UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





x                                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended November 30, 2008





o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





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

                    (IRS Employerincorporation or organization)

                    Identification Number)





6402 Corporate Drive

                    46278Indianapolis, IN

                    (Zip Code)(Address of principal executive offices)





(317) 532-1374


(Registrant’s telephone number, including area code)





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 x No o





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





Large accelerated filer

                         ̈

                        Accelerated filer

                         ̈Non-accelerated filer

                        x

                        Smaller reporting company

                         ̈(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes o No x





As of January 14, 2009, 11,682,173 shares of the Company’s $0.10 per share par value common stock were outstanding.













FORTUNE INDUSTRIES, INC.


FORM 10-Q


For The Quarterly Period Ended November 30, 2008





INDEX





PagePART  I.    Financial InformationITEM 1.  Financial StatementsConsolidated Balance Sheets as of November 30, 2008 (unaudited) and August 31, 2008

                                4Consolidated Statements of Operations for the three month periods ended November 30, 2008 and 2007 (unaudited)

                                5Consolidated Statement of Changes in Shareholders’ Equity (Deficit) for the three month period ended November 30, 2008 (unaudited)

                                6Consolidated Statements of Cash Flows for the three month periods ended November 30, 2008(unaudited) and 2007 (unaudited, restated)

                                7Notes to the Unaudited Interim Consolidated Financial Statements

                                9ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

                                33ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

                                42ITEM 4.  Controls and Procedures

                                42PART II.    Other InformationITEM 1.    Legal Proceedings

                                43ITEM 1A. Risk Factors

                                43ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

                                43ITEM 3.    Defaults Upon Senior Securities

                                43ITEM 4.    Submission of Matters to a Vote of Security Holders

                                43ITEM 5.    Other Information

                                43ITEM 6.    Exhibits

                                43Signatures

                                43




2


PART 1 - FINANCIAL INFORMATION


Item 1. Financial Statements.





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(DOLLARS IN THOUSANDS)











November 30,

                                    

                                    

                                    August 31,2008

                                    

                                    

                                    2008(Unaudited)

                                    

                                    

                                    (Audited)ASSETSCURRENT ASSETSCash and equivalents

                                    

                                    $

                                    2,533

                                    

                                    

                                    $

                                    4,740Restricted cash (Note 1)

                                    

                                    

                                    5,578

                                    

                                    

                                    

                                    5,370Accounts receivable, net (Note 5)

                                    

                                    

                                    2,610

                                    

                                    

                                    

                                    17,205Costs and estimated earnings in excess of billings on uncompleted contracts (Note 6)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    2,785Inventory, net (Note 7)

                                    

                                    

                                    13

                                    

                                    

                                    

                                    4,367Deferred tax asset

                                    

                                    

                                    1,489

                                    

                                    

                                    

                                    1,535Prepaid expenses and other current assets

                                    

                                    

                                    1,069

                                    

                                    

                                    

                                    2,263Assets of discontinued operations, net (Note 12)

                                    

                                    

                                    708

                                    

                                    

                                    

                                    -Total Current Assets

                                    

                                    

                                    14,000

                                    

                                    

                                    

                                    38,265OTHER ASSETSProperty, plant & equipment, net (Note 8)

                                    

                                    

                                    1,033

                                    

                                    

                                    

                                    10,749Long-term accounts receivable (Note 5)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    865Goodwill (Note 9)

                                    

                                    

                                    12,339

                                    

                                    

                                    

                                    12,491Other intangible assets, net (Note 9)

                                    

                                    

                                    3,500

                                    

                                    

                                    

                                    3,602Term note receivable related party (Note 2)

                                    

                                    

                                    3,240

                                    

                                    

                                    

                                    -Other long-term assets

                                    

                                    

                                    43

                                    

                                    

                                    

                                    140Total Other Assets

                                    

                                    

                                    20,155

                                    

                                    

                                    

                                    27,847TOTAL ASSETS

                                    

                                    $

                                    34,155

                                    

                                    

                                    $

                                    66,112





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.


