for the year ended August 31, 2007. We
      do
      not currently utilize any derivative financial instruments to hedge interest
      rate risks.





We
      are
      exposed to foreign currency risks due to both transactions and translations
      between functional and reporting currencies in our European, Singapore, and
      Chinese foreign subsidiaries. A hypothetical 10% adverse change in the foreign
      currency translation would not have had a material effect on net income for
      the
      year ended August 31, 2007. We do not currently utilize any derivative financial
      instruments to hedge foreign currency risks.




**Item
      8.*****Financial Statements and Supplementary
      Data***








**FORTUNE
      INDUSTRIES, INC.**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**








Report
                of Independent Registered Public Accounting Firm
            
            39Consolidated
                Balance Sheets as of August 31, 2007 and 2006
            
            40Consolidated
                Statements of Operations for the years ended August 31, 2007, 2006
                and
                2005
            
            42Consolidated
                Statements of Shareholders’ Equity for the years ended August 31, 2007,
                2006 and 2005
            
            43Consolidated
                Statements of Cash Flows for the years ended August 31, 2007, 2006
                and
                2005
            
            44Notes
                to Consolidated Financial Statements
            
            46


38
 *Table
          of Contents*


**Report
      of Independent Registered Public Accounting Firm**





Board
      of
      Directors and Shareholders


Fortune
      Industries, Inc. and Subsidiaries


Indianapolis,
      IN 46278





We
      have
      audited the accompanying consolidated balance sheets of Fortune Industries,
      Inc.
      and subsidiaries (the “Company”) as of August 31, 2007 and 2006 and the
      related consolidated statements of operations, changes in shareholders’ equity,
      and cash flows for each of the three years in the period ended August 31,
      2007. Our audits also included the financial statement schedule listed in the
      Index at Part IV, Item 15. These consolidated financial statements and
      schedule are the responsibility of the Company’s management. Our responsibility
      is to express an opinion on these consolidated financial statements and schedule
      based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Fortune Industries, Inc.
      and
      subsidiaries as of August 31, 2007 and 2006, and the results of its operations
      and its cash flows for each of the three years in the period ended
      August 31, 2007 in conformity with accounting principles generally accepted
      in the United States of America. Also, in our opinion, the related financial
      statement schedule, when considered in relation to the basic consolidated
      financial statements taken as a whole, presents fairly in all material respects
      the information set forth therein.







/s/
      Somerset CPAs, P.C.








Indianapolis,
      Indiana


December
      13, 2007


39
 *Table
          of Contents*


**FORTUNE
      INDUSTRIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**(DOLLARS
      IN THOUSANDS)**




**August
                  31,**
              
              
              **August
                  31,****2007**
              
              
              **2006****ASSETS****CURRENT
                  ASSETS**Cash
                  and equivalents
              
              $
              9,830
              
              
              $
              3,632Restricted
                  cash (Note 1)
              
              
              5,091
              
              
              
              3,462Marketable
                  equity securities (Note 4)
              
              
              -
              
              
              
              1,281Accounts
                  receivable, net (Note 5)
              
              
              21,157
              
              
              
              25,731Costs
                  and estimated earnings in excess of billings on uncompleted contracts
                  (Note 6)
              
              
              1,279
              
              
              
              4,500Inventory,
                  net (Note 7)
              
              
              6,656
              
              
              
              6,761Deferred
                  tax asset (Note 12)
              
              
              1,535
              
              
              
              1,535Prepaid
                  expenses and other current assets
              
              
              2,840
              
              
              
              1,922Total
                  Current Assets
              
              
              48,388
              
              
              
              48,824**OTHER
                  ASSETS**Property,
                  plant & equipment, net (Note 8)
              
              
              12,238
              
              
              
              6,323Long-term
                  accounts receivable (Note 5)
              
              
              770
              
              
              
              1,276Goodwill
                  (Note 9)
              
              
              18,461
              
              
              
              11,984Other
                  intangible assets, net (Note 9)
              
              
              7,450
              
              
              
              4,299Other
                  long-term assets
              
              
              1,048
              
              
              
              1,579Total
                  Other Assets
              
              
              39,967
              
              
              
              25,461**TOTAL
                  ASSETS**
              
              $
              88,355
              
              
              $
              74,285*See
                  Accompanying Notes to Consolidated Financial Statements*
  40
 *Table
            of Contents*




**FORTUNE
      INDUSTRIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS (CONTINUED)**


**(DOLLARS
      IN THOUSANDS)**




**August
                  31,**
              
              
              **August
                  31,****2007**
              
              
              **2006****LIABILITIES
                  AND SHAREHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Line
                  of credit (Note 10)
              
              $
              15,000
              
              
              $
              -Current
                  maturities of long-term debt (Note 10)
              
              
              2,249
              
              
              
              2,124Current
                  maturities of convertible term note (Note 10)
              
              
              2,727
              
              
              
              1,364Variable
                  interest entity line of credit (Note 10)
              
              
              2,200
              
              
              
              -Variable
                  interest entity current maturities of long-term debt (Note
                  10)
              
              
              503
              
              
              
              -Accounts
                  payable
              
              
              9,168
              
              
              
              9,324Health
                  and workers' compensation reserves
              
              
              5,128
              
              
              
              3,363Accrued
                  expenses
              
              
              9,239
              
              
              
              5,449Billings
                  in excess of costs and estimated earnings on uncompleted contracts
                  (Note
                  6)
              
              
              1,178
              
              
              
              1,968Other
                  current liabilities
              
              
              725
              
              
              
              1,849Total
                  Current Liabilities
              
              
              48,117
              
              
              
              25,441**LONG-TERM
                  LIABILITIES**Line
                  of credit (Note 10)
              
              
              -
              
              
              
              3,330Long-term
                  debt, less current maturities (Note 10)
              
              
              16,375
              
              
              
              18,213Convertible
                  term note (Note 10)
              
              
              2,950
              
              
              
              6,136Line
                  of credit term note - majority shareholder (Note 10)
              
              
              1,000
              
              
              
              -Variable
                  interest entity long-term debt, less current maturities (Note
                  10)
              
              
              4,559
              
              
              
              -Other
                  long-term liabilities
              
              
              215
              
              
              
              215Total
                  Long-Term Liabilities
              
              
              25,099
              
              
              
              27,894Total
                  Liabilities
              
              
              73,216
              
              
              
              53,335**MINORITY
                  INTEREST IN VARIABLE INTEREST ENTITY (NOTE 12)**
              
              
              236
              
              
              
              -**TEMPORARY
                  EQUITY (NOTE 14)**
              
              
              814
              
              
              
              -**SHAREHOLDERS'
                  EQUITY (NOTE 14)**Common
                  stock, $0.10 par value; 150,000,000 authorized; 11,391,823 and
                  10,522,722
                  issued and outstanding at August 31, 2007 and August 31, 2006,
                  respectively
              
              
              1,117
              
              
              
              1,053Preferred
                  stock, $0.10 par value; 1,000,000 authorized; 66,180 issued and
                  outstanding at August 31, 2007 and August 31, 2006,
                  respectively
              
              
              6,618
              
              
              
              6,618Additional
                  paid-in capital and warrants outstanding
              
              
              19,317
              
              
              
              17,633Accumulated
                  deficit
              
              
              (12,300
              )
              
              
              (4,518
              )Accumulated
                  other comprehensive income
              
              
              260
              
              
              
              16415,012
              
              
              
              20,950Less:
                  Treasury stock, 384,500 shares of common stock outstanding at August
                  31,
                  2007
              
              
              (923
              )
              
              
              -Total
                  Shareholders' Equity
              
              
              14,089
              
              
              
              20,950**TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY**
              
              $
              88,355
              
              
              $
              74,285*See
                  Accompanying Notes to Consolidated Financial
                  Statements*
  41
 *Table
            of Contents*





**FORTUNE
      INDUSTRIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(DOLLARS
      IN THOUSANDS, EXCEPT PER SHARE DATA)**







**Year
                Ended****August
                31,**
            
            
            **August
                31,**
            
            
            **August
                31,****2007**
            
            
            **2006**
            
            
            **2005****REVENUES**Service
                revenues
            
            $
            80,108
            
            
            $
            57,354
            
            
            $
            39,809Product
                revenues
            
            
            78,241
            
            
            
            99,759
            
            
            
            73,287**TOTAL
                REVENUES**
            
            
            158,349
            
            
            
            157,113
            
            
            
            113,096**COST
                OF REVENUES**Service
                cost of revenues
            
            
            62,600
            
            
            
            43,184
            
            
            
            30,702Product
                cost of revenues
            
            
            65,214
            
            
            
            83,025
            
            
            
            61,369**TOTAL
                COST OF REVENUES**
            
            
            127,814
            
            
            
            126,209
            
            
            
            92,071**GROSS
                PROFIT**
            
            
            30,535
            
            
            
            30,904
            
            
            
            21,025**OPERATING
                EXPENSES**Selling,
                general and administrative expenses
            
            
            28,896
            
            
            
            24,985
            
            
            
            19,685Depreciation
                and amortization
            
            
            2,686
            
            
            
            2,269
            
            
            
            1,709Impairment
                (Note 1)
            
            
            2,027
            
            
            
            -
            
            
            
            636Total
                Operating Expenses
            
            
            33,609
            
            
            
            27,254
            
            
            
            22,030**OPERATING
                INCOME (LOSS)**
            
            
            (3,074
            )
            
            
            3,650
            
            
            
            (1,005
            )**OTHER
                INCOME (EXPENSE)**Interest
                income
            
            
            480
            
            
            
            346
            
            
            
            61Interest
                expense
            
            
            (3,470
            )
            
            
            (2,483
            )
            
            
            (1,445
            )Loss
                on disposal of assets
            
            
            (381
            )
            
            
            -
            
            
            
            -Loss
                on investments in marketable securities, net (Note 3)
            
            
            (8
            )
            
            
            (7
            )
            
            
            (40
            )Exchange
                rate gain
            
            
            17
            
            
            
            5
            
            
            
            -Other
                income
            
            
            31
            
            
            
            285
            
            
            
            194Total
                Other Income (Expense)
            
            
            (3,331
            )
            
            
            (1,854
            )
            
            
            (1,230
            )**INCOME
                (LOSS) BEFORE MINORITY INTEREST IN VARIABLE INTEREST
                ENTITY**
            
            
            (6,405
            )
            
            
            1,796
            
            
            
            (2,235
            )Minority
                Interest in Variable Interest Entity (Note 2)
            
            
            724
            
            
            
            -
            
            
            
            -**INCOME
                (LOSS) BEFORE PROVISION FOR INCOME TAXES**
            
            
            (7,129
            )
            
            
            1,796
            
            
            
            (2,235
            )Provision
                for income taxes (Note 12)
            
            
            157
            
            
            
            (423
            )
            
            
            82**NET
                INCOME (LOSS)**
            
            
            (7,286
            )
            
            
            2,219
            
            
            
            (2,317
            )Preferred
                stock dividends
            
            
            496
            
            
            
            331
            
            
            
            -**NET
                INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS**
            
            $
            (7,782
            )
            
            $
            1,888
            
            
            $
            (2,317
            )**BASIC
                INCOME (LOSS) PER COMMON SHARE**
            
            $
            (0.72
            )
            
            $
            0.18
            
            
            $
            (0.22
            )**Basic
                weighted average shares outstanding**
            
            
            10,841,296
            
            
            
            10,582,203
            
            
            
            10,495,794**DILUTED
                INCOME (LOSS) PER COMMON SHARE**
            
            $
            (0.63
            )
            
            $
            0.16
            
            
            $
            (0.22
            )**Diluted
                weighted average shares outstanding**
            
            
            12,393,539
            
            
            
            11,845,284
            
            
            
            10,500,794*See
                Accompanying Notes to Consolidated Financial
                Statements*


42
 *Table
          of Contents*





**FORTUNE
      INDUSTRIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY**


**(DOLLARS
      IN THOUSANDS)**




**Common**
              **Stock**
            
            
            **Treasury**
              **Stock**
            
            
            **Preferred**
              **Stock**
            
            
            **Additional**
              **Paid-in
                Capital**
              **and
                Warrants**
              **Outstanding**
            
            
            **Accumulated**
              **Deficit**
            
            
            **Accumulated**
              **Other**
              **Comprehensive**
              **Income**
            
            
            **Total**
              **Shareholders'**
              **Equity**
            
            
            **Comprehensive**
              **Income****BALANCE
                AT AUGUST 31, 2004**
            
            **$**
            **1,008**
            
            
            **$**
            **-**
            
            
            **$**
            **-**
            
            
            **$**
            **15,893**
            
            
            **$**
            **(4,089**
            **)**
            
            **$**
            **6**
            
            
            **$**
            **12,818**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
                income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,317
            )
            
            
            -
            
            
            
            (2,317
            )
            
            
            (2,317
            )Foreign
                currency translationadjustments,
                net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (17
            )
            
            
            (17
            )
            
            
            (17
            )Unrealized
                gains (losses) on investments, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            64
            
            
            
            64
            
            
            
            64Reclassification
                adjustments for realized gains & losses included in net income, net of
                tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            40
            
            
            
            40
            
            
            
            40Total
                comprehensive loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            **$**
            **(2,230**
            **)****BALANCE
                AT AUGUST 31, 2005**
            
            **$**
            **1,046**
            
            
            **$**
            **-**
            
            
            **$**
            **-**
            
            
            **$**
            **17,340**
            
            
            **$**
            **(6,406**
            **)**
            
            **$**
            **93**
            
            
            **$**
            **12,073**Issuance
                of 64,459 shares of common stock for acquisitions
            
            
            7
            
            
            
            -
            
            
            
            -
            
            
            
            293
            
            
            
            -
            
            
            
            -
            
            
            
            300
            
            
            $
            -Retirement
                of 101,580 shares of common  stock
            
            
            (2
            )
            
            
            -
            
            
            
            -
            
            
            
            (98
            )
            
            
            -
            
            
            
            -
            
            
            
            (100
            )
            
            
            -Issuance
                of 66,180 shares of preferred  stock
            
            
            -
            
            
            
            -
            
            
            
            6,618
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,618
            
            
            
            -Stock
                compensation
            
            
            2
            
            
            
            -
            
            
            
            -
            
            
            
            98
            
            
            
            -
            
            
            
            -
            
            
            
            100
            
            
            
            -Net
                income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,219
            
            
            
            -
            
            
            
            2,219
            
            
            
            2,219Prefered
                Stock Dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (331
            )
            
            
            -
            
            
            
            (331
            )
            
            
            -Foreign
                currency translation adjustments, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            80
            
            
            
            80
            
            
            
            80Unrealized
                gains (losses) on investments, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (16
            )
            
            
            (16
            )
            
            
            (16
            )Reclassification
                adjustments for realized gains & losses included in net
                income, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7
            
            
            
            7
            
            
            
            7Total
                comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            **$**
            **2,290****BALANCE
                AT AUGUST 31, 2006**
            
            **$**
            **1,053**
            
            
            **$**
            **-**
            
            
            **$**
            **6,618**
            
            
            **$**
            **17,633**
            
            
            **$**
            **(4,518**
            **)**
            
            **$**
            **164**
            
            
            **$**
            **20,950**Issuance
                of 883,026 shares of common stock for acquisitions
            
            
            66
            
            
            
            -
            
            
            
            -
            
            
            
            1,738
            
            
            
            -
            
            
            
            -
            
            
            
            1,804
            
            
            
            -Issuance
                of 22,000 shares of common stock for compensation
            
            
            2
            
            
            
            -
            
            
            
            -
            
            
            
            88
            
            
            
            -
            
            
            
            -
            
            
            
            90
            
            
            
            -Retirement
                of 35,926 shares of common stock
            
            
            (4
            )
            
            
            -
            
            
            
            -
            
            
            
            (142
            )
            
            
            -
            
            
            
            -
            
            
            
            (146
            )
            
            
            -Net
                loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,286
            )
            
            
            -
            
            
            
            (7,286
            )
            
            
            (7,286
            )Preferred
                Stock Dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (496
            )
            
            
            -
            
            
            
            (496
            )
            
            
            -Foreign
                currency translation adjustments, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            64
            
            
            
            64
            
            
            
            64Unrealized
                gains on investments, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            24
            
            
            
            24
            
            
            
            24Reclassification
                adjustments for realized gains & losses included in net income, net of
                tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8
            
            
            
            8
            
            
            
            8Variable
                interest entity investment in 384,500 shares of common stock of the
                Company
            
            
            -
            
            
            
            (923
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (923
            )
            
            
            -Total
                comprehensive loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            **$**
            **(7,190**
            **)****BALANCE
                AT AUGUST 31, 2007**
            
            **$**
            **1,117**
            
            
            **$**
            **(923**
            **)**
            
            **$**
            **6,618**
            
            
            **$**
            **19,317**
            
            
            **$**
            **(12,300**
            **)**
            
            **$**
            **260**
            
            
            **$**
            **14,089**




*See
                Accompanying Notes to Consolidated Financial
                Statements*





43
 *Table
            of Contents*




**FORTUNE
      INDUSTRIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(DOLLARS
      IN THOUSANDS)**




**Year
                  Ended****August
                  31,**
              
              
              **August
                  31,**
              
              
              **August
                  31,****2007**
              
              
              **2006**
              
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  Income (Loss)
              
              $
              (7,286
              )
              
              $
              2,219
              
              
              $
              (2,317
              )Adjustments
                  to reconcile net income (loss) to net cash provided by (used in)
                  operating
                  activities:Depreciation
                  and amortization
              
              
              2,686
              
              
              
              2,269
              
              
              
              2,301Provision
                  for losses on accounts receivable
              
              
              (184
              )
              
              
              (98
              )
              
              
              400Loss
                  on sale of investments
              
              
              8
              
              
              
              7
              
              
              
              40Loss
                  on disposal of assets
              
              
              381
              
              
              
              -
              
              
              
              5Stock
                  based compensation
              
              
              90
              
              
              
              100
              
              
              
              264Minority
                  interest in variable interest entity income
              
              
              724
              
              
              
              -
              
              
              
              -Deferred
                  income taxes
              
              
              -
              
              
              
              (521
              )
              
              
              -Impairment
                  on intangible assets
              
              
              2,027
              
              
              
              -
              
              
              
              -Changes
                  in certain operating assets and liabilities:Restricted
                  cash
              
              
              (406
              )
              
              
              (1,978
              )
              
              
              (987
              )Accounts
                  receivable
              
              
              6,059
              
              
              
              (4,179
              )
              
              
              (5,192
              )Costs
                  and estimated earnings in excess of billings on uncompleted
                  contracts
              
              
              3,221
              
              
              
              (1,819
              )
              
              
              (802
              )Inventory,
                  net
              
              
              105
              
              
              
              1,567
              
              
              
              1,537Prepaid
                  assets and other current assets
              
              
              295
              
              
              
              (130
              )
              
              
              29Other
                  long-term assets
              
              
              565
              
              
              
              (809
              )
              
              
              (830
              )Accounts
                  payable
              
              
              (728
              )
              
              
              2,181
              
              
              
              1,109Health
                  and workers' compensation reserves
              
              
              (80
              )
              
              
              (637
              )
              
              
              (457
              )Accrued
                  expenses and other current liabilities
              
              
              (852
              )
              
              
              727
              
              
              
              (548
              )Billings
                  in excess of costs and estimated earnings on uncompleted
                  contracts
              
              
              (790
              )
              
              
              (133
              )
              
              
              189Net
                  Cash Provided by (Used in) Operating Activities
              
              
              5,835
              
              
              
              (1,234
              )
              
              
              (5,259
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Capital
                  expenditures
              
              
              (1,020
              )
              
              
              (2,754
              )
              
              
              (1,932
              )Purchases
                  of marketable securities
              
              
              -
              
              
              
              (204
              )
              
              
              (176
              )Proceeds
                  from sales of marketable securities
              
              
              1,225
              
              
              
              1,050
              
              
              
              -Acquisition
                  of productive assets and businesses, net of cash received
              
              
              (7,317
              )
              
              
              (502
              )
              
              
              (2,758
              )Net
                  Cash Used in Investing Activities
              
              
              (7,112
              )
              
              
              (2,410
              )
              
              
              (4,866
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Net
                  borrowings (payments) under line of credit
              
              
              11,670
              
              
              
              (15,668
              )
              
              
              11,050Variable
                  interest entity net borrowings (payments) under line of
                  credit
              
              
              -
              
              
              
              -
              
              
              
              -Borrowings
                  on short-term debt - majority shareholder
              
              
              1,000
              
              
              
              -
              
              
              
              800Payment
                  on short-term debt - majority shareholder
              
              
              -
              
              
              
              -
              
              
              
              (827
              )Borrowings
                  on long-term debt
              
              
              -
              
              
              
              20,000
              
              
              
              1,880Payments
                  on long-term debt
              
              
              (2,041
              )
              
              
              (7,236
              )
              
              
              (2,496
              )Variable
                  interest entity payments on long-term debt
              
              
              (463
              )
              
              
              -
              
              
              
              -Debt
                  issuance costs
              
              
              -
              
              
              
              (856
              )
              
              
              -Borrowings
                  (payments) from convertible debentures
              
              
              (1,822
              )
              
              
              7,500
              
              
              
              -Dividends
                  on preferred stock
              
              
              (496
              )
              
              
              (331
              )
              
              
              -Proceeds
                  from variable interest entity member contributions
              
              
              129
              
              
              
              -
              
              
              
              -Distributions
                  to variable interest entity members
              
              
              (566
              )
              
              
              -
              
              
              
              -Other
              
              
              -
              
              
              
              -
              
              
              
              (5
              )Net
                  Cash Provided by Financing Activities
              
              
              7,411
              
              
              
              3,409
              
              
              
              10,402Effect
                  of exchange rate changes on cash
              
              
              64
              
              
              
              80
              
              
              
              (17
              )**NET
                  INCREASE (DECREASE) IN CASH AND EQUIVALENTS**
              
              
              6,198
              
              
              
              (155
              )
              
              
              260**CASH
                  AND EQUIVALENTS**Beginning
                  of Period
              
              
              3,632
              
              
              
              3,787
              
              
              
              3,527End
                  of Period
              
              $
              9,830
              
              
              $
              3,632
              
              
              $
              3,787*See
                  Accompanying Notes to Consolidated Financial
                  Statements.*
  44
 *Table
            of Contents*




**FORTUNE
      INDUSTRIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(DOLLARS
      IN THOUSANDS)**




**Year
                Ended****August
                31,**
            
            
            **August
                31,**
            
            
            **August
                31,****2007**
            
            
            **2006**
            
            
            **2005****SUPPLEMENTAL
                DISCLOSURES**Interest
              paid
            
            $
            3,183
            
            
            $
            2,431
            
            
            $
            1,398Income
              taxes paid
            
            $
            229
            
            
            $
            85
            
            
            $
            116Unrealized
              net gain (loss) on marketable equity securities
            
            $
            24
            
            
            $
            (16
            )
            
            $
            22Non-cash
              investing and financing activities:Issuance
                of preferred stock for debt extinguishment
            
            
            
            
            
            $
            6,618Issuance
                of warrants in connection with loan refinancing
            
            
            
            
            
            
            266$
            6,884Acquisitions
              (See Note 3)Cash
                and equivalents
            
            $
            2,883
            
            
            $
            15
            
            
            $
            2,704Restricted
                cash
            
            
            1,223
            
            
            
            -
            
            
            
            -Accounts
                receivable
            
            
            1,301
            
            
            
            96
            
            
            
            672Inventory
            
            
            -
            
            
            
            13
            
            
            
            106Prepaid
                expenses and other current assets
            
            
            1,213
            
            
            
            2
            
            
            
            1,303Property,
                plant & equipment, net
            
            
            421
            
            
            
            77
            
            
            
            -Goodwill
                and other intangible assets
            
            
            12,731
            
            
            
            658
            
            
            
            4,982Other
                non-current assets
            
            
            -
            
            
            
            1
            
            
            
            195Accounts
                payable
            
            
            (572
            )
            
            
            (48
            )
            
            
            (1,290
            )Accrued
                expenses and other current liabilities
            
            
            (3,127
            )
            
            
            (12
            )
            
            
            (4,121
            )Health
                and workers compensation reserves
            
            
            (1,845
            )
            
            
            -
            
            
            
            -Notes
                payable
            
            
            (328
            )
            
            
            -
            
            
            
            -13,900
            
            
            
            802
            
            
            
            4,551Common
                stock consideration
            
            
            3,700
            
            
            
            300
            
            
            
            1,039Cash
                paid
            
            $
            10,200
            
            
            $
            502
            
            
            $
            3,512Consolidation
              of Variable Interest Entity (Note 2)Cash
            
            $
            64Property,
                plant and equipment
            
            
            6,822Marketable
                equity securities
            
            
            1,838Other
                long-term assets
            
            
            5Total
                Assets
            
            $
            8,729Line
                of credit
            
            
            2,200Current
                maturities of long-term debt
            
            
            450Accrued
                expenses
            
            
            24Other
                current liabilities
            
            
            116Long-term
                debt
            
            
            5,075Minority
                interest
            
            
            864Total
                Liabilities and Minority Interest
            
            $
            8,729




*See
      Accompanying Notes to Consolidated Financial Statements.*


45
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          of Contents*


**FORTUNE
      INDUSTRIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(DOLLARS
      IN THOUSANDS UNLESS OTHERWISE INDICATED,**


**EXCEPT
      PER SHARE DATA)**





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





**General**





Fortune
      Industries, Inc. (formerly known as Fortune Diversified Industries, Inc.) is
      an
      Indiana corporation, originally incorporated in Delaware in 1988. The term
      “Company” as used herein refers to Fortune Industries, Inc. and its subsidiaries
      unless the context otherwise requires.  The Company provides a variety
      of services and products for selected market segments, which are classified
      under five operating segments, Wireless Infrastructure, Business Solutions,
      Transportation Infrastructure, Ultraviolet Technologies and Electronics
      Integration.  As a holding company of various products and services,
      the Company has historically invested in businesses that are undervalued,
      underperforming, or operations that are poised for significant
      growth.  Management’s strategic focus is to support the revenues and
      earnings growth of its operations by creating synergies that can be leveraged
      to
      enhance the performance of the Company’s entities and by investing capital to
      fund expansion.  Additionally, management continually seeks and
      evaluates strategic acquisitions that expand core offerings and drive
      incremental revenue and earnings growth.





*Principles
      of Consolidation:*  The accompanying consolidated financial
      statements include the accounts of Fortune Industries, Inc., its wholly owned
      subsidiaries, and a variable interest entity as described in Note
      2.  Nor-Cote contains foreign subsidiaries from the United Kingdom,
      China and Singapore, 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 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 shareholders’ 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 entity’s owners. For
      the Company, comprehensive income (loss) is equal to net income plus the change
      in unrealized gains or losses on investments and the change in foreign currency
      translation adjustments. The Company reports comprehensive income (loss) in
      the
      consolidated statement of shareholders’ equity.





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


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





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





The
      PEOs
      account for their revenues using the accrual method of accounting. Under the
      accrual method of accounting, revenues are recognized in the period in which
      the
      worksite employee performs work. The PEOs accrue revenues for service fees,
      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. The PEOs 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
      period, such costs are paid and the related service fees are
      billed.





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





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





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


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





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





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





*Restricted
        Cash:* Restricted cash includes certificates of deposits and letters of
        credit issued to collateralize its obligations under its health and accident
        benefit program, its workers compensation program, and certain general insurance
        coverage related to the Company’s Business Solutions segment. At August 31,
        2007, the Company had $5,091 in total restricted cash.  Of this,
        $1,725 is restricted for employer contributions to various health and accident
        benefit programs established under third party actuarial analysis, $3,005
        is
        restricted for the Company’s workers compensation program in accordance with
        terms of its insurance carrier agreement, and the remainder is restricted
        for
        certain standby letters of credits in accordance with various state
        regulations.





*Marketable
      Securities:* Marketable securities include common stocks classified as
      available for sale investments in accordance with the provisions of Statement
      of
      Financial Accounting Standards (“SFAS”) 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 changes in
      shareholders’ 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. Accounts receivable are ordinarily due 30-60 days after the
      issuance of the invoice. The Company provides allowances for estimated doubtful
      accounts and for returns and sales allowances, based on the Company’s assessment
      of known delinquent accounts, historical experience, and other currently
      available evidence of the collect-ability and the aging of the accounts
      receivable. Delinquent receivables that are deemed uncollectible are written
      off
      based on individual credit evaluation and specific circumstances of the
      customer. The Company’s policy is not to accrue interest on past due trade
      receivables.





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





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





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


48
 *Table
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Expenditures
      for normal repairs and maintenance are charged to operations as incurred. The
      cost of property or equipment retired or otherwise disposed of and the related
      accumulated depreciation are removed from the accounts in the period of disposal
      with the resulting gain or loss reflected in earnings or in the cost of the
      replacement asset.





*Goodwill
      and Other Indefinite-Lived Intangible Assets:*  The Company
      accounts for goodwill and other indefinite-lived intangible assets under SFAS
      No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill
      and other intangible assets with indeterminate lives are assessed for impairment
      at least annually and more often as triggering events occur. In making this
      assessment, management relies on a number of factors including operating
      results, business plans, economic projections, anticipated future cash flows,
      and transactions and market place data. There are inherent uncertainties related
      to these factors and management’s judgment in applying them to the analysis of
      both goodwill and other intangible assets impairment. Since management’s
      judgment is involved in performing goodwill and other intangible assets
      valuation analyses, there is risk that the carrying value of the goodwill and
      other intangible assets may be overstated or understated.





As
      described in Note 9, the Company recognized impairment charges amounting to
      $2,027 during second quarter fiscal 2007 as a result of triggering events
      primarily within its Wireless Infrastructure segment.  Triggering
      events include a) losses incurred within certain operating units, b) significant
      downsizing of personnel and operations, c) disposal of operating assets, and
      d)
      restructuring of management.





The
      Company has elected to perform the annual impairment test of recorded goodwill
      and other indefinite-lived intangible assets as required by 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, (after
      consideration of impairment write-down previously recognized during second
      quarter fiscal 2007) as of August 31, 2007, exceeded the carrying, or book
      value, including goodwill, and therefore recorded goodwill and other
      indefinite-lived intangible assets were not subject to impairment. The required
      annual impairment test may result in future periodic write-downs.





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





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





*Stock-based
      Compensation:*On September 1, 2005, the Company adopted the provisions of
      SFAS 123R, “Share-Based Payment” using the modified prospective
      method.  Prior to fiscal 2006, the Company elected to follow APB 25
      and to adopt the disclosure-only provisions as required under SFAS 123, and
      SFAS
      No. 148, “Accounting for Stock-Based Compensation – Transition and
      Disclosure”.  The adoption of this statement resulted in increased
      salaries, wages, and related expenses.  The amount of the impact was
      immaterial to the Company for the years ended August 31, 2007 and
      2006.





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





All
      references in the Form 10-K 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 the Company’s common stock effective June 2,
      2005.


49
 *Table
          of Contents*


*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, Mexico and Singapore income tax
      returns.





*Research
      and Development Costs:* Research and development costs are expensed as
      incurred and totaled $577, $538, and $440 for the years ended August 31, 2007,
      2006, and 2005, respectively. Research and development expense is recorded
      in
      the Company’s Nor-Cote subsidiary.





*Advertising
      Costs:* Advertising costs including marketing, advertising, publicity,
      promotion and other distribution costs, are expensed as incurred and totaled
      $438, $328, and $227 for the years ended August 31, 2007, 2006, and 2005,
      respectively.





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





Debt
      and
      equity issuances may have features which allow the holder to convert at
      beneficial conversion terms, which are then measured using similar valuation
      techniques and amortized to interest expense in the case of debt or recorded
      as
      dividends in the case of preferred stock instruments.  No issuances
      have beneficial conversion terms for any of the three years ended August 31,
      2007, 2006 and 2005.





*Self-Funded
      Insurance:* The Company 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 $70 and which limits its aggregate annual exposure to approximately
      $1,200.





The
      Company’s PSM subsidiary maintains a loss-sensitive worksite employees’ health
      and accident benefit program. Under the insurance policy, PSM’s self-funded
      liability is limited to $200 per employee, with an aggregate liability limit
      of
      approximately $13,600. The aggregate liability limits are adjusted annually,
      based on the number of participants.





*Workers’
      Compensation:* The Company’s PSM and CSM subsidiaries maintain partially
      self-funded workers’ compensation insurance programs. Under the insurance
      policies established at each company, PSM and CSM’s deductible liability is
      limited to $250 per incident, with an aggregate liability limit of approximately
      $1,300.  Under the insurance policy established at ESG, the deductible
      liability is limited to $750 per incident, with no aggregate annual liability
      limit.





***New
      Accounting Pronouncements:***





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards No. 154, “Accounting Changes and Error
      Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”
(“SFAS 154”). SFAS 154 was effective in our current fiscal year. There was no
      impact of adoption in fiscal 2007 as there were no accounting changes or
      corrections of errors.





In
      June
      2006, the FASB issued Interpretation, or FIN, No. 48,*Accounting for
      Uncertainty in Income Taxes — an Interpretation of
      SFAS No. 109,*  or FIN 48. FIN 48 clarifies
      the accounting for uncertain taxes recognized in an enterprise’s financial
      statements in accordance with SFAS No. 109,*Accounting for Income
      Taxes.*  FIN 48 prescribes a recognition threshold and
      measurement of a tax position taken or expected to be taken in an enterprise’s
      tax return. In addition, FIN 48 provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods and
      disclosure related to uncertain income tax positions. FIN 48 is effective
      for the fiscal years beginning after December 15, 2006 for all public
      companies. The adoption of FIN 48 will not have a material impact on its
      consolidated financial statements.


50
 *Table
          of Contents*


In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on
      how the effects of the carryover or reversal of prior year misstatements should
      be considered in quantifying a current year misstatement. SAB 108 was effective
      in current fiscal year 2007.  The adoption of this statement did not
      have a material impact on our financial position or results of operations in
      fiscal 2007.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
      value, establishes a formal framework for measuring fair value and expands
      disclosures about fair value measurements. The Statement is effective beginning
      in fiscal 2009. We are in the process of determining the effect, if
      any, that the adoption of SFAS 157 will have on our financial statements.
      In November 2006, the FASB ratified the consensuses of Emerging Issues Task
      Force (EITF) Issue No. 06-6, “Debtor’s Accounting for a Modification (or
      Exchange) of Convertible Debt Instruments” (EITF 06-6). This consensus
      supersedes EITF Issue No. 05-7, “Accounting for Modifications to Conversion
      Options Embedded in Debt Instruments and Related Issues and applies to
      modifications or exchanges of debt instruments that occur during interim or
      annual reporting periods for our fiscal year beginning September 1, 2008.
      We are currently evaluating the impact of EITF 06-6 on our consolidated
      financial statements. We do not anticipate that the adoption of this
      pronouncement will have a material effect on our consolidated financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with
      an option to report selected financial assets and financial liabilities at
      fair
      value. Unrealized gains and losses on items for which the fair value option
      has
      been elected are reported in earnings at each subsequent reporting date. SFAS
      159 is effective for fiscal years beginning after November 15, 2007. We are
      in the process of determining the effect, if any, that the potential
      adoption of SFAS 159 will have on our consolidated financial
      statements.





FASB
      statement No. 160 “Noncontrolling Interests in Consolidated Financial
      Statements—an amendment of ARB No. 51” was issued December of 2007. This
      Statement establishes accounting and reporting standards for the noncontrolling
      interest in a subsidiary and for the deconsolidation of a subsidiary. The
      guidance will become effective as of the beginning of a company’s fiscal year
      beginning after December 15, 2008. The Company believes that this new
      pronouncement will have an immaterial impact on the Company’s financial
      statements in future periods.





**NOTE
      2 – VARIABLE INTEREST ENTITY**





In
      December 2003, the Financial Accounting Standards Board (“FASB”) issued
      Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R").
      FIN 46R requires a variable interest entity (VIE) to be consolidated by a
      company, if that company is subject to a majority of the risk of loss from
      the
      variable interest entity's activities or is entitled to receive a majority
      of
      the entity's residual returns, or both. FIN 46R also requires disclosures about
      variable interest entities that a company is not required to consolidate, but
      in
      which it has a significant variable interest.