3


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS (CONTINUED)


(DOLLARS IN THOUSANDS)





November 30,

                                    

                                    

                                    August 31,2008

                                    

                                    

                                    2008(Unaudited)

                                    

                                    

                                    (Audited)LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESCurrent maturities of long-term debt-majority shareholder (Note 10)

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    1,280Short- term debt and current maturities of long-term debt (Note 10)

                                    

                                    

                                    38

                                    

                                    

                                    

                                    153Current maturities of convertible term note (Note 10)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    3,405Variable interest entity line of credit (Note 10)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    2,200Variable interest entity current maturities of long-term debt (Note 10)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    3,752Accounts payable

                                    

                                    

                                    1,485

                                    

                                    

                                    

                                    5,550Health and workers' compensation reserves

                                    

                                    

                                    5,447

                                    

                                    

                                    

                                    5,435Accrued expenses

                                    

                                    

                                    7,892

                                    

                                    

                                    

                                    11,752Billings in excess of costs and estimated earnings on uncompleted contracts (Note 6)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    632Other current liabilities

                                    

                                    

                                    42

                                    

                                    

                                    

                                    412Liabilities of discontinued operations

                                    

                                    

                                    125

                                    

                                    

                                    

                                    -Total Current Liabilities

                                    

                                    

                                    15,029

                                    

                                    

                                    

                                    34,571LONG-TERM LIABILITIESLine of credit (Note 10)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    3,250Long-term debt, less current maturities (Note 10)

                                    

                                    

                                    27

                                    

                                    

                                    

                                    189Variable interest entity long-term debt, less current maturities (Note 10)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    481Line of credit term note - majority shareholder (Note 10)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    30,720Other long-term liabilities

                                    

                                    

                                    831

                                    

                                    

                                    

                                    831Total Long-Term Liabilities

                                    

                                    

                                    858

                                    

                                    

                                    

                                    35,471Total Liabilities

                                    

                                    

                                    15,887

                                    

                                    

                                    

                                    70,042MINORITY INTEREST IN VARIABLE INTEREST ENTITY (NOTE 3)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (517

                                    )SHAREHOLDERS' EQUITY (DEFICIT) (NOTE 14)Common stock, $0.10 par value; 150,000,000 authorized; 11,632,173 and 11,383,373 issued and outstanding at November 30, 2008 and August 31, 2008, respectively

                                    

                                    

                                    1,182

                                    

                                    

                                    

                                    1,117Preferred stock, $0.10 par value; 1,000,000 authorized; 296,180 and 79,180 issued and outstanding at November 30, 2008 and August 31, 2008, respectively

                                    

                                    

                                    29,618

                                    

                                    

                                    

                                    7,918Additional paid-in capital and warrants outstanding

                                    

                                    

                                    19,243

                                    

                                    

                                    

                                    19,241Accumulated deficit

                                    

                                    

                                    (31,775

                                    )

                                    

                                    

                                    (31,881

                                    )Accumulated other comprehensive income (Note 15)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    192Total Shareholders' Equity (Deficit)

                                    

                                    

                                    18,268

                                    

                                    

                                    

                                    (3,413

                                    )TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

                                    

                                    $

                                    34,155

                                    

                                    

                                    $

                                    66,112





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.


4


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


(UNAUDITED)


Three Month Period EndedNovember 30,

                                    

                                    

                                    November 30,2008

                                    

                                    

                                    2007REVENUESService revenues

                                    

                                    $

                                    18,236

                                    

                                    

                                    $

                                    22,455Product revenues

                                    

                                    

                                    17,929

                                    

                                    

                                    

                                    21,302TOTAL REVENUES

                                    

                                    

                                    36,165

                                    

                                    

                                    

                                    43,757COST OF REVENUESService cost of revenues

                                    

                                    

                                    14,109

                                    

                                    

                                    

                                    17,315Product cost of revenues

                                    

                                    

                                    14,944

                                    

                                    

                                    

                                    17,532TOTAL COST OF REVENUES

                                    

                                    

                                    29,053

                                    

                                    

                                    

                                    34,847GROSS PROFIT

                                    

                                    

                                    7,112

                                    

                                    

                                    

                                    8,910OPERATING EXPENSESSelling, general and administrative expenses

                                    

                                    

                                    6,369

                                    

                                    

                                    

                                    6,965Depreciation and amortization

                                    

                                    

                                    376

                                    

                                    

                                    

                                    691Total Operating Expenses

                                    

                                    

                                    6,745

                                    

                                    

                                    

                                    7,656OPERATING INCOME

                                    

                                    

                                    367

                                    

                                    

                                    

                                    1,254OTHER INCOME (EXPENSE)Interest income

                                    

                                    

                                    30

                                    

                                    

                                    

                                    79Interest expense

                                    

                                    

                                    (144

                                    )

                                    

                                    

                                    (923

                                    )Gain (Loss) on disposal of assets

                                    

                                    

                                    3

                                    

                                    

                                    

                                    (46

                                    )Exchange rate gain

                                    

                                    

                                    1

                                    

                                    

                                    

                                    19Other income

                                    

                                    

                                    73

                                    

                                    

                                    

                                    5Total Other Income (Expense)

                                    

                                    

                                    (37

                                    )

                                    

                                    

                                    (866

                                    )INCOME BEFORE MINORITY INTEREST INVARIABLE INTEREST ENTITY

                                    

                                    

                                    330

                                    

                                    

                                    

                                    388Minority Interest in Variable Interest Entity (Note 3)

                                    

                                    

                                    -

                                    

                                    

                                    

                                    195INCOME BEFORE PROVISION FOR INCOME TAXES

                                    

                                    

                                    330

                                    

                                    

                                    

                                    193Provision for income taxes

                                    

                                    

                                    28

                                    

                                    

                                    

                                    59NET INCOME FROM CONTINUING OPERATIONS

                                    

                                    

                                    302

                                    

                                    

                                    

                                    134DISCONTINUED OPERATIONSLoss from discontinued operations (Note 12)

                                    

                                    

                                    (60

                                    )

                                    

                                    

                                    -NET INCOME

                                    

                                    

                                    242

                                    

                                    

                                    

                                    134Preferred stock dividends

                                    

                                    

                                    198

                                    

                                    

                                    

                                    124NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

                                    

                                    $

                                    44

                                    

                                    

                                    $

                                    10BASIC INCOME PER COMMON SHARE

                                    

                                    $

                                    0.00

                                    

                                    

                                    $

                                    0.00Basic weighted average shares outstanding

                                    

                                    

                                    11,388,222

                                    

                                    

                                    

                                    11,391,823DILUTED INCOME PER COMMON SHARE

                                    

                                    $

                                    0.00

                                    

                                    

                                    $

                                    0.00Diluted weighted average shares outstanding

                                    

                                    

                                    11,766,980

                                    

                                    

                                    

                                    12,768,981





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.


5


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Additional

                                    

                                    

                                    

                                    

                                    

                                    AccumulatedPaid-in Capital

                                    

                                    

                                    

                                    

                                    

                                    Other

                                    

                                    

                                    TotalCommon

                                    

                                    

                                    Preferred

                                    

                                    

                                    and Warrants

                                    

                                    

                                    Accumulated

                                    

                                    

                                    Comprehensive

                                    

                                    

                                    Shareholders'

                                    

                                    

                                    ComprehensiveStock

                                    

                                    

                                    Stock

                                    

                                    

                                    Outstanding

                                    

                                    

                                    Deficit

                                    

                                    

                                    Income

                                    

                                    

                                    Equity (Deficit)

                                    

                                    

                                    LossBALANCE AT AUGUST 31, 2008

                                    

                                    $

                                    1,117

                                    

                                    

                                    $

                                    7,918

                                    

                                    

                                    $

                                    19,241

                                    

                                    

                                    $

                                    (31,881

                                    )