The
      Company leases a total of six facilities from a consolidated variable interest
      entity, a related-party referenced earlier whose primary purpose is to own
      and
      lease these properties to the Company. The VIE has ownership of 384,500 shares
      of the Company’s stock and is wholly-owned equally by the Company’s Chairman of
      the Board and its Chief Executive Officer.  The VIE does not have any
      other significant assets.  Although the Company does not have direct
      ownership interests in the VIE, it is considered the primary beneficiary as
      interpreted by FIN 46R due to implicit interests generated from personal
      guarantees from the Company’s majority shareholders on certain debt instruments
      and leasing arrangements of the VIE solely to the Company.





The
      real
      estate owned by the VIE consists of land, buildings and building improvements,
      which were subject to mortgages under which the lender has no recourse to the
      Company.  The non-cash consolidation of the assets and liabilities of
      the variable interest entity at August 31, 2007, consisted of the
      following:


51
 *Table
          of Contents*





**Assets**Cash
            
            $
            79Marketable
                equity securities
            
            
            923Prepaid
                expenses
            
            
            10Property,
                plant and equipment
            
            
            6,626Other
                assets
            
            
            3$
            7,641**Liabilities
                and Members Equity**Line
                of credit
            
            $
            2,200Current
                maturities of long-term debt
            
            
            503Accrued
                expenses
            
            
            143Long-term
                debt, net of current maturities
            
            
            4,5597,405Members
                equity
            
            $
            236$
            7,641





The
      marketable equity securities represent 384,500 shares of Fortune Industries
      common stock and are reported as treasury stock on the Company’s consolidated
      balance sheet at August 31, 2007.





For
      the
      three month period ended August 31, 2007, the consolidation of the VIE included
      income of $251 comprising of $439 in rental income, offset by a $140 charge
      to
      interest expense, a $50 charge to depreciation expense, and $2 in other
      miscellaneous income.  For the year ended August 31, 2007, the
      consolidation of the VIE included income of $724 comprising of $1,493 in rental
      income, offset by a $522 charge to interest expense, a $198 charge to
      depreciation expense, and $49 in administrative and other miscellaneous
      expenses.








**NOTE
      3 - ACQUISITIONS AND PRO FORMA FINANCIAL STATEMENTS**





**Acquisitions**





During
      the fiscal year 2007, the Company had the following material
      acquisitions”





*Employer
      Solutions Group, Inc. (“ESG”) (Business Solutions
      segment)*





The
      Company acquired all the shares of Employer Solutions Group, Inc. and its
      affiliated entities (“ESG”) through an Agreement and Plan of Share Exchange
      entered into effective March 1, 2007 by and among ESG, Craig Allred, Dee
      Henderson, Garth Allred, David Dyches, Kurt Robinson and Kira Reisch and the
      Company. The Company’s acquisition of ESG enabled the Company to expand its
      geographic presence in the professional employment organization (“PEO”)
      marketplace.  The purchase price of approximately $11,520 includes
      cash paid by the Company of $9,100 and issuance of 577,143 shares of the
      Company’s common stock valued at the closing price of the Company’s stock on the
      date of purchase at $4.20 per share.  Of the 577,143 total shares
      issued; 217,143 shares were issued to the sellers at closing and 360,000
      contingent shares are held in escrow and may be earned based on the EBITDA
      schedule below.  The Company and its two primary shareholders entered
      into an agreement in which the sellers may put (put option) the 217,143 shares
      issued at closing to the Company and these shareholders during the thirty (30)
      day period that begins on March 1, 2010.  The Company recorded $814
      related to the put option on the 217,143 shares as temporary equity, since
      the
      Company is not able to control whether such options can be put to the Company
      during the required time period.  The contingent shares are earned
      based on the table below:





(3)EBITDA
                TargetMinimum
            
            
            Maximum
            
            
            
            Total
                SharesYear
                1 - 3/1/2008*
            
            $
            1,600
            
            
            $
            1,800
            
            
            
            
            120,000Year
                2 - 3/1/2009*
            
            $
            1,600
            
            
            $
            2,000
            
            
            
            
            120,000Year
                3 - 3/1/2010*
            
            $
            1,600
            
            
            $
            2,400
            
            
            
            
            120,000360,000closing
                share price*
            
            
            4.20$
            1,512,000(3)
                Earn-out of 360,000 shares vests ratably over 3 years based on annual
                EBITDA


52
 *Table
          of Contents*


The
      earn
      out of $1,512,000 (360,000 shares at $4.20/share) is included as a component
      of
      the purchase allocation based on Company EBITDA projections over this period
      combined with expected synergies gained  from working with the
      Company’s existing PEO subsidiaries included in the Business Solutions
      segment.  As a result management deemed the likelihood for sellers to
      earn all the contingent stock to be more than likely at the date of the
      transaction.





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





AssetsCash
            
            $
            2,502Restricted
                Cash
            
            
            1,223Accounts
                receivable
            
            
            1,250Prepaid
                and other current assets
            
            
            1,199Property,
                plant and equipment, net
            
            
            386Goodwill
            
            
            6,781Intangible
                assets
            
            
            3,640Total
                Assets
            
            
            16,981LiabilitiesAccounts
                payable
            
            
            557Health
                and workers compensation reserves
            
            
            1,708Accrued
                expenses and other liabilities
            
            
            2,903Debt
            
            
            289Total
                Liabilities
            
            
            5,457Net
                Assets
            
            $
            11,524Cash
                consideration
            
            $
            9,100Fair
                value of common stock consideration
            
            
            2,424$
            11,524





*Precision
      Employee Management, LLC (“PEM”) (Business Solutions segment)*





The
      Company acquired all membership units of PEM through a unit purchase agreement
      entered into as of February 1, 2007 by and among PEM, an Arizona company, Tom
      Lickliter, Larry Bailliere, Charmaine Hayes, the Company, Carter Fortune and
      John Fisbeck. The Company’s acquisition of PEM enabled the Company to expand its
      geographic presence in the PEO marketplace.  The purchase price of
      $2,376 includes cash paid by the Company of $1,100 and issuance of 305,883
      shares of the Company’s common stock valued at the closing price of the
      Company’s stock on the date of purchase at $4.17 per share.  Of the
      305,883 total shares issued; 258,824 shares were issued to the sellers at
      closing and 47,059 contingent shares are held in escrow and may be earned based
      on certain EBITDA criteria as defined in the agreement.  The Company’s
      two major shareholders individually entered into an agreement in which the
      sellers may  put (put option) the 258,824 shares issued at closing to
      the major shareholders during the thirty (30) day period that begins on February
      1, 2009.





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





AssetsCash
            
            $
            381Accounts
                receivable
            
            
            51Prepaid
                and other current assets
            
            
            15Property,
                plant and equipment, net
            
            
            35Goodwill
            
            
            1,539Intangible
                assets
            
            
            770Total
                Assets
            
            
            2,791LiabilitiesAccounts
                payable
            
            
            15Accrued
                expenses and other liabilities
            
            
            359Debt
            
            
            41Total
                Liabilities
            
            
            415Net
                Assets
            
            $
            2,376Cash
                consideration
            
            $
            1,100Fair
                value of common stock consideration
            
            
            1,276$
            2,376


53
 *Table
          of Contents*


During
      the fiscal year 2006, the Company had the following material
      acquisition:





*Audio
      - Video Revolution, Inc. (Electronics Integration segment)*





The
      Company acquired certain assets and assumed certain liabilities of Audio -
      Video
      Revolution, Inc. (“AVR”) through an asset purchase agreement entered into as of
      November 14, 2005. Purchased assets in the agreement include, at a minimum,
      goodwill, proprietary property and products, furniture, equipment, machinery
      and
      other intellectual property. The Company’s acquisition of AVR enabled the
      Company to offer a wider range of design, engineering and installation of
      structured cabling systems for the residential and commercial
      marketplace.





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





Inventory,
                net
            
            $
            13Property,
                Plant and equipment, net
            
            
            59Goodwill
            
            
            130$
            202Cash
                consideration
            
            $
            202$
            202





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





*CSM,
      Inc.  (Business Solutions segment)*





Effective
      April 1, 2005, the Company acquired all of the issued and outstanding shares
      of
      common stock of CSM, Inc. and subsidiaries (“CSM”) for $2,704 in cash and $600
      in restricted shares of the Company’s common stock. Founded in 1985, CSM is a
      PEO serving over 200 company locations, representing over 3,100 employees in
      more than 24 states. The Company acquired CSM in order to expand its presence
      in
      the PEO industry. $707 and $3,100 of the excess purchase price paid over the
      fair value of tangible net assets acquired was allocated to goodwill and
      intangible assets, respectively.  The identified finite-life
      intangible assets consist of $1,680 of customer relationships and $830 of a
      non-compete agreement, which are being amortized over their useful lives of
      10
      years and 5 years, respectively.  Additionally, there is $590 of
      identified trade name, which is an infinite-life intangible asset.





Per
      the
      terms of the agreement, the $600 in restricted share consideration totaled
      150,000 restricted shares that vest over the three-year period from April 1,
      2005 through March 31, 2008 based upon annual operating
      performance.  The vested shares of common stock can be put to the
      Company’s majority shareholder and chairman of the Board of Directors during the
      period June 1, 2008 to September 30, 2008 at $10.33 per share. The 150,000
      shares are valued at the closing price of the Company’s stock on the date of
      purchase at $4.00 share.


54
 *Table
          of Contents*


The
      contingent stock consideration is included as a component of the purchase price
      in accordance with SFAS 141, “Business Combinations” and ETIF 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 deemed 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:





Cash
            
            $
            2,704Accounts
                receivable, net
            
            
            302Prepaid
                expenses and other current assets
            
            
            1,290Property
                and equipment
            
            
            132Goodwill
            
            
            707Intangible
                assets
            
            
            3,1008,235Accounts
                payable
            
            
            1,146Other
                accrued liabilities
            
            
            2,257Deferred
                revenue
            
            
            1,361Other
                current liabilities
            
            
            1714,935$
            3,300Cash
                consideration
            
            $
            2,700Fair
                value of common stock consideration
            
            
            600$
            3,300




**Pro
      Forma Financial Statements**





The
      following pro forma data summarize the results of operations for the periods
      indicated as if the ESG, PEM, AVR, and CSM, acquisitions had been completed
      as
      of the beginning of the periods presented.  The pro forma data give
      effect to actual operating results prior to the acquisitions and adjustments
      to
      interest expense, amortization of intangible assets 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 acquisitions had occurred as of the beginning of the periods presented
      or
      that may be achieved in the future.





Year
                endedAugust
                31, 2007
            
            
            August
                31, 2006
            
            
            August
                31, 2005Net
                revenue
            
            $
            178,257
            
            
            $
            176,469
            
            
            $
            141,401Operating
                income (loss)
            
            $
            (3,877
            )
            
            $
            4,261
            
            
            $
            (1,197
            )Net
                income (loss) available to common shareholders
            
            $
            (8,464
            )
            
            $
            2,472
            
            
            $
            (2,723
            )Basic
                income (loss) per common share
            
            $
            (0.78
            )
            
            $
            0.23
            
            
            $
            (0.26
            )Diluted
                income (loss) per common share
            
            $
            (0.68
            )
            
            $
            0.21
            
            
            $
            (0.26
            )






**NOTE
      4 - INVESTMENTS IN MARKETABLE EQUITY SECURITIES**





The
      amortized cost and approximate fair values of marketable securities held are
      summarized as follows:


55
 *Table
          of Contents*




August
                31,
            
            
            August
                31,2007
            
            
            2006Amortized
                cost
            
            $
            0
            
            
            $
            1,310Net
                unrealized loss
            
            
            0
            
            
            
            (16
            )Estimated
                fair value
            
            $
            0
            
            
            $
            1,294





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.  There was $8 and $7 of
      realized losses from the sale of marketable securities for the years ended
      August 31, 2007 and 2006, respectively.  There was $40 of realized
      losses from the sale of marketable securities for the year ended August 31,
      2005.








**NOTE
      5 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE**





Accounts
      receivable and contracts receivable are summarized as follows:





August
                31,
            
            
            August
                31,2007
            
            
            2006Accounts
                receivable
            
            $
            17,572
            
            
            $
            13,856Contracts
                receivable:Progress
                billing
            
            
            4,576
            
            
            
            11,683Retainages
            
            
            239
            
            
            
            1,60622,387
            
            
            
            27,145Less
                allowance for doubtful accounts and sales returns
            
            
            (1,230
            )
            
            
            (1,414
            )$
            21,157
            
            
            $
            25,731Long-term
                accounts receivable
            
            $
            770
            
            
            $
            1,276








**NOTE
      6 - CONTRACTS IN PROGRESS**





Information
      related to contracts in progress is summarized as follows:





August
                31,
            
            
            August
                31,2007
            
            
            2006Costs
                incurred on uncompleted contracts
            
            $
            10,999
            
            
            $
            36,700Estimated
                earnings recognized to date on uncompleted contracts
            
            
            2,511
            
            
            
            7,41613,510
            
            
            
            44,116Less
                billings on uncompleted contracts
            
            
            (13,409
            )
            
            
            (41,584
            )$
            101
            
            
            $
            2,532





The
      net
      amount is included in the accompanying consolidated balance sheets under the
      following captions:





August
                31,
            
            
            August
                31,2007
            
            
            2006Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            $
            1,279
            
            
            $
            4,500Billings
                in excess of costs and estimated earnings on uncompleted
                contracts
            
            
            1,178
            
            
            
            1,968$
            101
            
            
            $
            2,532




56
 *Table
          of Contents*


**NOTE
      7 - INVENTORY**





Inventories
      are summarized as follows:





August
                31,
            
            
            August
                31,2007
            
            
            2006Raw
                materials
            
            $
            691
            
            
            $
            698Work-in-process
            
            
            29
            
            
            
            72Finished
                goods
            
            
            6,317
            
            
            
            6,2597,037
            
            
            
            7,029Less
                inventory reserve
            
            
            (381
            )
            
            
            (268
            )$
            6,656
            
            
            $
            6,761








**NOTE
      8 - PROPERTY AND EQUIPMENT**





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





August
                31,
            
            
            August
                31,2007
            
            
            2006Land
                and building
            
            $
            9,440
            
            
            $
            1,891Machinery
                and equipment
            
            
            6,926
            
            
            
            6,934Research
                equipment
            
            
            270
            
            
            
            389Office
                equipment
            
            
            5,616
            
            
            
            4,857Vehicles
            
            
            3,299
            
            
            
            3,633Leasehold
                improvements
            
            
            342
            
            
            
            31625,893
            
            
            
            18,020Less
                accumulated depreciation
            
            
            (13,655
            )
            
            
            (11,697
            )$
            12,238
            
            
            $
            6,323





The
      provision for depreciation amounted to $1,238, $1,623, and $1,108 for the years
      ended August 31, 2007, 2006, and 2005, respectively.








**NOTE
      9 - GOODWILL AND OTHER INTANGIBLE ASSETS**





The
      changes in the carrying amount of goodwill, as recorded under SFAS 142, are
      summarized as follows:





Wireless
              Infrastructure
            
            
            Business
              Solutions
            
            
            Transportation
              Infrastructure
            
            
            Ultraviolet
              Technologies
            
            
            Electronics
              Integration
            
            
            Segment
              TotalsGoodwill
                at August 31, 2005
            
            $
            1,189
            
            
            $
            4,287
            
            
            $
            152
            
            
            $
            4,694
            
            
            $
            1,358
            
            
            $
            11,680Goodwill-acquisitions
            
            
            308
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            130
            
            
            
            438Goodwill
                adjustment
            
            
            -
            
            
            
            (134
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (134
            )Goodwill
                at August 31, 2006
            
            $
            1,497
            
            
            $
            4,153
            
            
            $
            152
            
            
            $
            4,694
            
            
            $
            1,488
            
            
            $
            11,984Goodwill-acquisitions
            
            
            0
            
            
            
            8,186
            
            
            
            -
            
            
            
            -
            
            
            
            0
            
            
            
            8,186Goodwill
                impairment
            
            
            (1,497
            )
            
            
            0
            
            
            
            -
            
            
            
            -
            
            
            
            (212
            )
            
            
            (1,709
            )Goodwill
                at August 31, 2007
            
            $
            0
            
            
            $
            12,339
            
            
            $
            152
            
            
            $
            4,694
            
            
            $
            1,276
            
            
            $
            18,461


57
 *Table
          of Contents*


The
      total
      amount of goodwill that is deductible for tax purposes is $9,476 and $1,969
      at
      August 31, 2007 and 2006, respectively.   The Company recognized
      impairment on certain goodwill in its Wireless Infrastructure segment of $1,497
      and its Electronics Integration segment of $212 for the year ended August 31,
      2007.





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





August
                31, 2007Gross
              Carrying
              Amount
            
            
            Accumulated
              Amortization
            
            
            Net
                Book
              Value
            
            
            Amortization
              Period
                (in years)Customer
                relationships
            
            $
            6,294
            
            
            $
            1,169
            
            
            $
            5,124
            
            
            
            10Non-compete
            
            
            200
            
            
            
            58
            
            
            
            142
            
            
            
            5Non-compete
            
            
            930
            
            
            
            93
            
            
            
            837
            
            
            
            5Non-compete
            
            
            1,485
            
            
            
            729
            
            
            
            757
            
            
            
            5Total
            
            
            8,909
            
            
            
            2,049
            
            
            
            6,860Trade
                name (not subject to amortization)
            
            
            590
            
            
            
            -
            
            
            
            590Total
            
            $
            9,499
            
            
            $
            2,049
            
            
            $
            7,450








August
                31, 2006Gross
              Carrying
              Amount
            
            
            Accumulated
              Amortization
            
            
            Net
                Book
              Value
            
            
            Weighted
                Average
              Amortization
              Period
                (in years)Customer
                relationships
            
            $
            3,342
            
            
            $
            657
            
            
            $
            2,667
            
            
            
            10Non-compete
            
            
            200
            
            
            
            38
            
            
            
            162
            
            
            
            5Non-compete
            
            
            1,229
            
            
            
            468
            
            
            
            761
            
            
            
            5Non-compete
            
            
            100
            
            
            
            81
            
            
            
            119
            
            
            
            3Total
            
            
            4,871
            
            
            
            1,244
            
            
            
            3,709Trade
                name (not subject to amortization)
            
            
            590
            
            
            
            -
            
            
            
            590Total
            
            $
            5,461
            
            
            $
            1,244
            
            
            $
            4,299
            
            
            
            -


58
 *Table
          of Contents*


Intangible
      asset amortization expense is $1,448, $646, and $601 for the years ended August
      31, 2007. 2006, and 2005, respectively, which includes $477, $20, and $30 of
      amortization related to loan origination fees, respectively.