                                    

                                    $

                                    192

                                    

                                    

                                    $

                                    (3,413

                                    )Issuance of 658,800 shares of common stock for compensation

                                    

                                    

                                    66

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    114

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    180

                                    

                                    

                                    

                                    -Retirement of 10,000 shares of common stock

                                    

                                    

                                    (1

                                    )

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (61

                                    )

                                    

                                    

                                    62

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -Net income

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    242

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    242

                                    

                                    

                                    

                                    242Retirement of 79,180 shares of series B  preferred stock

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (7,918

                                    )

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (7,918

                                    )

                                    

                                    

                                    -Issuance of 296,180 shares of series C  preferred stock

                                    

                                    

                                    

                                    

                                    

                                    

                                    29,618

                                    

                                    

                                    

                                    

                                    

                                    

                                    

                                    

                                    

                                    

                                    

                                    

                                    

                                    

                                    

                                    29,618

                                    

                                    

                                    

                                    -Disposition of productive business assets

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (51

                                    )

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (192

                                    )

                                    

                                    

                                    (243

                                    )

                                    

                                    

                                    (192

                                    )Preferred stock dividends

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (198

                                    )

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (198

                                    )

                                    

                                    

                                    -Total comprehensive loss

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    $

                                    50BALANCE AT NOVEMBER 30, 2008

                                    

                                    $

                                    1,182

                                    

                                    

                                    $

                                    29,618

                                    

                                    

                                    $

                                    19,243

                                    

                                    

                                    $

                                    (31,775

                                    )

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    18,268





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements


6


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Three Months EndedNovember 30,

                                

                                

                                November 30,2008

                                

                                

                                2007 (Restated)CASH FLOWS FROM OPERATING ACTIVITIESNet Income

                                

                                $

                                242

                                

                                

                                $

                                134Adjustments to reconcile net income to net cashused in operating activities:Depreciation and amortization

                                

                                

                                376

                                

                                

                                

                                897Provision for gains on accounts receivable

                                

                                

                                (4

                                )

                                

                                

                                (216

                                )Loss (Gain) on disposal of assets

                                

                                

                                (3

                                )

                                

                                

                                46Stock based compensation

                                

                                

                                180

                                

                                

                                

                                -Minority interest in variable interest entity income

                                

                                

                                -

                                

                                

                                

                                195Deferred income taxes

                                

                                

                                -

                                

                                

                                

                                -Changes in certain operating assets and liabilities:Restricted cash

                                

                                

                                (208

                                )

                                

                                

                                (114

                                )Accounts receivable

                                

                                

                                560

                                

                                

                                

                                1,018Costs and estimated earnings in excess of billings on uncompleted contracts

                                

                                

                                -

                                

                                

                                

                                (2,053

                                )Inventory, net

                                

                                

                                245

                                

                                

                                

                                640Prepaid assets and other current assets

                                

                                

                                326

                                

                                

                                

                                693Assets of discontinued operations

                                

                                

                                134

                                

                                

                                

                                -Other long-term assets

                                

                                

                                81

                                

                                

                                

                                (48

                                )Accounts payable

                                

                                

                                1,019

                                

                                

                                

                                (3,467

                                )Health and workers' compensation reserves

                                

                                

                                197

                                

                                

                                

                                (217

                                )Accrued expenses and other current liabilities

                                

                                

                                (1,385

                                )

                                

                                

                                36Billings in excess of costs and estimated earnings on uncompleted contracts

                                

                                

                                -

                                

                                

                                

                                579Liabilities of discontinued operations

                                

                                

                                64

                                

                                

                                

                                -Net Cash Provided by (Used in) Operating Activities

                                

                                

                                1,824

                                

                                

                                

                                (1,877

                                )CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures

                                

                                

                                (107

                                )

                                

                                

                                (465

                                )Variable interest entity proceeds from sale of assets

                                

                                

                                -

                                

                                

                                

                                430Net Cash Used in Investing Activities

                                

                                

                                (107

                                )

                                

                                

                                (35

                                )CASH FLOWS FROM FINANCING ACTIVITIESNet payments under line of credit

                                

                                

                                -

                                

                                

                                

                                (305

                                )Payments on long-term debt majority shareholder

                                

                                

                                (300

                                )

                                

                                

                                -Payments on short and long-term debt

                                

                                

                                (21

                                )

                                

                                

                                (643

                                )Variable interest entity payments on long-term debt

                                

                                

                                -

                                

                                

                                

                                (458

                                )Debt issuance costs

                                

                                

                                -

                                

                                

                                

                                (113

                                )Payments on convertible debentures

                                

                                

                                (3,405

                                )

                                

                                

                                (227

                                )Dividends on preferred stock

                                

                                

                                (198

                                )

                                

                                

                                (124

                                )Proceeds from variable interest entity member contributions

                                

                                

                                -

                                

                                

                                

                                70Distributions to variable interest entity members

                                

                                

                                -

                                

                                

                                

                                (265

                                )Net Cash Used in Financing Activities

                                

                                

                                (3,924

                                )

                                

                                

                                (2,065

                                )Effect of exchange rate changes on cash

                                

                                

                                -

                                

                                

                                

                                40NET DECREASE IN CASH AND EQUIVALENTS

                                

                                

                                (2,207

                                )

                                

                                

                                (3,937

                                )CASH AND EQUIVALENTSBeginning of Period

                                

                                

                                4,740

                                

                                

                                

                                9,830End of Period

                                

                                $

                                2,533

                                

                                

                                $

                                5,893





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.


7


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Three Months EndedNovember 30,

                                    

                                    

                                    November 30,2008

                                    

                                    

                                    2007 (Restated)SUPPLEMENTAL DISCLOSURESInterest paid

                                    

                                    $

                                    263

                                    

                                    

                                    $

                                    917Income taxes paid

                                    

                                    $

                                    11

                                    

                                    

                                    $

                                    27Non-cash investing and financing activities:Retirement of series B preferred stock in exchange for series C

                                    

                                    $

                                    (7,918

                                    )

                                    

                                    $

                                    -Issuance of series C preferred stock as exchange for series B

                                    

                                    

                                    7,918

                                    

                                    

                                    

                                    -Issuance of series C preferred stock for debt extinguishment

                                    

                                    

                                    21,700

                                    

                                    

                                    

                                    -Term note receivable for disposition of assets

                                    

                                    

                                    (3,240

                                    )

                                    

                                    

                                    -Reduction in term loan in exchange for disposition of assets

                                    

                                    

                                    (10,000

                                    )

                                    

                                    

                                    -$

                                    8,460

                                    

                                    

                                    $

                                    -Consolidation of Variable Interest Entity (Note 3)Cash

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    20Prepaid Expenses

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -Property, plant and equipment

                                    

                                    

                                    -

                                    

                                    

                                    

                                    6,144Other long-term assets

                                    

                                    

                                    -

                                    

                                    

                                    

                                    2Total Assets

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    6,166Line of credit

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    2,200Current maturities of long-term debt

                                    

                                    

                                    -

                                    

                                    

                                    

                                    365Accrued expenses

                                    

                                    

                                    -

                                    

                                    

                                    

                                    49Long-term debt

                                    

                                    

                                    -

                                    

                                    

                                    

                                    4,239Minority interest

                                    

                                    

                                    -

                                    

                                    

                                    

                                    351Less:  Treasury Stock

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (1,038

                                    )Total Liabilities and Minority Interest

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    6,166





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.


8


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED,


EXCEPT PER SHARE DATA)


(UNAUDITED)





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





General





Basis of Presentation: The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2008 Annual Report on Form 10-K filed by Fortune Industries, Inc. (which, together with its subsidiaries unless the context requires otherwise, shall be referred to
            herein as the “Company”).  The accompanying unaudited consolidated financial statements have been prepared by the Company without audit. These unaudited financial statements contain, in the opinion of management, all adjustments (consisting of normal accruals and other recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented in conformity with accounting
            principles generally accepted in the United States. The operating results for the three-month period ended November 30, 2008 are not necessarily indicative of the operating results to be expected for the full fiscal year.