In
      fiscal
      year 2007, the Company recognized impairment on certain intangible assets in
      it
      Wireless Infrastructure segment of $318.  Management determined the
      assets were impaired based upon the changes in management and evaluations of
      customer contracts resulting from incurred losses.





In
      fiscal
      year 2005, the Company recognized impairment on certain other intangible assets
      in its Electronics Integration segment of $417 and in its Wireless
      Infrastructure segment of $219. 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 Electronics
      Integration segment.





Amortization
      expense on intangible assets currently owned by the Company at August 31, 2007
      for each of the next five fiscal years is as follows:





2008
            
            $
            1,1692009
            
            
            1,1802010
            
            
            9162011
            
            
            9162012
            
            
            8992013
                and thereafter
            
            
            1,780Total
            
            $
            6,860








**NOTE
      10 - DEBT ARRANGEMENTS**





The
      Company’s debt obligations consisted of the following:





August
                31,
            
            
            August
                31,2007
            
            
            2006Notes
                payable:Revolving
                line of credit promissory note due August 31, 2008.  Interest at
                LIBOR plus 2.0% or 1.75% upon achievement of certain financial performance
                criteria.  The loan is secured by the business assets of the
                Company and personal guarantees of the Company’s two major shareholders
                (the Chairmen of the Board and the CEO of the Company).  The
                loan is further secured by certain marketable securities of the major
                shareholder.
            
            $
            15,000
            
            
            $
            3,330Term
                loan note due in monthly installments of $167 plus interest at LIBOR
                plus
                2.0% or 1.75% upon achievement of certain financial performance criteria
                through maturity date, August 31, 2011.  The loan is secured by
                the business assets of the Company and personal guarantees of the
                Company’s two major shareholders.  The loan is further secured
                by certain marketable securities of the major shareholder.
            
            
            18,167
            
            
            
            20,000Various
                term notes due in monthly installments of $14, including interest
                ranging
                from 4.9% to 9.03% through April 2010. The loans are secured by vehicles
                and equipment.
            
            
            314
            
            
            
            173Convertible
                term note:Convertible
                term note due in monthly installments of $227 plus interest at the
                Prime
                Rate plus 3.0% (subject to adjustments as described below) through
                maturity date, November 30, 2008.  The loan is guaranteed by the
                Company’s two major shareholders.
            
            
            5,678
            
            
            
            7,500Debt
                with majority shareholder:Unsecured
                line of credit promissory note due December 1,
                2010.  Interest atthe one-month LIBOR plus 3% with $8,000
                available borrowings.
            
            
            1,000
            
            
            
            -Term
                note due in monthly installments of $3 including interest at 4.0%
                through
                September 2008.  The loan is secured by vehicles and
                equipment.
            
            
            30
            
            
            
            63Variable
                interest entity:Revolving
                line of credit promissory note due September 30, 2007.  Interest
                at LIBOR plus 1.6%.  The loan is secured by real estate and
                personal guarantees of the Company’s two majority
                shareholders.
            
            
            2,200
            
            
            
            -Various
                term loans due in monthly installments totaling $44 plus interest
                at
                ranges from LIBOR plus 1.5% to LIBOR plus 1.6%.  The loans
                mature at dates ranging from February 2009 through April
                2011.  The notes are secured by real estate and personal
                guarantees of the Company’s two majority shareholders.
            
            
            5,062
            
            
            
            -Capital
                leases:Various
                notes due in monthly installments of $4 including interest at ranges
                from
                2.3% to 11.6% through November 2010. The loans are secured by computers
                and equipment.
            
            
            113
            
            
            
            101Total
                debt obligation
            
            
            47,564
            
            
            
            31,167Less
                current maturities
            
            
            (22,679
            )
            
            
            (3,488
            )Long-term
                portion of outstanding debt
            
            $
            24,885
            
            
            $
            27,679


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Fiscal
      year principal payments due on long-term debt outstanding (including convertible
      term note) at August 31, 2007 are approximately as follows:





2008
            
            $
            22,6792009
            
            
            9,8372010
            
            
            2,5822011
            
            
            12,4662012
                and thereafter
            
            
            -$
            47,564





*Credit
      Facility Loan and Security Agreement*





Effective
      August 31, 2006 and as amended by the “First Amendment to the Loan and Security
      Agreement” (the “Agreement”) on October 18, 2007, the Company entered into a
      $35,000 credit facility with Fifth Third Bank.  The credit facility
      replaced the parties' $25,000 credit facility, which expired on August 31,
      2006.
      The facility includes a $20,000 term loan evidenced by a term loan note, which
      matures on August 31, 2011 and a $15,000 revolving loan evidenced by a revolving
      line of credit promissory note, which matures on August 31, 2008. Availability
      under the revolving loan is the lesser of $15,000 or the borrowing base amount,
      which is calculated monthly as a percentage of the Company's eligible assets.
      Interest is charged on the loans at LIBOR plus 2.0%, which may be reduced to
      LIBOR plus 1.75% if the Company meets certain performance criteria. The line
      of
      credit is secured by assets of the Company and the term loan is secured by
      personal guarantees of the Company’s two major shareholders (the Chairman of the
      Board of Directors and CEO).  Outstanding borrowings on this line of
      credit amounted to $15,000 at August 31, 2007.  The Company had $0
      availability under the line of credit at August 31, 2007.


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Covenant
      terms of the Company’s Agreement require the maintenance of certain ratios
      including debt (excluding subordinated debt) to EBITDA and fixed charge
      coverage.  Additionally, the Company must maintain tangible net worth
      requirements and one of the personal guarantors of the Agreement must meet
      certain liquidity tests.  The Company violated certain loan covenants
      during the second and third quarters of fiscal 2007.  However, the
      bank provided waivers for noncompliance in conjunction with the Agreement with
      respect to those dates.  The bank also amended certain covenants as of
      August 31, 2007 and through the respective maturity dates in the
      Agreement.  The Company’s major shareholder is also required to
      maintain $20,000 of personal marketable securities in the bank’s custody until
      certain future EBITDA targets are met by the Company.





Under
      terms of the Agreement, the bank may call the loan if the Company is in
      violation of any restrictive covenants.  Due to the consolidation of
      the variable interest entity described in Note 2, at August 31, 2007, the
      Company was in breach of (a) the Minimum Shareholders’ Equity covenant
      requirement of $15,000 and (b) the Maximum Funded Debt/Total Capitalization
      Ratio covenant of .75 to 1.00.  The Company has not changed the
      long-term classification of its debt obligations to current liabilities as
      a
      result of alternative financing options available in the event the loan was
      called by the bank.





*Cancellation
      of Line of Credit - Related Party*





As
      described in Note 14, on November 30, 2005, the Company issued 66,180 shares
      of
      $0.10 par value preferred stock to the Company’s majority shareholder as
      consideration for cancellation of certain debt obligations owed by the Company
      under a line of credit promissory note dated May 25, 2005.  A total of
      $6,618 of debt was retired under the agreement.





*Convertible
      Term Note*





On
      November 21, 2005 the Company issued a convertible term note (the “Note”)
      payable to an unrelated party, Laurus Master Fund Ltd., in the principal amount
      of $7,500.  The Note has a term of three years and is convertible into
      the Company’s common stock at an exercise price of $5.50 per share subject to
      certain adjustments contained in the Note.  Principal payments are
      payable monthly at $227 beginning March 1, 2006.  Interest is payable
      monthly in arrears beginning January 1, 2006 at prime plus 3.0% subject to
      a
      floor of 9.5%. This interest rate is subject to adjustments as later described
      and as fully set forth in the Note.  Additionally, the Company issued
      a warrant to Laurus (the “Laurus Warrant”) to purchase up to an aggregate of
      272,727 shares of the Company's common stock.  The Company also issued
      a warrant (the “CB Capital Warrant”) exercisable for shares of the Company’s
      common stock to CB Capital Partners, Inc. (“CB Capital”), a financial advisor to
      purchase up to an aggregate of 13,636 shares of the Company’s common
      stock.  The Laurus and CB Capital warrants (collectively, “the
      Warrants”) have a term of five years and an exercise price of $6.60 per share.
      The Company used the proceeds from the offering of the Note and the Warrants
      for
      general working capital purposes.  The Note is unsecured by the
      Company, but guaranteed by the Company’s two majority
      shareholders.  The Company has registered the shares of common stock
      underlying the Note and Warrants.





Subject
      to the terms of the Note, the monthly principal and interest payments are
      payable in shares of the Company’s common stock if certain criteria are met, as
      follows:





•
            the
                average closing price of the Company’s common stock as reported by
                Bloomberg, L.P. for the five trading days immediately preceding the
                repayment date is greater than or equal to 109% of the conversion
                price of
                the Note, set in the Note at $5.50 per share (based upon the conversion
                price of $5.50, the average closing price required would be
                $6.00);




•
            the
                total value of the shares converted cannot exceed 25% of the aggregate
                dollar trading volume of the Company’s common stock for the previous
                twenty-two trading days;




•
            there
                must be an effective registration statement covering the shares of
                the
                Company’s common stock into which the principal and interest under the
                Note are convertible or an exemption from registration for resale
                must be
                available pursuant to Rule 144 of the Securities Act;
                and


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•
            there
                must be no event of default existing under the Note that has not
                been
                cured or is otherwise waived in writing by Laurus at Laurus’
                option.




If
      the
      above criteria are not met, the Company must pay that portion or all of the
      monthly principal payment in cash at a rate of 102% of the respective monthly
      amortization amounts.  The Company had the option to postpone payment
      of any 12 principal payments due.  As of August 31, 2007, the Company
      has postponed all 12 months of principal payments.  These deferred
      principal amounts shall be due and payable, at the Company’s option, on any
      subsequent payment date or on the maturity date of the Note.





The
      Company may prepay the Note at any time by paying 130% of the principal amount
      then outstanding, together with accrued but unpaid interest thereon. Upon an
      event of default under the Note, Laurus may demand repayment in full at a rate
      of 105% of the outstanding principal amount of the Note. If the Note remains
      outstanding after an event of default that is not cured, the interest rate
      increases an additional 1.0% per month. Events of default include:




•
            a
                failure to make payments under the Note when
                due;





•
            a
                material breach of the transaction documents by the
                Company;




•
            bankruptcy
                related events;




•
            a
                change of control transaction without prior approval;
                and




•
            events
                of default under certain other agreements to which the Company is
                a
                party.





On
      a
      month-by-month basis, the interest rate on the Note is subject to reduction
      by
      2% for every 25% increase in the market price of the Company’s common stock
      above the fixed conversion price of the Note, but in no event shall the interest
      rate be less than 0%.





Laurus
      also has the option to convert all or a portion of the Note into shares of
      the
      Company’s common stock at any time, at an initial fixed conversion price of
      $5.50 per share, subject to limitations and adjustment as described below.
      The
      Note is currently convertible into 1,363,636 shares of the Company’s common
      stock, excluding the conversion of any accrued interest. The conversion price
      is
      adjustable on a weighted average basis upon certain future issuances of
      securities by the Company at a price less than the conversion price then in
      effect. There are a number of limitations on Laurus’ ability to convert the Note
      and exercise the Laurus Warrant. These limitations include:





•
            Laurus
                may not convert the Note or exercise the Laurus Warrant for a number
                of
                shares that would cause all shares then held by Laurus to exceed
                4.99% of
                the Company’s outstanding shares of common stock unless there has been an
                event of default or Laurus provides the Company with seventy-five
                days
                prior notice.





•
            Laurus
                agreed that it would not acquire in aggregate more than 2,108,764
                shares
                of common stock through the conversion of the Note or the Laurus
                Warrant
                or through any agreement related thereto unless the Company’s shareholders
                approved such issuance.





Subject
      to prior satisfaction of the conversion of amounts due and subject to certain
      other restrictions set forth in the Note, if (i) the average closing price
      of
      common stock as reported by Bloomberg, L.P. for five consecutive trading days
      in
      any calendar month shall be greater than or equal to 200% of the conversion
      price, then Laurus shall convert on each such occurrence (limited to once per
      calendar month), such principal amount of the Note as does not exceed 25% of
      the
      aggregate dollar trading volume of the common stock for the period of twenty-two
      trading days immediately preceding such date less any amounts previously
      converted.





The
      Warrants were recorded at fair value and classified as a
      liability.  Any discount accretion is considered immaterial based on
      the Black-Scholes model.  The Company recorded $856 for debt issue
      costs, including $308 paid to affiliates of Laurus, $475 to CB Capital, and
      $73
      for legal and professional fees. The debt issue costs are included in other
      assets in the accompanying consolidated balance sheet as of August 31,
      2007.


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**NOTE
      11 - RETIREMENT PLAN**





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





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








**NOTE
      12 - INCOME TAXES**





The
      reconciliation for the 2007, 2006 and 2005 income tax expense (benefit) computed
      at the U.S. Federal statutory tax rate to the Company's effective income rate
      is
      as follows:





August
                31,
            
            
            August
                31,
            
            
            August
                31,2007
            
            
            2006
            
            
            2005Tax
                at U.S. Federal statutory rate
            
            
            34.0
            %
            
            
            34.0
            %
            
            
            34.0
            %State
                and local taxes, net of federal benefit
            
            
            5.6
            
            
            
            5.6
            
            
            
            5.6Change
                in valuation allowance
            
            
            (39.6
            )
            
            
            (78.6
            )
            
            
            (39.6
            )0
            %
            
            
            (39.0
            )%
            
            
            0
            %





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





Year
                EndedAugust
                31,
              2007
            
            
            August
                31,
              2006
            
            
            August
                31,
              2005Current:Federal
            
            $
            (1,652
            )
            
            $
            753
            
            
            $
            (41
            )State
            
            
            (273
            )
            
            
            124
            
            
            
            72(1,925
            )
            
            
            877
            
            
            
            31Deferred:Federal
            
            
            (96
            )
            
            
            (328
            )
            
            
            (567
            )State
            
            
            (15
            )
            
            
            (54
            )
            
            
            (318
            )(111
            )
            
            
            (382
            )
            
            
            (885
            )Increase
                (decrease) in valuation allowance
            
            
            2,193
            
            
            
            (920
            )
            
            
            936Net
                income tax (benefit)
            
            $
            157
            
            
            $
            (423
            )
            
            $
            82





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:





August
                31,
            
            
            August
                31,2007
            
            
            2006Current:Allowances
                for doubtful accounts and inventory
            
            $
            637
            
            
            $
            596Accrued
                liabilities and other
            
            
            1,494
            
            
            
            900Noncurrent:Amortization
                of covenants
            
            
            270
            
            
            
            (84
            )Depreciation
            
            
            (246
            )
            
            
            (233
            )Net
                operating losses and other carryforwards
            
            
            ,3,684
            
            
            
            2,4675,839
            
            
            
            3,646Valuation
                allowance
            
            
            (4,304
            )
            
            
            (2,111
            )Total
                deferred tax assets
            
            $
            1,535
            
            
            $
            1,535


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SFAS
      109
      requires a valuation allowance to reduce the deferred tax assets reported if,
      at
      August 31, 2007, the Company had federal tax operating loss based on the weight
      of the evidence, it is more likely than not that some portion or all of the
      deferred tax assets will not be realized.  After consideration of the
      evidence, both positive and negative, management has determined that a $4,304
      valuation allowance at August 31, 2007 is necessary to reduce the deferred
      tax
      assets to the amount that will more likely than not be realized. The change
      in
      the valuation allowance for the current period is $2,193.  At August
      31, 2007 the Company has federal net operating loss carryforwards of
      approximately 10,000 which expire between 2020 and 2023. The state tax operating
      loss carryforwards are approximately $12,000.  The difference between
      federal and state net operating loss carryforwards represents a change in
      business venue in a prior period.  The Company's capital loss
      carryforward is approximately $47, which expires during the fiscal year ending
      August 31, 2010 and 2012.  The Company also incurred net operating
      losses related to European operations that can be carried forward
      indefinitely.








**NOTE
      13 – EQUITY INCENTIVE PLANS AND OTHER STOCK COMPENSATION**





*Restricted
      Share Units*





Effective
      April 13, 2006, the Company’s shareholders approved the 2006 Equity Incentive
      Plan. Under terms of the 2006 Equity Incentive Plan, the Company may grant
      options, restricted share units and other stock-based awards to its management
      personnel as well as other individuals for up to 1.0 million shares of
      common stock.  During the year-ended August 31, 2007, 22,000
      restricted share units were issued under this plan.





*Warrants*





At
      August
      31, 2007, the Company had 5,000 warrants issued and outstanding that are each
      convertible into one share of common stock with an exercise price of $10.00
      per
      share. The remaining contractual term on these warrants is through June 30,
      2008.








**NOTE
      14 - SHAREHOLDERS’ EQUITY**





*Common
      Stock*





The
      following are the details of the Company's common stock as of August 31, 2007
      and August 31, 2006:








Number
                of SharesAuthorized
            
            
            Issued
            
            
            Outstanding
            
            
            AmountAugust
                31, 2007Common
                stock, $0.10 par value
            
            
            150,000,000
            
            
            
            11,391,823
            
            
            
            11,391,823
            
            
            $
            1,139August
                31, 2006Common
                stock, $0.10 par value
            
            
            150,000,000
            
            
            
            10,522,722
            
            
            
            10,522,722
            
            
            $
            1,053





A
      total
      of 905,026 shares were issued and a total of 35,926 shares were retired during
      the year ended August 31, 2007.





At
      August
      31, 2007 the Company had 3,000 shares of common stock that could potentially
      be
      issued under the terms of a restricted share unit agreement entered into as
      part
      of the Company’s Employee Stock Plan and 1,032,232 shares of common stock
      related to the Laurus convertible term note.  The Company also had
      291,090 outstanding warrants issued as part of the Laurus transaction and stock
      compensation.


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*Preferred
      Stock*





The
      following are the details of the Company's non-voting preferred stock as of
      August 31, 2007 and August 31, 2007:





Number
                of SharesAuthorized
            
            
            Issued
            
            
            Outstanding
            
            
            AmountAugust
                31, 2007Preferred
                stock, $0.10 par value
            
            
            1,000,000
            
            
            
            66,180
            
            
            
            66,180
            
            
            $
            6,618August
                31, 2006Preferred
                stock, $0.10 par value
            
            
            1,000,000
            
            
            
            66,180
            
            
            
            66,180
            
            
            $
            6,618





On
      November 30, 2005, the Company issued 66,180 shares of $0.10 par value
      non-voting preferred stock to the Company’s majority shareholder as
      consideration for cancellation of certain debt obligations owed by the Company
      under a line of credit promissory note dated May 25, 2005. The shares are not
      convertible to common stock and have various restrictions pertaining to their
      transferability as they are not registered under the Securities Act of
      1933.  The shares issued are single class and pay on a monthly basis
      an annual cash dividend of $7.50 per share. Dividends of $496 and $331 were
      paid
      for the years ended August 31, 2007 and 2006, respectively.





Treasury
      Stock





The
      Company’s related party consolidated variable interest entity described in Note
      2 holds 384,500 shares of the Company’s common stock at August 31,
      2007.  The Company’s securities valued at $923 as of August 31, 2007
      are required to be recorded as treasury stock for purposes of the
      consolidation.





Temporary
      Equity





As
      described in Note 3, the Company and its two primary shareholders entered into
      an agreement in 2007 in which ESG sellers may put (put option) 217,143 shares
      issued at closing to the Company.  The Company recorded $814 related
      to the put option on the 217,143 shares as temporary equity, since the potential
      exercise of the put option is outside the Company’s control at August 31,
      2007.








**NOTE
      15 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**





Significant
      components of accumulated other comprehensive income (loss) is as
      follows:





Foreign
              Currency
              Adjustments
            
            
            Unrealized
              (Gains) Losses
              on
                Securities
            
            
            Reclassification
                ofRealized
              Gains(Losses)
              includedin
                Net Income
            
            
            Accumulated
              Other
              Comprehensive
              IncomeBalance
                at August 31, 2005
            
            $
            115
            
            
            $
            (49
            )
            
            $
            27
            
            
            $
            93Period
                change
            
            
            80
            
            
            
            (16
            )
            
            
            7
            
            
            
            71Balance
                at August 31, 2006
            
            
            195
            
            
            
            (65
            )
            
            
            34
            
            
            
            164Period
                change
            
            
            64
            
            
            
            24
            
            
            
            8
            
            
            
            96Balance
                at August 31, 2007
            
            $
            259
            
            
            $
            (41
            )
            
            $
            42
            
            
            $
            260


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








**NOTE
      16 - PER SHARE DATA**





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





Year
                EndedAugust
                31,
            
            
            August
                31,
            
            
            August
                31,2007
            
            
            2006
            
            
            2005NET
                INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
            
            $
            (7,782
            )
            
            $
            1,888
            
            
            $
            (2,317
            )BASIC
                INCOME (LOSS) PER COMMON SHARE
            
            $
            (0.72
            )
            
            $
            0.18
            
            
            $
            (0.22
            )Basic
                weighted average shares outstanding
            
            
            10,841,296
            
            
            
            10,582,203
            
            
            
            10,495,794DILUTED
                INCOME (LOSS) PER COMMON SHARE
            
            $
            (0.63
            )
            
            $
            0.16
            
            
            $
            (0.22
            )Diluted
                weighted average shares outstanding
            
            
            12,393,539
            
            
            
            11,845,284
            
            
            
            10,500,794








At
      August
      31, 2007, diluted shares represent 1,032,232 shares obtainable through the
      Laurus convertible term note, 272,727 shares obtainable through the Laurus
      Warrant, 13,363 shares obtainable through the CB Capital Warrant, 3,000
      restricted share units granted under the Company’s 2007 equity incentive plan,
      and 5,000 shares obtainable through warrants issued as stock
      compensation.





**NOTE
      17 - OPERATING LEASE COMMITMENTS**





**Property
      Lease Commitments**





Segment
            
            Location(s)
            
            DescriptionCorporate
                and various Wireless Infrastructure & Electronics Integration
                subsidiaries
            
            Indianapolis,
                IN (1)
            
            Corporate
                offices, various subsidiary offices and warehouse
                facilitiesWireless
                Infrastructure
            
            Columbus,
                OH (2); Cleveland, OH, Kansas City, MO, Alpharetta, GA,  Pace,
                FL, and Richmond, VA metropolitan areas (3); Ft. Wayne, IN
                (4)
            
            Offices,
                warehouse facilitiesBusiness
                Solutions
            
            Richmond,
                IN (5); Indianapolis, IN (6); Brentwood, TN (7); Provo, UT (11);
                Tucson,
                AZ (13); Loveland, CO (12)
            
            OfficesTransportation
                Infrastructure
            
            Indianapolis,
                IN, Sedalia, MO, Knoxville, TN (8)
            
            Offices,
                equipment yard, warehouse, storageUltraviolet
                Technologies
            
            Crawfordsville,
                IN (9); United Kingdom, Singapore, Shenzhen, China and GuangDong,
                China
                (10)
            
            Offices,
                warehouse and manufacturing
                facilities





(1)
            The
                leases on these properties are with a limited liability company
                consolidated by the Company as a variable interest entity and owned
                by the
                Company’s two major shareholders.   The operating lease
                agreement provides for monthly base rent of $108 per month for office
                and
                warehouse facilities through February 2017, adjusted annually to
                fair
                market value. The agreement also includes a one year renewal option.
                The
                lease is an “Absolute Triple Net Lease” which provides for the lessee to
                pay most expenses related to the building including repairs and
                maintenance, insurance, and property
                taxes.


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(2)
            The
                leases on these properties are with a limited liability company
                consolidated by the Company as a variable interest entity and owned
                by the
                Company’s two majority shareholders.  The operating lease
                agreement provides for monthly base rent of $4 through April 30,
                2011,
                adjusted annually to fair market value. The agreement also includes
                a one
                year renewal option. The lease is an “Absolute Triple Net Lease” which
                provides for the lessee to pay most expenses related to the building
                including repairs and maintenance, insurance, and property
                taxes.





(3)
            The
                Company maintains various operating lease agreements that provide
                for
                monthly base rents between $1 and $8 that expire between January
                31, 2008
                and April 30, 2011 and may be adjusted annually to fair market value
                or to
                increases defined in the agreements. The agreements include various
                multi-year renewal options and the lessee pays most expenses related
                to
                the building including repairs and maintenance, insurance, and property
                taxes.





(4)
            The
                Company maintains a sublease obligation that provides for monthly
                base
                rent of $3 through December 31, 2010 and may be adjusted annually
                to fair
                market value or to increases defined in the agreement. The agreement
                includes a one year renewal option and the lessee pays most expenses
                related to the building including repairs and maintenance, insurance,
                and
                property taxes.





(5)
            The
                lease on this property is with the former Chief Operating Officer
                of the
                Company.  The operating lease agreement provides for monthly
                base rent of $4 through May 30, 2008, with nominal annual increases.
                The
                agreement also includes a one year renewal
                option.





(6)
            The
                Company maintains a sublease obligation that provides for monthly
                base
                rent of $5 through December 31, 2008 and may be adjusted annually
                to fair
                market value or to increases defined in the agreement. The lessee
                pays
                most expenses related to the building including repairs and maintenance,
                insurance, and property taxes. There is no renewal
                option.





(7)
            The
                Company maintains an operating lease agreement that provides for
                monthly
                base rent of $9 through January 31, 2009. In addition to an escalating
                base monthly rent, the agreement requires the Company to pay any
                increase
                in operating costs, real estate taxes, or utilities over the base
                year.





(8)
            The
                leases on these properties are with a limited liability company
                consolidated by the Company as a variable interest entity and owned
                by the
                Company’s two major shareholders.  The operating lease agreement
                provides for monthly base rent of $25 through April 30, 2014, adjusted
                annually to fair market value. The agreement also includes a one
                year
                renewal option. The lease is an “Absolute Triple Net Lease” which provides
                for the lessee to pay most expenses related to the buildings including
                repairs and maintenance, insurance, and property
                taxes.





(9)
            The
                leases on these properties are with a limited liability company
                consolidated by the Company as a variable interest entity and owned
                by the
                Company’s two major shareholders.  The operating lease agreement
                provides for monthly base rent of $7 through August 31, 2009, adjusted
                annually to fair market value. The Agreement also includes one renewal
                option.





(10)
            The
                Company maintains various operating leases in the United Kingdom,
                Singapore and China providing for monthly base rent of approximately
                $10
                with various expirations through 2015, which may be adjusted annually
                to
                fair market value or to increases defined in the agreement. The agreement
                includes a one year renewal option and the lessee pays most expenses
                related to the building including repairs and maintenance, insurance,
                and
                property taxes.





(11)
            The
                Company maintains an operating lease agreement that provides for
                monthly
                base rent of $25 through January 31, 2011 and is increased 5%
                annually.  The lessee pays most expenses related to repairs,
                maintenance, property taxes, and insurance.  The lessor is
                required to carry minimum amounts of
                insurance.


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(12)
            The
                Company maintains an operating lease agreement that provides for
                monthly
                base rent of $2 through January 31, 2009.  The lessee pays most
                expenses related to repairs, maintenance, property taxes, and
                insurance.  The lessor is required to carry minimal amounts of
                insurance.





(13)
            The
                Company maintains an operating lease agreement that provides for
                monthly
                base rent of $5 through January 31, 2010.  The lessee pays most
                expenses related to repairs, maintenance, property taxes, and
                insurance.  The lessor is required to carry minimal amounts of
                insurance.  The lease includes two three year lease renewal
                options for a total of six years.





Rent
      expense under these agreements amounted to $2,102, $1,307, and $976 for the
      years ended August 31, 2007, 2006, and 2005, respectively.








**Equipment**





The
      Company leases a fleet of trucks and trailers, support vehicles and specialty
      construction equipment.  As of August 31, 2007, the Company had
      approximately 300 units of rolling-stock fleet. Lease expense under these
      agreements amounted to approximately $974, $1,735, and $734 for the years ended
      August 31, 2007, 2006 and 2005, respectively and leases expire in various years
      through 2009. Most operating leases provide 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 at August 31, 2007 are approximately
      as follows:





Facilities
            
            
            Vehicles
                and
              Equipment2008
            
            $
            2,611
            
            
            $
            6922009
            
            
            2,419
            
            
            
            262010
            
            
            2,186
            
            
            
            -2011
            
            
            1,912
            
            
            
            -2012
            
            
            1,662
            
            
            
            -2013
                and thereafter
            
            
            6,813
            
            
            
            -$
            17,603
            
            
            $
            718





**NOTE
      18 - RELATED PARTY TRANSACTIONS**





The
      following is a summary of related party amounts included in the consolidated
      balance sheets at August 31, 2007 and 2006, respectively:





August
                31,
            
            
            August
                31,2007
            
            
            2006Assets:Note
                receivable from subsidiary employee
            
            $
            300
            
            
            $
            300Liabilities:Long-term
                line of credit
            
            
            (1,000
            )
            
            
            -Installment
                notes payable
            
            
            (30
            )
            
            
            (63
            )Net
                assets (liabilities)
            
            $
            (730
            )
            
            $
            237





The
      note
      receivable represents a loan with a subsidiary employee in connection with
      the
      acquisition of the subsidiary.  The loan is secured by restricted
      stock and expires March 31, 2008.





The
      Company had $6,618 borrowed at August 31, 2005 under a long-term unsecured
      line
      of credit with the Company’s majority shareholder. Effective November 30, 2005,
      the Company issued 66,180 shares of $0.10 par value preferred stock to the
      Company’s majority shareholder as consideration for cancellation of this debt
      obligation.


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The
      long-term line of credit represents a loan from the Company’s majority
      shareholder and matures on December 1, 2010.  See Note 10 for
      further details.





The
      installment notes payable represents loans for equipment and vehicle purchases
      by the Company’s majority shareholder.  The loans are secured by the
      respective assets acquired and expire no later than August 31,
      2008.  Interest expense is immaterial.  See Note 10 for
      further details.





The
      following is a summary of related party amounts included in the consolidated
      statements of operations for the years ending August 31, 2007, 2006 and 2005,
      respectively:





August
                31,
            
            
            August
                31,
            
            
            August
                31,2007
            
            
            2006
            
            
            2005Revenues:Electronics
                Integration (1)
            
            $
            -
            
            
            $
            83
            
            
            $
            -Total
            
            
            -
            
            
            
            83
            
            
            
            -Expenses:Wireless
                Infrastructure (2) (3) (4)
            
            
            439
            
            
            
            292
            
            
            
            231Business
                Solutions (5)
            
            
            196
            
            
            
            47
            
            
            
            24Transportation
                Infrastructure (6)
            
            
            250
            
            
            
            180
            
            
            
            180Ultraviolet
                Technologies (7)
            
            
            84
            
            
            
            84
            
            
            
            78Electronics
                Integration (2)
            
            
            200
            
            
            
            281
            
            
            
            235Holding
                Company (8) (9) (10) (11)
            
            
            946
            
            
            
            192
            
            
            
            392Total
            
            
            2,115
            
            
            
            1,076
            
            
            
            1,140





(1)
            The
                Company’s AVR subsidiary performed $83 worth of services for businesses
                owned by the Company’s two majority
                shareholders.


(2)
            The
                Company maintains an operating lease agreement for the rental of
                a
                building with a limited liability company consolidated by the Company
                as a
                variable interest entity and owned by the Company’s two majority
                shareholders.  A majority of the Company’s subsidiaries maintain
                offices and or warehouse space in the facility. The lease agreement
                includes a ten year term with one option to extend the lease term
                for a
                one year period. The agreement provides for a monthly base rent of
                $45 per
                month. The base rent shall be adjusted annually to fair market value.
                In
                addition the Company shall pay certain expenses including taxes,
                assessments, maintenance and repairs.  Rent and related expenses
                of $590, $554 and $461 were recognized for the years ended August
                31,
                2007, 2006 and 2005, respectively.


(3)
            The
                Company maintains a debt obligation to its majority shareholder for
                the
                purchase of vehicles and equipment. The loans are secured by the
                assets
                and pay interest at 6%.  Interest expense of $2, $3 and $5 was
                recognized for the years ended August 31, 2007, 2006 and 2005,
                respectively.


(4)
            The
                Company’s Fortune Wireless subsidiary maintains an operating lease
                agreement for rental of a building with a limited liability company
                consolidated by the Company as a variable interest entity and owned
                by the
                Company’s two majority shareholders. The operating lease agreement
                provides for monthly base rent of $4 through April 30, 2011, adjusted
                annually to fair market value. The agreement also includes a one
                year
                renewal option. Rent and related expenses of $46 and $16 were recognized
                for the years ended August 31, 2007 and 2006,
                respectively.


(5)
            The
                Company’s PSM subsidiary holds a lease for an office building in Richmond,
                IN from a former director of the Company. The lease is for a period
                of
                five years and expires in May 2008. The agreement provides for base
                rent
                of $4 per month with nominal annual increases.  Rent and related
                expense of $47, $47 and $24 were recognized for the years ended August
                31,
                2007, 2006 and 2005, respectively.  The Company’s ESG subsidiary
                is entered into a lease agreement for an office building in Provo,
                Utah
                which is leased from a limited liability company in which an employee
                is a
                member of the limited liability company.  The lease is due to
                expire January 31, 2011.  Rent and related expense of $149 was
                recognized for the year ended August 31,
                2007.


(6)
            The
                Company’s JH Drew subsidiary maintains an operating lease agreement for
                rental of three buildings located in Indiana, Tennessee and Missouri
                with
                a limited liability company consolidated by the Company as a variable
                interest entity and owned by the Company’s two major shareholders. The
                lease agreement includes a five year term with one option to extend
                the
                lease term for a one year period and provides for base rent of $25
                per
                month. The base rent shall be adjusted annually to fair market value.
                In
                addition the Company shall pay certain expenses including taxes,
                assessments, maintenance and repairs.  Rent and related expenses
                of $250, $180 and $180 were recognized for the years ended August
                31,
                2007, 2006 and 2005,
                respectively.


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(7)
            The
                Company’s Nor-Cote subsidiary maintains an operating lease agreement for
                rental of a building with a limited liability company consolidated
                by the
                Company as a variable interest entity and owned by the Company’s two major
                shareholders.  The agreement provides for monthly base rent of
                $7 and expires in August 2009. The base rent shall be adjusted annually
                to
                fair market value. The Agreement also includes one renewal option,
                which
                allows the Company to extend the lease term for an additional
                year.  Rent and related expenses of $84 were recognized for the
                years ended August 31, 2007 and 2006,
                respectively.


(8)
            The
                Company maintains an operating lease agreement for the rental of
                a
                building with a limited liability company consolidated by the Company
                as a
                variable interest entity and owned by the Company’s two majority
                shareholders.  The lease agreement includes a ten year term with
                one option to extend the lease term for a one year period. The agreement
                provides for a monthly base rent of $63 per month. The base rent
                shall be
                adjusted annually to fair market value. In addition the Company shall
                pay
                certain expenses including taxes, assessments, maintenance and
                repairs.  Rent and related expenses of $600, $554 and $461 were
                recognized for the years ended August 31, 2007, 2006 and 2005,
                respectively.


(9)
            Consulting
                services of $73 were paid to a related party company owned by the
                Company’s Chief Executive Officer during the fiscal year ending August 31,
                2006.  These consulting services were recognized as compensation
                expense for disclosure purposes for the Chief Executive
                Officer.


(10)
            Guarantee
                fees approved by the Company’s Board of Directors were paid during the
                fiscal year ending August 31, 2007 to the Company’s Chief Executive
                Officer in the amount of $394.  The fees were associated with
                the Chief Executive Officer providing personal guarantees for a
                substantial portion of the Company’s debt obligations.  On
                August 31, the Company’s Board of Directors along with the Chief Executive
                Officer approved repayment of the $394 to the Company in response
                to the
                Company’s lower than expected operating results in fiscal
                2007.  The fees were returned to the Company in September
                2007.


(11)
            As
                described in Note 10, the Company entered into various unsecured
                line of
                credit agreements with its majority shareholder. Interest expense
                booked
                on these agreements amounted to $12, $119 and $392 for the years
                ending
                August 31, 2007, 2006 and 2005,
                respectively.





**Other
      Related Party Transactions**





The
      Company’s major shareholders have entered into various put/call option
      agreements (“option agreements”) with the Company’s common stock over the last
      five years.  Option agreements with these shareholders are included in
      the acquisitions of Nor-Cote, PSM, CSM and PEM   The put/ call
      options range in price from $1 to $10.33 per common share.  During
      fiscal 2007, the majority shareholders acquired 2,489,000 shares of the
      Company’s common stock related to option agreements with Nor-Cote and PSM for
      approximately $12,050.





**Guaranties**





A
      significant portion of the Company’s debt and surety bonds are personally
      guaranteed by the Company’s Chairman of the Board and Chief Executive
      Officer.  Future changes to these guaranties may affect financing
      capacity of the Company.








**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 increase (decrease) in the valuation allowance for
      deferred income tax assets was $2,193, ($920), and $936 at August 31, 2007,
      2006, and 2005, 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. At August 31, 2007, management believes it is more likely than
      not
      that the majority of net deferred income tax assets will not be
      realized.


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





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





Certain
      portions of the Company’s business (including, but not limited to the Wireless
      Infrastructure and Transportation Infrastructure Segments) recognize revenues
      using the percentage-of-completion method of accounting.  This
      accounting method results in the Company recognizing contract revenues and
      earnings ratably over the contract term in proportion to its incurrence of
      contract cost.  The earnings or losses recognized on individual
      contracts are based on estimates of contract revenues, costs and profitability
      which require considerable judgment. If in any period the Company significantly
      increases its estimate of the total costs to complete a given project, the
      Company may recognize very little or no additional revenues with respect to
      that
      project.  If the total contract cost estimates indicate that there is
      a loss, such loss is recognized in the period such determination is
      made.  To the extent that the Company’s cost estimates fluctuate over
      time or differ from actual costs, its operating results may be materially
      affected.  As a result, the Company’s gross profit in future periods
      may be significantly reduced or eliminated.








**NOTE
      20 - 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
      21 - COMMITMENTS AND CONTINGENCIES**





**Litigation**





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





**Restricted
      Cash**





Certain
      states and vendors require the Company to post letters of credit to
      ensure payment of taxes or payments to the Company’s vendors under health
      insurance and workers compensation contracts and to guarantee performance under
      the Company’s contracts. Such letters of credit are generally issued by a bank
      or similar financial institution. The letter of credit commits the issuer to
      pay
      specified amounts to the holder of the letter of credit if the holder
      demonstrates that the Company has failed to perform specified actions. If this
      were to occur, the Company would be required to reimburse the issuer of the
      letter of credit. Depending on the circumstances of such a reimbursement, the
      Company may also have to record a charge to earnings for the reimbursement.
      The
      Company does not believe that it is likely that any claims will be made under
      a
      letter of credit in the foreseeable future.  As of August 31,
      2007, the Company had approximately $5.1 million in restricted cash primarily
      to
      secure obligations under its PEO contracts in the Business Solutions
      segment.


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**Payment
      and Performance Bonds**





Within
      the Company’s Wireless Infrastructure and Transportation Infrastructure
      segments, certain customers, particularly in connection with new construction,
      require the Company to post payment or performance bonds issued by a financial
      institution known as a surety. These bonds provide a guarantee to the customer
      that the Company will perform under the terms of a contract and that the Company
      will pay subcontractors and vendors. If the Company fails to perform under
      a
      contract or to pay subcontractors and vendors, the customer may demand that
      the
      surety make payments or provide services under the bond. The Company must
      reimburse the surety for any expenses or outlays it incurs. Under the Company’s
      continuing indemnity and security agreement with the surety, the Company has
      posted letters of credit in the amount of $5 million in favor of the surety
      and, with the consent of the Company’s lenders under its credit facility; the
      Company has granted security interests in certain of its assets to collateralize
      its obligations to the surety. The Company expects this letter of credit in
      favor of the surety to be reduced in the future. To date, the Company has not
      been required to make any reimbursements to the surety for bond-related costs.
      The Company believes that it is unlikely that it will have to fund claims under
      its surety arrangements in the foreseeable future.






**NOTE
      22 – QUARTERLY FINANCIAL DATA (UNAUDITED)**





The
      following table presents the unaudited consolidated operating results by quarter
      for the fiscal years ended August 31, 2007, 2006 and 2005:





For
                the Three Months EndedNovember
                30,
            
            
            February
                28,
            
            
            May
                31,
            
            
            August
                31,2007:Revenues
            
            
            40,684
            
            
            
            32,239
            
            
            
            42,286
            
            
            
            43,140Gross
                Profit
            
            
            8,774
            
            
            
            4,529
            
            
            
            8,029
            
            
            
            9,203Net
                income available to common shareholders
            
            
            726
            
            
            
            (7,755
            )
            
            
            (1,355
            )
            
            
            602Basic
                earnings (loss) per share
            
            
            .07
            
            
            
            (.73
            )
            
            
            (.12
            )
            
            
            .05Diluted
                earnings (loss) per share
            
            
            .06
            
            
            
            (.63
            )
            
            
            (.10
            )
            
            
            .052006:Revenues
            
            $
            36,443
            
            
            $
            33,356
            
            
            $
            39,468
            
            
            $
            47,846Gross
                Profit
            
            
            7,238
            
            
            
            7,534
            
            
            
            7,570
            
            
            
            8,562Net
                income available to common shareholders
            
            
            847
            
            
            
            362
            
            
            
            143
            
            
            
            536Basic
                earnings (loss) per share
            
            
            0.08
            
            
            
            0.03
            
            
            
            0.01
            
            
            
            0.06Diluted
                earnings (loss) per share
            
            
            0.08
            
            
            
            0.03
            
            
            
            0.01
            
            
            
            0.042005:Revenues
            
            $
            25,048
            
            
            $
            20,149
            
            
            $
            31,904
            
            
            $
            35,995Gross
                Profit
            
            
            4,890
            
            
            
            3,709
            
            
            
            6,631
            
            
            
            5,795Net
                income (loss) available to common shareholders
            
            
            703
            
            
            
            (1,324
            )
            
            
            1,078
            
            
            
            (2,774
            )Basic
                earnings (loss) per share
            
            
            0.07
            
            
            
            (0.13
            )
            
            
            0.10
            
            
            
            (0.26
            )Diluted
                earnings (loss) per share
            
            
            0.07
            
            
            
            (0.13
            )
            
            
            0.10
            
            
            
            (0.26
            )


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**NOTE
      23 - SEGMENT INFORMATION**





The
      Company’s reportable business segments are organized in a manner that reflects
      how management reviews and evaluates those business
      activities.  Certain businesses have been grouped together for segment
      reporting based upon similar products or product lines, marketing, selling
      and
      distribution characteristics.


The
      segments are organized as follows:





**Segment
                & Entity**
            
            **Business
                Activity****Wireless
                Infrastructure**Fortune
                Wireless, Inc.; PDH, Inc.; Innovative Telecommunications Consultants,
                Inc.; Magtech Services, Inc.; Cornerstone Wireless Construction Services,
                Inc.; James Westbrook & Associates, LLC
            
            Installer
                and service provider of cell phone tower sites**Business
                Solutions**Professional
                Staff Management, Inc. and subsidiaries; CSM, Inc. and subsidiaries
                and
                related entities; Employer Solutions Group, LLC and subsidiaries;
                Precision Employee Management, LLC
            
            Provider
                of outsourced human resource services**Transportation
                Infrastructure**James
                H. Drew Corp. and subsidiaries
            
            Installer
                of highway construction safety products**Ultraviolet
                Technologies**Nor-Cote
                International, Inc. and subsidiaries
            
            Manufacturer
                of UV curable screen printing ink products**Electronics
                Integration**Kingston
                Sales Corporation and subsidiaries; Commercial Solutions, Inc.;
                Audio-Video Revolution, Inc. and subsidiaries
            
            Distributor
                and installer of home and commercial electronics**Variable
                Interest Entity**Fortune
                Fisbeck Development, LLC
            
            Land
                , buildings and building improvements that are utilized solely by
                the
                Company





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


73
 *Table
          of Contents*





Wireless
            
            
            Business
            
            
            Transportation
            
            
            Ultraviolet
            
            
            Electronics
            
            
            OperatingInfrastructure
            
            
            Solutions
                (1)
            
            
            Infrastructure
            
            
            Technologies
            
            
            Integration
            
            
            TotalYear
                Ended August 31, 2007Net
                revenues
            
            $
            23,162
            
            
            $
            69,170
            
            
            $
            40,110
            
            
            $
            12,421
            
            
            $
            13,450
            
            
            $
            158,313Cost
                of revenues
            
            
            18,919
            
            
            
            54,824
            
            
            
            35,044
            
            
            
            7,419
            
            
            
            11,608
            
            
            
            127,814Gross
                profit
            
            
            4,243
            
            
            
            14,346
            
            
            
            5,066
            
            
            
            5,002
            
            
            
            1,842
            
            
            
            30,499Operating
                expensesSelling,
                general and administrative
            
            
            6,337
            
            
            
            9,365
            
            
            
            3,205
            
            
            
            4,580
            
            
            
            2,103
            
            
            
            25,590Depreciation
                and amortization
            
            
            302
            
            
            
            992
            
            
            
            17
            
            
            
            293
            
            
            
            102
            
            
            
            1,706Impairment
                loss on intangible assets
            
            
            1,815
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            212
            
            
            
            2,027Total
                operating expenses
            
            
            8,454
            
            
            
            10,357
            
            
            
            3,222
            
            
            
            4,873
            
            
            
            2,417
            
            
            
            29,323Segment
                operating income (loss)
            
            $
            (4,211
            )
            
            $
            3,989
            
            
            $
            1,844
            
            
            $
            129
            
            
            $
            (575
            )
            
            $
            1,176





Holding
            
            
            Consolidated
            
            
            VIECompany
            
            
            VIE
            
            
            Elimination
            
            
            TotalsYear
                Ended August 31, 2007 (continued)Net
                revenues
            
            $
            -
            
            
            $
            1,493
            
            
            $
            (1,457
            )
            
            $
            158,349Cost
                of revenues
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            127,814Gross
                profit
            
            
            -
            
            
            
            1,493
            
            
            
            (1,457
            )
            
            
            30,535Operating
                expensesSelling,
                general and administrative
            
            
            4,712
            
            
            
            51
            
            
            
            (1,457
            )
            
            
            28,896Depreciation
                and amortization
            
            
            782
            
            
            
            198
            
            
            
            
            
            
            
            2,686Impairment
                loss on intangible assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,027Total
                operating expenses
            
            
            5,494
            
            
            
            249
            
            
            
            (1,457
            )
            
            
            33,609Segment
                operating income (loss)
            
            $
            (5,494
            )
            
            $
            1,244
            
            
            $
            -
            
            
            $
            (3,074





(1)
      Gross
      billings of $512,755 less worksite employee payroll costs of
      $443,585.








Wireless
            
            
            Business
            
            
            Transportation
            
            
            Ultraviolet
            
            
            Electronics
            
            
            OperatingInfrastructure
            
            
            Solutions
                (1)
            
            
            Infrastructure
            
            
            Technologies
            
            
            Integration
            
            
            TotalYear
                Ended August 31, 2006Net
                revenues
            
            $
            27,859
            
            
            $
            44,543
            
            
            $
            57,931
            
            
            $
            12,437
            
            
            $
            14,343
            
            
            $
            157,113Cost
                of revenues
            
            
            21,898
            
            
            
            34,084
            
            
            
            51,137
            
            
            
            7,177
            
            
            
            11,913
            
            
            
            126,209Gross
                profit
            
            
            5,961
            
            
            
            10,459
            
            
            
            6,794
            
            
            
            5,260
            
            
            
            2,430
            
            
            
            30,904Operating
                expensesSelling,
                general and administrative
            
            
            5,680
            
            
            
            6,437
            
            
            
            3,340
            
            
            
            4,175
            
            
            
            2,397
            
            
            
            22,029Depreciation
                and amortization
            
            
            405
            
            
            
            599
            
            
            
            484
            
            
            
            418
            
            
            
            124
            
            
            
            2,030Total
                operating expenses
            
            
            6,085
            
            
            
            7,036
            
            
            
            3,824
            
            
            
            4,593
            
            
            
            2,521
            
            
            
            24,059Segment
                operating income (loss)
            
            $
            (124
            )
            
            $
            3,423
            
            
            $
            2,970
            
            
            $
            667
            
            
            $
            (91
            )
            
            $
            6,845





Holding
            
            
            Consolidated
            
            
            VIE
            
            
            SegmentCompany
            
            
            VIE
            
            
            Elimination
            
            
            TotalsYear
                Ended August 31, 2006 (continued)Net
                revenues
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            157,113Cost
                of revenues
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            126,209Gross
                profit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            30,904Operating
                expensesSelling,
                general and administrative
            
            
            2,956
            
            
            
            -
            
            
            
            -
            
            
            
            24,985Depreciation
                and amortization
            
            
            239
            
            
            
            -
            
            
            
            -
            
            
            
            2,269Total
                operating expenses
            
            
            3,195
            
            
            
            -
            
            
            
            -
            
            
            
            27,254Segment
                operating income (loss)
            
            $
            (3,195
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            3,650





(1)
      Gross
      billings of $293,367 less worksite employee payroll costs of
      $248,824.


74
 *Table
          of Contents*





Wireless
            
            
            Business
            
            
            Transportation
            
            
            Ultraviolet
            
            
            Electronics
            
            
            OperatingInfrastructure
            
            
            Solutions
                (1)
            
            
            Infrastructure
            
            
            Technologies
            
            
            Integration
            
            
            TotalYear
                Ended August 31, 2005Net
                revenues
            
            $
            14,911
            
            
            $
            28,458
            
            
            $
            46,549
            
            
            $
            10,771
            
            
            $
            12,407
            
            
            $
            113,096Cost
                of revenues
            
            
            11,597
            
            
            
            21,646
            
            
            
            42,268
            
            
            
            5,934
            
            
            
            10,626
            
            
            
            92,071Gross
                profit
            
            
            3,314
            
            
            
            6,812
            
            
            
            4,281
            
            
            
            4,837
            
            
            
            1,781
            
            
            
            21,025Operating
                expensesSelling,
                general and administrative
            
            
            3,496
            
            
            
            4,107
            
            
            
            2,814
            
            
            
            4,663
            
            
            
            2,243
            
            
            
            17,323Depreciation
                and amortization
            
            
            202
            
            
            
            336
            
            
            
            459
            
            
            
            393
            
            
            
            216
            
            
            
            1,606Impairment
                loss on intangible assets
            
            
            219
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            417
            
            
            
            636Total
                operating expenses
            
            
            3,917
            
            
            
            4,443
            
            
            
            3,273
            
            
            
            5,056
            
            
            
            2,876
            
            
            
            19,565Segment
                operating income (loss)
            
            $
            (603
            )
            
            $
            2,369
            
            
            $
            1,008
            
            
            $
            (219
            )
            
            $
            (1,095
            )
            
            $
            1,460





Holding
            
            
            Consolidated
            
            
            VIECompany
            
            
            VIE
            
            
            Elimination
            
            
            TotalsYear
                Ended August 31, 2005 (continued)Net
                revenues
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            113,096Cost
                of revenues
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            92,071Gross
                profit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            21,025Operating
                expensesSelling,
                general and administrative
            
            
            2,362
            
            
            
            -
            
            
            
            -
            
            
            
            19,685Depreciation
                and amortization
            
            
            103
            
            
            
            
            
            
            
            
            
            
            
            1,709Impairment
                loss on intangible assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            636Total
                operating expenses
            
            
            2,465
            
            
            
            -
            
            
            
            -
            
            
            
            22,030Segment
                operating income (loss)
            
            $
            (2,465
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            (1,005





(1)
      Gross
      billings of $193,136 less worksite employee payroll costs of
      $164,678.








Wireless
            
            
            Business
            
            
            Transportation
            
            
            Ultraviolet
            
            
            Electronics
            
            
            OperatingInfrastructure
            
            
            Solutions
            
            
            Infrastructure
            
            
            Technologies
            
            
            Integration
            
            
            TotalAs
                of August 31, 2007Current
                AssetsCash
                and equivalents
            
            $
            (134
            )
            
            $
            9,104
            
            
            $
            498
            
            
            $
            519
            
            
            $
            (77
            )
            
            $
            9,910Restricted
                cash
            
            
            -
            
            
            
            5,091
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,091Marketable
                equity securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Accounts
                receivable, net
            
            
            5,193
            
            
            
            3,330
            
            
            
            9,913
            
            
            
            1,856
            
            
            
            1,614
            
            
            
            21,906Costs
                and estimated earnings in excessof billings on uncompleted
                contracts
            
            
            560
            
            
            
            -
            
            
            
            719
            
            
            
            -
            
            
            
            -
            
            
            
            1,279Inventory,
                net
            
            
            78
            
            
            
            9
            
            
            
            3,339
            
            
            
            1,759
            
            
            
            1,471
            
            
            
            6,656Deferred
                tax asset
            
            
            -
            
            
            
            922
            
            
            
            613
            
            
            
            -
            
            
            
            -
            
            
            
            1,535Prepaid
                expenses and other current assets
            
            
            713
            
            
            
            731
            
            
            
            399
            
            
            
            232
            
            
            
            238
            
            
            
            2,313Total
                Current Assets
            
            
            6,410
            
            
            
            19,187
            
            
            
            15,481
            
            
            
            4,366
            
            
            
            3,246
            
            
            
            48,690Other
                AssetsProperty,
                plant & equipment, net
            
            
            790
            
            
            
            636
            
            
            
            1,614
            
            
            
            1,869
            
            
            
            139
            
            
            
            5,048Accounts
                receivable - long term
            
            
            -
            
            
            
            -
            
            
            
            770
            
            
            
            -
            
            
            
            -
            
            
            
            770Goodwill
            
            
            -
            
            
            
            12,338
            
            
            
            152
            
            
            
            4,695
            
            
            
            1,276
            
            
            
            18,461Other
                intangible assets, net
            
            
            -
            
            
            
            6,888
            
            
            
            -
            
            
            
            562
            
            
            
            -
            
            
            
            7,450Other
                long term assets
            
            
            -
            
            
            
            38
            
            
            
            -
            
            
            
            15
            
            
            
            4
            
            
            
            57Total
                Other Assets
            
            
            790
            
            
            
            19,900
            
            
            
            2,536
            
            
            
            7,141
            
            
            
            1,419
            
            
            
            31,786Total
                Assets
            
            $
            7,200
            
            
            $
            39,087
            
            
            $
            18,017
            
            
            $
            11,507
            
            
            $
            4,665
            
            
            $
            80,476


75
 *Table
          of Contents*




Holding
            
            
            Consolidated
            
            
            SegmentCompany
            
            
            VIE
            
            
            TotalsAs
                of August 31, 2007 (continued)Current
                AssetsCash
                and equivalents
            
            $
            (159
            )
            
            $
            79
            
            
            $
            9,830Restricted
                cash
            
            
            -
            
            
            
            -
            
            
            
            5,091Marketable
                equity securities
            
            
            -
            
            
            
            -
            
            
            
            -Accounts
                receivable, net
            
            
            (749
            )
            
            
            -
            
            
            
            21,157Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            
            -
            
            
            
            -
            
            
            
            1,279Inventory,
                net
            
            
            -
            
            
            
            -
            
            
            
            6,656Deferred
                tax asset
            
            
            -
            
            
            
            -
            
            
            
            1,535Prepaid
                expenses andother current assets
            
            
            517
            
            
            
            10
            
            
            
            2,840Total
                Current Assets
            
            
            (391
            )
            
            
            89
            
            
            
            48,388Other
                AssetsProperty,
                plant & equipment, net
            
            
            564
            
            
            
            6,626
            
            
            
            12,238Accounts
                receivable - long term
            
            
            -
            
            
            
            -
            
            
            
            770Goodwill
            
            
            -
            
            
            
            -
            
            
            
            18,461Other
                intangible assets, net
            
            
            -
            
            
            
            -
            
            
            
            7,450Other
                long term assets
            
            
            988
            
            
            
            3
            
            
            
            1,048Total
                Other Assets
            
            
            1,552
            
            
            
            6,629
            
            
            
            39,967Total
                Assets
            
            $
            1,161
            
            
            $
            6,718
            
            
            $
            88,355











Wireless
            
            
            Business
            
            
            Transportation
            
            
            Ultraviolet
            
            
            Electronics
            
            
            OperatingInfrastructure
            
            
            Solutions
            
            
            Infrastructure
            
            
            Technologies
            
            
            Integration
            
            
            TotalAs
                of August 31, 2006Current
                AssetsCash
                and equivalents
            
            $
            (791
            )
            
            $
            4,308
            
            
            $
            78
            
            
            $
            594
            
            
            $
            (187
            )
            
            $
            4,002Restricted
                cash
            
            
            -
            
            
            
            3,462
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,462Marketable
                equity securities
            
            
            -
            
            
            
            1,246
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,246Accounts
                receivable, net
            
            
            9,632
            
            
            
            1,858
            
            
            
            10,701
            
            
            
            1,884
            
            
            
            2,260
            
            
            
            26,335Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            
            2,269
            
            
            
            -
            
            
            
            2,231
            
            
            
            -
            
            
            
            -
            
            
            
            4,500Inventory,
                net
            
            
            218
            
            
            
            30
            
            
            
            3,154
            
            
            
            1,721
            
            
            
            1,638
            
            
            
            6,761Deferred
                tax asset
            
            
            -
            
            
            
            876
            
            
            
            659
            
            
            
            -
            
            
            
            -
            
            
            
            1,535Prepaid
                expenses and other current assets
            
            
            255
            
            
            
            623
            
            
            
            424
            
            
            
            286
            
            
            
            22
            
            
            
            1,610Total
                Current Assets
            
            
            11,583
            
            
            
            12,403
            
            
            
            17,247
            
            
            
            4,485
            
            
            
            3,733
            
            
            
            49,451Other
                AssetsProperty,
                plant & equipment, net
            
            
            1,311
            
            
            
            448
            
            
            
            1,686
            
            
            
            1,997
            
            
            
            299
            
            
            
            5,741Accounts
                receivable - long term
            
            
            -
            
            
            
            4,153
            
            
            
            1,276
            
            
            
            -
            
            
            
            -
            
            
            
            5,429Goodwill
            
            
            1,497
            
            
            
            3,289
            
            
            
            152
            
            
            
            4,695
            
            
            
            1,487
            
            
            
            11,120Other
                intangible assets, net
            
            
            359
            
            
            
            -
            
            
            
            -
            
            
            
            651
            
            
            
            -
            
            
            
            1,010Other
                long term assets
            
            
            -
            
            
            
            28
            
            
            
            -
            
            
            
            14
            
            
            
            87
            
            
            
            129Total
                Other Assets
            
            
            3,167
            
            
            
            7,918
            
            
            
            3,114
            
            
            
            7,357
            
            
            
            1,873
            
            
            
            23,429Total
                Assets
            
            $
            14,750
            
            
            $
            20,321
            
            
            $
            20,361
            
            
            $
            11,842
            
            
            $
            5,606
            
            
            $
            72,880


76
 *Table
          of Contents*




Holding
            
            
            Consolidated
            
            
            SegmentCompany
            
            
            VIE
            
            
            TotalsAs
                of August 31, 2006 (continued)Current
                AssetsCash
                and equivalents
            
            $
            (370
            )
            
            $
            -
            
            
            $
            3,632Restricted
                cash
            
            
            -
            
            
            
            -
            
            
            
            3,462Marketable
                equity securities
            
            
            35
            
            
            
            -
            
            
            
            1,281Accounts
                receivable, net
            
            
            (604
            )
            
            
            -
            
            
            
            25,731Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            
            -
            
            
            
            -
            
            
            
            4,500Inventory,
                net
            
            
            -
            
            
            
            -
            
            
            
            6,761Deferred
                tax asset
            
            
            -
            
            
            
            -
            
            
            
            1,535Prepaid
                expenses and other current assets
            
            
            312
            
            
            
            -
            
            
            
            1,922Total
                Current Assets
            
            
            (627
            )
            
            
            -
            
            
            
            48,824Other
                AssetsProperty,
                plant & equipment, net
            
            
            582
            
            
            
            -
            
            
            
            6,323Accounts
                receivable - long term
            
            
            -
            
            
            
            -
            
            
            
            5,429Goodwill
            
            
            -
            
            
            
            -
            
            
            
            11,120Other
                intangible assets, net
            
            
            -
            
            
            
            -
            
            
            
            1,010Other
                long term assets
            
            
            1,450
            
            
            
            -
            
            
            
            1,579Total
                Other Assets
            
            
            2,032
            
            
            
            -
            
            
            
            25,461Total
                Assets
            
            $
            1,405
            
            
            $
            -
            
            
            $
            74,285





**NOTE
      24 - SUBSEQUENT EVENTS**





**Line
      of Credit Promissory Note – Majority Shareholder**





On
      December 13, 2007, the Company entered into a line of credit promissory note
      with the Company’s majority shareholder, in which the Company may draw on the
      line of credit in $50 increments up to the maximum amount available of
      $8,000.  Amounts are payable in thirty-five (35) consecutive, monthly,
      interest payments commencing on January 1, 2008 and continuing on the first
      day of each month thereafter followed by a balloon payment of principal and
      all
      accrued interest on December 1, 2010.  The line of credit promissory
      has consolidated a previous $1,000 line credit promissory note entered into
      with
      the majority shareholder on July 1, 2007.  The Company has $7,000
      available on the line of credit at December 13, 2007.


As
      described in Note 10, the Company Amended its Credit Facility on October 18,
      2007.





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





None






**Item
      9A. *Controls and Procedures***





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





Under
      the
      supervision and with the participation of the Company’s management, including
      the Company’s Chief Executive Officer and Chief Financial Officer, the Company
      has evaluated the effectiveness of the Company’s disclosure controls and
      procedures as of August 31, 2007. Based on this evaluation, the Chief Executive
      Officer and Chief Financial Officer have concluded that, for the reasons more
      fully set forth below, the Company’s disclosure controls and procedures were not
      effective on August 31, 2007 in providing reasonable assurance that information
      required to be disclosed in the reports the Company file pursuant to the
      Securities Exchange Act of 1934 was recorded, processed, summarized and reported
      within the time periods specified in the SEC’s rules and forms.


77
 *Table
          of Contents*


More
      specifically, the Company’s management has concluded that (i) additional
      accounting personnel were needed both at the parent company level and at certain
      subsidiaries at August 31, 2007 to ensure that certain disclosure controls
      and
      procedures were operating effectively; (ii) greater segregation of duties was
      needed in the accounting functions; and (iii) certain procedures should be
      documented to ensure that personnel turnover does not result in a failure of
      those procedures. The Company will continue to evaluate the need for additional
      staff at the parent and subsidiary levels, but given the size and location
      of
      the Company’s subsidiaries the Company believes it will continue to face
      challenges in attracting and retaining qualified personnel. Additionally, the
      Company is also in the process of evaluating ways in which the impact of
      personnel turnover on the implementation of disclosure controls and procedures
      can be reduced.  Management continues to evaluate the effectiveness of
      this segregation and the need for additional enhancements, including, but not
      limited to, the addition of accounting personnel.






**Item
      9B. *Other Information***





None


78
 *Table
          of Contents*


**PART
      III**





**Item
      10.*****Directors and Executive Officers
      of
      the Company***





**Directors
      of the Company**





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





**Name**
            
            **Principle
                Position and Role (Age)**
            
            **Director**
              **Since**John
                F. Fisbeck
            
            Director,
                President and Chief Executive Officer (52)
            
            2005Carter
                M. Fortune
            
            Treasurer,
                Chairman of the Board (66)
            
            2002P.
                Andy Rayl
            
            Independent
                Director, Chairman of the Audit Committee (35)
            
            2005Nolan
                R. Lackey
            
            Independent
                Director, Audit Committee Member (84)
            
            2005David
                A. Berry
            
            Independent
                Director, Audit Committee Member (54)
            
            2002





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





John
      F.  Fisbeck was elected President, Chief Executive Officer and
      Director of the Company on May 27, 2005. Prior to and during the period from
      August 2000 through May 2005, Mr. Fisbeck was employed by Merrill Lynch as
      Senior Financial Advisor and after May 28, 2005 and until his appointment by
      the
      Company, he was employed by Wachovia Securities as Senior Financial
      Advisor/Branch Office Manager. Mr. Fisbeck graduated with a Bachelor of Science
      degree in business management from Indiana University.





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





P.
      Andy
      Rayl was elected to the Company’s Board on May 17, 2005. Mr. Rayl also serves as
      Chairman of the Company’s Audit Committee. Mr. Rayl has served as the Chief
      Financial Officer and Director of Operations for Technuity, Inc. (“Technuity”)
      since October 2002. From October 2000 to October 2002, he served as Controller
      and Vice President of Finance of Technuity. Technuity is a virtual manufacturer
      of battery products and related accessories. Since its inception in 1999,
      Technuity, 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 ten fastest growing private
      companies in Indiana in both 2002 and 2004. Mr. Rayl has also served as Chief
      Financial Officer of Batteries.com, LLC (“Batteries.com”) since its formation in
      December 2004. Batteries.com is a retailer of battery products and accessories
      to the general public via the internet. Prior to joining Technuity, Mr. Rayl
      was
      employed as a Certified Public Accountant by Ernst & Young, LLP where he
      specialized in providing auditing and assurance services for fast growing
      private and public start-up companies. Mr. Rayl graduated with honors with
      a
      Bachelor of Science degree in accounting from Indiana University.





Nolan
      R.
      Lackey was elected to the Company’s Board on July 29, 2005. Mr. Lackey also
      serves on the Company’s Audit Committee. A native of Oklahoma, Mr. Lackey holds
      a Bachelor 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 that
      company’s  reorganization. Mr. Lackey founded Lackey Investments, LLC
      in 2000 and remains President of that entity.


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David
      A.
      Berry was elected to the Company’s Board 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, 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 (“OSP”), an outside telephone and cable
      systems contractor. Mr. Berry again grew OSP into a national company, with
      customers from Maine to California, which he sold in 1990. Mr. Berry was also
      one of the founding members of Citimark Communications, another wire
      infrastructure development company; 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, he sold CLEC in 2000 to a large national utility.





**Executive
      Officers of the Company**





The
      executive officers of the Company are as follows:





**Name**
            
            **Age**
            
            **Position**John
                F. Fisbeck
            
            52
            
            President
                and Chief Executive OfficerGarth
                D. Allred
            
            44
            
            Chief
                Financial Officer





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





John
      F.
      Fisbeck was elected President, Chief Executive Officer and Director of the
      Company on May 27, 2005 Mr. Fisbeck’s biographical information is set forth
      above.





Garth
      Allred became Chief Financial Officer on September 14, 2007, replacing Steve
      Hise who resigned as the Company’s Chief Financial Officer on September 14,
      2007. Prior to his election as the Company’s Chief Financial Officer, Mr. Allred
      served as Chief Financial Officer and Chief Operating Officer of ESG and managed
      the areas of accounting, financial reporting, treasury management, payroll
      administration, employee benefits administration, workers compensation
      administration and IT for ESG. Mr. Allred has been employed by ESG for the
      past
      ten years.





**SECTION
      16(a) BENEFICIAL OWNERSHIP COMPLIANCE**





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





Based
      solely on its review of the copies of such forms received by it, or written
      representations from certain such reporting persons that no Form 5’s were
      required for such persons, the Company believes that, for the fiscal year ended
      August 31, 2007, its officers, Directors and ten percent shareholders complied
      with all applicable Section 16(a) filing requirements, except for two Form
      4’s
      that were filed by John F. Fisbeck and Carter M. Fortune subsequent to the
      date
      such forms were due.





**CODE
      OF ETHICS**





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


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**SHAREHOLDER
      PROPOSALS**





Any
      of
      our shareholders wishing to have a proposal considered for inclusion in our
      2008
      proxy solicitation materials must set forth such proposal in writing to be
      received at our corporate office no later than February 1, 2008. In addition,
      any shareholder wishing to nominate a candidate for Director or propose other
      business at the Annual Meeting must generally give us written notice on or
      before February 1, 2008, and the notice must provide certain specific
      information as pursuant to Rule 14a-8 of the rules promulgated under the
      Exchange Act must comply with the advance notice provisions and other
      requirements of our bylaws, which are on file with the SEC and may be obtained
      from our corporate office upon request. Our Board will review any shareholder
      proposals that are filed as required and will determine whether such proposals
      meet applicable criteria for inclusion in our 2008 proxy solicitation materials
      or consideration at the 2008 Annual Meeting. In addition, we retain discretion
      to vote proxies on matters of which we are not properly notified at our
      principal executive offices on or before the close of business on March 1,
      2008,
      and also retain that authority under certain other circumstances. These
      procedures remain unchanged from those last reported in the Company’s Schedule
      14A, except for the notice dates set forth above.





**THE
      AUDIT COMMITTEE**





The
      Company maintains an Audit Committee that is currently composed of three
      members, P. Andy Rayl, David A. Berry and Nolan R. Lackey, none of whom are
      officers or employees of the Company or any parent or subsidiary of the
      Company.  Further, no member of the Audit Committee has any other
      material relationship with the Company that would interfere with their exercise
      of independent judgment. The Board has determined that each of the members
      of
      the Audit Committee is "independent" and "financially sophisticated" as such
      terms are defined by The American Stock Exchange.





The
      Company’s Board has determined that one member of the Audit Committee, P. Andy
      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 (the “Exchange Act”). Mr. Rayl has a Bachelor’s 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 Exchange Act.








**Item
      11. *Executive Compensation***





**COMPENSATION
      DISCUSSION AND ANALYSIS**





**Overview**





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





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





**Determination
      of Compensation**





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


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**Elements
      of Compensation**





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





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





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




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





**Chief
      Executive Officer Compensation**





The
      Company’s Board of Directors considered a variety of factors when determining
      the compensation to be paid to the Company’s Chief Executive Officer, Mr.
      Fisbeck, during the fiscal year ended August 31, 2007. Among the factors
      considered by the Board of Directors was Mr. Fisbeck’s performance, the scope of
      his responsibilities to the Company, and his leadership value and skills. The
      primary element of Mr. Fisbeck’s compensation package for the fiscal year ended
      August 31, 2007 was his base salary. At the start of fiscal year 2007, Mr.
      Fisbeck was paid a base salary of $360,000. Effective March 1, 2007, Mr.
      Fisbeck’s base salary was increased to $600,000.  Mr. Fisbeck also
      received additional amounts in association with certain personal guarantees
      taken on by Mr. Fisbeck, which related to Company financial
      obligations.  In response to the Company’s lower than expected
      operating results, Mr. Fisbeck voluntarily repaid to the Company all of the
      guarantee fees that he had been paid.





**Chief
      Financial Officer Compensation**





Amy
      Gallo, the Company’s former Chief Financial Officer, who resigned effective June
      29, 2007, was paid salary of $83,333 and a bonus of $5,000 during the fiscal
      year ended August 31, 2007. Ms. Gallo’s compensation was based upon her past
      performance, her experience in financial matters and upon other value that
      she
      brought to the Company.





Steve
      Hise, who succeeded Ms. Gallo as the Company’s Chief Financial Officer until his
      resignation on September 14, 2007, was paid $21,875 in salary during the fiscal
      year ended August 31, 2007. Mr. Hise also received 10,000 shares of Company
      common stock when he joined the Company.  Mr. Hise and the Company had
      entered into an employment agreement that would have paid Mr. Hise an annual
      salary of $175,000 during his first year of employment with the Company. Upon
      his resignation from the Company, Mr. Hise agreed to return the 10,000 shares
      of
      Company common stock that he had received. The Board of Directors based Mr.
      Hise’s compensation on his record of performance for other companies and for the
      skills and expertise that he offered the Company. The Board of Directors also
      considered salaries paid to comparable executives by peer
      companies.







**Compensation
      for Named Executives**





The
      following table sets forth certain information concerning the compensation
      paid
      or accrued by the Company for services rendered during the Company’s past three
      fiscal years ended August 31, 2007 by our Chief Executive Officer and Chief
      Financial Officer. The Company had no other executive officers during
      fiscal year 2007.


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**EXECUTIVE
      COMPENSATION TABLE (1)**





Name
                and Principal Position
            
            Fiscal
                Year
              Ended
              August
                31,
            
            Annual
                Salary
              Compensation
            
            
            Annual
                Bonus
              Compensation
            
            
            Stock
              Awards
            
            
            Other
              Compensation
            
            
            TotalJohn
                F. Fisbeck, CEO
            
            2007
            
            $
            495,000
            
            
            $
            20,000
            
            
            
            -
            
            
            $
            20,000
            (3)(4)
            
            $
            515,0002006
            
            $
            360,000
            
            
            
            -
            
            
            
            -
            
            
            $
            73,000
            (2)
            
            $
            433,0002005
            
            $
            210,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            210,000Harlan
                M. Schafir, COO (5)
            
            2007
            
            $
            36,923
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            36,9232006
            
            $
            240,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            240,0002005
            
            $
            240,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            240,000Steve
                Hise, CFO (6)
            
            2007
            
            $
            21,875
            
            
            
            -
            
            
            
            10,000
            (7)
            
            
            -
            
            
            $
            21,8752006
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -2005
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Amy
                E. Gallo, CFO (8)
            
            2007
            
            $
            83,333
            
            
            $
            5,000
            
            
            
            -
            
            
            
            
            
            
            $
            88,3332006
            
            $
            100,000
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            $
            100,0002005
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -





(1)   Garth
      Allred did not begin his term as the Company’s CFO until after the end of the
      fiscal year ended August   31, 2007 and as a result his
      compensation is not included in this Executive Compensation Table.





(2)
       Consulting fees were paid to a company owned by the Company’s
      CEO.  These consulting fees have been recognized as compensation
      expense for disclosure purposes for the CEO.





(3)   Mr.
      Fisbeck received, during the fiscal year ended August 31, 2007, other
      Compensation in an amount less than $10,000.




(4)   As
      described in the Compensation Disclosure and Analysis set forth above, Mr.
      Fisbeck also received a total of approximately $394,000 in in guarantee fees
      from the Company in relation to commercial loans benefiting the Company. This
      amount is not reflected in the Executive Compensation Table because the full
      amount has been repaid to the Company by Mr. Fisbeck.





(5) Harlan  Schafir’s
      term as the Company’s COO ended on September 30, 2006, when his employment
      contract with the Company was not renewed.





(6) Steve
      Hise was employed as the Company’s CFO during the period July 16, 2007 to
      September 14, 2007.





(7)   Mr.
      Hise received 10,000 shares of Company Common Stock upon the beginning his
      term
      as Company CFO. Upon his resignation from the Company Mr. Hise agreed to return
      all of the 10,000 shares of Company Common Stock to the Company and those shares
      are in the process of being retired.





(8)   Prior
      to August 31, 2005, Amy Gallo’s salary did not exceed $100,000 and thus was not
      included in this table.   Amy Gallo’s employment as the Company’s
      CFO terminated on June 29, 2007.


83
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**Grant
      of Plan Based Awards**





No
      plan-based awards were made to the named executive officers during the fiscal
      year ended August 31, 2007.





**Outstanding
      Equity Awards**





The
      were
      no outstanding equity awards for the named executive officers as of the end
      of
      the fiscal year ended August 31, 2007.





**Option
      Exercises and Vested Stock**





There
      were no option/SAR exercises during the fiscal year ended August 31, 2007 by
      any
      of the named executive officers and there are currently no outstanding
      unexercised options or SARs held by any of the named executive
      officers.





**Pension
      Benefits**





None
      of
      the named executive officers held any pension benefits as of the end of the
      fiscal year ended August 31, 2007.





**Non-Qualified
      Deferred Compensation Plans**





None
      of
      the named executive officers was the beneficiary of any non-qualified deferred
      compensation plan during the fiscal year ended August 31, 2007.





**Compensation
      of Directors**





The
      following table sets forth the compensation paid to all Directors of the Company
      during the fiscal year ended August 31, 2007. The table does not include
      compensation paid to John Fisbeck in his role as CEO.  This
      compensation is set forth above in the Executive Compensation
      Table:





**DIRECTOR
      COMPENSATION TABLE**





**Name**
            
            **Fees
                Earned or paid in Cash**
            
            
            **All
                Other Compensation**
            
            
            **Total**Carter
                M. Fortune
            
            $
            0
            
            
            $
            0
            
            
            $
            0P.
                Andy Rayl
            
            $
            12,000
            
            
            $
            0
            
            
            $
            12,000Nolan
                Lackey
            
            $
            0
            
            
            $
            0
            
            
            $
            0David
                A. Berry
            
            $
            12,000
            
            
            $
            0
            
            
            $
            12,000John
                F. Fisbeck
            
            $
            0
            
            
            $
            0
            
            
            $
            0Harlan
                Schafir (1)
            
            $
            0
            
            
            $
            0
            
            
            $
            0





(1)
      Harlan Schafir’s term as a Director of the Company ended effective September 21,
      2007.





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




**Compensation
      Committee Interlocks and Insider Participation**





There
      were no compensation committee interlocks or insider participation during the
      fiscal year ended August 31, 2007.





**Compensation
      Committee Report**





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


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John
      F. Fisbeck


Carter
      M. Fortune


P.
      Andy Rayl


David
      A. Berry


Nolan
      R. Lackey








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





**Shares
      Authorized for Issuance under Equity Compensation Plans**





The
      following information presents a summary of the Company’s equity compensation
      plans as of August 31, 2007:





Plan
                Category
            
            Number
                of securities to
              be
                issued upon exercise
              of
                outstanding options,
              warrants
                and rights
            
            
            Weighted-average
              exercise
                price of
              outstanding
                options,
              warrants
                and rights
            
            
            Number
                of
              securities
                remaining
              available
                for future
              issuanceEquity
                Compensation Plan Approved by Shareholders (1)
            
            
            22,000
            (2)
            
            $
            0.00
            
            
            
            978,000Total
            
            
            22,000
            
            
            $
            0.00
            
            
            
            978,000





(1)
            Includes
                the 2006 Equity Incentive Plan (2)
            Includes
              shares to be issued upon the vesting of Restricted Stock Units (“RSUs”),
              for which no exercise price will be paid


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





**Security
      Ownership of Certain Beneficial Owners**





The
      following table sets forth information as of December 6, 2007 with respect
      to
      the only persons or groups known to the Company who may be deemed to
      beneficially own more than five percent of the Company’s voting securities (i.e.
      Common Stock).





**Title
                of Class**
            
            **Name
                and Address of Beneficial Owner**
            
            **Amount
                and Nature of Beneficial Ownership (1)**
            
            **Percent
                of Class**Common
                Stock
            
            Fortune
                Industries, Inc. Control Group (in the aggregate)
              6402
                Corporate Drive
              Indianapolis,
                IN 46278
            
            8,454,784
                (2)
            
            74.2Common
                Stock
            
            John
                F. Fisbeck
              6402
                Corporate Drive
              Indianapolis,
                IN 46278
            
            3,170,987
                (3)
            
            27.8Common
                Stock
            
            Carter
                M. Fortune
              6402
                Corporate Drive
              Indianapolis,
                IN 46278
            
            5,668,297
                (3)
            
            49.8





(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 December 6, 2007. "Beneficial ownership"
                also
                includes that ownership of shares that may be imputed to any control
                group
                of the Company.


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(2)
            A
                control group comprised of Messrs. John F. Fisbeck and Carter M.
                Fortune
                may be deemed to beneficially own, as defined in Footnote No.1 of
                this
                table, 8,454,784 (74.2%) shares of Common Stock, as of December 6,
                2007.
                Individually, each person within the control group has sole dispositive
                and voting power over the following shares of Common Stock: John
                F.
                Fisbeck, 2,786,487 (24.5%) and Carter M. Fortune, 5,283,797 (46.4%).
                Additionally, Messrs. Fortune and Fisbeck share dispositive power
                over
                384,500 (3.4%) shares of the Company’s Common Stock held by
                Fisbeck-Fortune Development, LLC.


(3)
            As
                interest holders in Fisbeck-Fortune Development, LLC, Carter M. Fortune
                and John F. Fisbeck also have shared voting and dispositive power
                over
                384,500 (3.4%) shares of the Company is Common Stock held by that
                entity,
                therefore 384,500 shares are included within the beneficial holdings
                of
                both Mr. Fisbeck and Mr. Fortune in the above
                table.




**Security
      Ownership of Management**





The
      following table sets forth information as of December 6, 2007 with respect
      to
      (i) each current Director, (ii) all individuals currently serving as the
      Company’s executive officers (as defined in Item 402(a)(3) of Regulation S-K) as
      of the above date, and (iii) all current Directors and all such executive
      officers as a group. Unless otherwise noted, each holder has sole voting and
      investment power with respect to the shares of the listed securities. An
      asterisk (*) indicates beneficial ownership of less than one
      percent.





**Title
                of Class**
            
            **Name
                and Address of Beneficial Owner**
            
            **Amount
                and Nature of Beneficial Ownership (1)**
            
            **Percent
                of Class**Common
                Stock
            
            John
                F. Fisbeck
              6402
                Corporate Drive
              Indianapolis,
                IN 46278
            
            3,170,987
                (2)
            
            27.8Common
                Stock
            
            Carter
                M. Fortune
              6402
                Corporate Drive
              Indianapolis,
                IN 46278
            
            5,668,297
                (2)
            
            49.8Common
                Stock
            
            David
                A. Berry
              6402
                Corporate Drive
              Indianapolis,
                IN 46278
            
            20,000
            
            *Common
                Stock
            
            Garth
                Allred
              6402
                Corporate Drive
              Indianapolis,
                IN 46278
            
            0
            
            *Common
                Stock
            
            Nolan
                R. Lackey
              6402
                Corporate Drive
              Indianapolis,
                IN 46278
            
            12,200
            
            *Common
                Stock
            
            P.
                Andy Rayl
              6402
                Corporate Drive
              Indianapolis,
                IN 46278
            
            0
            
            *Common
                Stock
            
            All
                current executive officers and Directors as a group
            
            8,486,984
                (3)
            
            74.5





(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 December 6,
                2007.


(2)
            As
                interest holders in Fisbeck-Fortune Development, LLC, Carter M. Fortune
                and John F. Fisbeck also have shared voting and dispositive power
                over
                384,500 (3.4%) shares of the Company’s Common Stock held by that entity,
                therefore 384,500 shares are included within the beneficial holdings
                of
                both Mr. Fisbeck and Mr. Fortune in the above
                table.


(3)
            As
                a result of the conclusion that John F. Fisbeck and Carter M. Fortune
                share beneficial ownership over 384,500 (3.4%) shares of the Company’s
                Common Stock held by Fisbeck-Fortune Development, LLC, that ownership
                is
                only reflected once in the group ownership
                total.


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**CHANGES
      IN CONTROL**





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








**Item
      13.*****Certain Relationships and Related
      Transactions***





The
      Company holds various operating leases for the rental of properties with its
      consolidated variable interest entity, Fisbeck-Fortune Development, LLC. These
      leases are for five-year terms with options to extend terms.  The
      Company pays certain expenses including taxes, assessments, maintenance and
      repairs under terms of the leases.  Rent expense of $1,572,000 was
      recognized in fiscal year 2007 under these agreements.





The
      Company’s PSM subsidiary holds two leases for the rental of a property in
      Richmond, IN from Harlan M. Schafir, the Company’s former COO and Director. The
      leases are for five-year terms with options to extend terms.  The
      leases provide for base rent of $4,000 per month with nominal annual increases.
      Rent and related expense of $47,000 was recognized in fiscal year 2007 under
      these agreements.





The
      Company maintains a debt obligation to its majority shareholder for the purchase
      of vehicles and equipment. The loans are secured by the assets and pay interest
      at 6%.  Interest expense of $2 was recognized in fiscal year 2007
      under this agreement.





Effective
      July 1, 2007, the Company executed a $1,000,000 Line of Credit Promissory Note
      in favor of Carter M. Fortune.  As of August 31, 2007, $1,000,000 is
      outstanding.  Interest is payable at a rate of 7.25% per
      annum.  The loan is unsecured.





Effective
      December 13, 2007, the Company executed a $8,000,000 Line of Credit Promissory
      Note in favor of Carter M. Fortune.  Upon the execution of this note,
      the $1,000,000 Line of Credit Promissory Note was cancelled and the $1,000,000
      outstanding balance was rolled-over to this new note.  Interest is
      payable at a rate of one-month LIBOR plus 3%.  The loan is
      unsecured.








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





Our
      financial statements for the fiscal year ended August 31, 2007 were certified
      by
      Somerset CPA’s, P.C. (“Somerset”).  The following table sets forth the
      aggregate fees billed to the Company by Somerset:





Fiscal
                2007
            
            
            Fiscal
                2006Audit
                Fees
            
            $
            425,000
            
            
            $
            390,000Audit
                Related Fees
            
            $
            150,000
            
            
            
            140,000Tax
                Fees
            
            $
            150,000
            
            
            
            145,000All
                Other Fees
            
            
            -
            
            
            
            -$
            725,000
            
            
            $
            675,000





Audit
      Fees: The aggregate fees billed in each of the fiscal years ended August 31,
      2007 and 2006 for professional services rendered by the principal accountant
      for
      the audit of the Company’s annual financial statements and review of the
      financial statements included in the Company’s Forms 10-K and 10-Q or services
      that are normally provided by the accountant in connection with statutory and
      regulatory filings or engagements for those fiscal years.





Audit
      Related Fees: The aggregate fees billed in each of the fiscal years ended August
      31, 2007 and 2006 for professional services rendered by the principal accountant
      for audit related fees including, primarily, consultations on various accounting
      and reporting matters.





Tax
      Fees:
      The aggregate fees billed in each of the fiscal years ended August 31, 2007
      and
      2006 for professional services rendered by the principal accountant for tax
      compliance Federal and State advice.




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All
      Other
      Fees: For the fiscal years ended August 31, 2007 and 2006, the Company was
      not
      billed any additional fees for services by Somerset other than the services
      covered under the captions "Audit Fees", "Audit Related Fees" and "Tax Fees"
      above.





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








**POLICIES
      RELATED TO PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
      Audit
      Committee has pre-approval policies and procedures, pursuant to which the Audit
      Committee approves the audit and permissible non-audit services provided by
      Somerset. The Audit Committee’s pre-approval policy is as follows: consistent
      with the Audit Committee’s responsibility for engaging our independent auditors,
      all audit and permitted non-audit services require pre-approval by the Audit
      Committee, some such services require specific approvals, whereas other services
      are granted general pre-approval. All requests or applications for services
      to
      be provided by the independent registered public accounting firm that do not
      require specific approval by the Audit Committee will be submitted to the Chief
      Financial Officer and must include a detailed description of the services to
      be
      rendered. The Chief Financial Officer will determine whether such services
      are
      included within the list of services that have received the general pre-approval
      of the Audit Committee. The Audit Committee will be informed on a timely basis
      of any such services rendered by the independent auditor. Requests or
      applications to provide services that require specific approval by the Audit
      Committee will be submitted to the Audit Committee by both the independent
      auditor and the Chief Financial Officer, and must include a joint statement
      as
      to whether, in their view, the request or application is consistent with the
      Securities and Exchange Commission‘s (“SEC’s”) rules on auditor independence.
      The Chief Financial Officer will immediately report any breach of this policy
      that comes to the attention of the Chief Financial Officer or any member of
      management to the chairman of the Audit Committee. Pursuant to these procedures,
      the Audit Committee approved the foregoing audit and permissible non-audit
      services provided by Somerset in fiscal 2007.




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**PART
      IV**








**Item
      15.*****Exhibits and Financial Statement
      Schedules.***





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





(1)
            Financial
                Statements. Reference is made to the Index to Consolidated Financial
                Statements on page 39 of this
                Report.





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





(3)
            List
                of Exhibits.








**Exhibit**
              **No.**
            
            **Description**3.1
            
            Second
                Amended and Restated Code of Bylaws (1)21.1
            
            List
                of subsidiaries (2)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. (2)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 Garth Allred. (2)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. (2)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 Garth Allred.
                (2)





Notes
      to
      Exhibits:





1.
            This
                exhibit is incorporated by reference from the Company’s Current Report on
                Form 8-K, dated December 27, 2006.





2.
            Attached
                hereto.


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**SIGNATURES**





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





FORTUNE
              INDUSTRIES, INC.Date:  December
                14, 2007
            By:
            /s/
                John F. FisbeckJohn
                F. Fisbeck,Chief
                Executive OfficerDate:
                December 14, 2007
            By:
            /s/
                Garth AllredGarth
                AllredChief
                Financial OfficerPursuant
                to the requirements of the Securities Exchange Act of 1934, this
                report
                has been signed below by the following persons on behalf of the registrant
                and in the capacities and on the dates indicated.Date:  December
                14, 2007
            
            /s/
                John F. FisbeckJohn
                F. Fisbeck, Chief Executive Officerand
                DirectorDate:  December
                14, 2007
            
            /s/
                Carter M. FortuneCarter
                M. Fortune, Chairman of the BoardDate:  December
                14, 2007
            
            /s/
                P. Andy RaylP.
                Andy Rayl, DirectorDate:  December
                14, 2007
            
            /s/
                David A. BerryDavid
                A. Berry, DirectorDate:  December
                14, 2007
            
            /s/
                Nolan R. LackeyNolan
                R. Lackey, Director






90