Nature of Business: Fortune Industries, Inc. is an Indiana corporation, originally incorporated in Delaware in 1988. The Company provides 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. As a holding company of various products and services, the Company has historically invested in businesses that are undervalued, underperforming, or in operations that are poised for significant growth. Management’s strategic focus is to support the revenue and earnings growth of its operations by creating synergies that can be leveraged to enhance the performance of the Company’s entities and by investing capital to fund
            expansion. Effective November 30, 2008 the Company sold its subsidiaries in its Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and Electronics Integration business segments to a related party.  Refer to Note 2 for further details.  As of this date, management will focus all its financial and human capital resources on its subsidiaries in the Business Solutions segment. The effect of this sale will impact the comparability of the
            Company’s financial information in future filings.





Principles of Consolidation:  The accompanying consolidated financial statements include the accounts of Fortune Industries, Inc. and its wholly-owned subsidiaries, and a variable interest entity (“VIE”) as described in Note 3. Nor-Cote International, Inc. (“Nor-Cote”), a wholly-owned subsidiary, contains foreign
            subsidiaries from the United Kingdom, China, and Singapore, which have been eliminated in consolidation at the Nor-Cote subsidiary level. As of November 30, 2008, the Company did not consolidate the VIE.  Refer to Note 3 for further details.  All significant inter-company accounts and transactions of the Company have been eliminated.





Foreign Currency Translation:  Assets and liabilities of the foreign subsidiaries of Nor-Cote are translated into U.S. dollars at the exchange rate in effect 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 (deficit).





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





Estimates:  Management uses estimates and assumptions in preparing consolidated financial statements in accordance with accounting principles generally accepted in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported
            revenue 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.


9


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





The PEOs report revenue 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 revenue on a gross basis for the total amount billed to clients for service fees, which includes health and welfare benefit plan fees, workers’ compensation insurance, unemployment insurance fees, and employment-related taxes. The PEOs
            report revenue on a gross basis for such fees because the PEOs are the primary obligor and deemed to be the principal in these transactions under EITF No. 99-19.  The PEOs report revenue 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 revenue using the accrual method of accounting. Under the accrual method of accounting, revenues are recognized in the period in which the worksite employee performs work. The PEOs accrue 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 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 Fortune Wireless agrees to do the work for units of work performed. Fortune Wireless also performs
            services on a cost-plus or time and material basis. Fortune Wireless completes most projects within twelve months. Fortune Wireless generally recognizes revenue utilizing output measures, such as when services are performed, units are delivered or when contract milestones are reached or under the percentage of completion method as appropriate.  Cornerstone Construction recognizes revenue solely using the percentage of completion method on contracts in process. Under this
            method, the portion of the contract price recognized as revenue is based on the ratio of costs incurred to the total estimated cost of the contract. The estimated total cost of a contract is based upon management’s best estimate of the remaining costs that will be required to complete a project. The actual costs required to complete a project and, therefore, the profit eventually realized, could differ materially in the near term. Costs and estimated earnings in excess of
            billings on uncompleted contracts are shown as a current asset. Billings in excess of costs and estimated earnings on uncompleted contracts are shown as a current liability. Anticipated losses on contracts, if any, are recognized when they become evident.





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





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





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


10


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 as collateral 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 November 30, 2008, the Company had $5,578 in total restricted
            cash.  Of this, $1,891 is restricted for employer contributions to various health and accident benefit programs established under third party actuarial analysis, $3,227 is restricted for various workers compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credits in accordance with various state regulations.





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





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





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





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





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





Goodwill and Other Indefinite-Lived Intangible Assets:  The Company accounts for goodwill and other indefinite-lived intangible assets under 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.





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.





As described in Note 9, the Company recognized impairment charges amounting to $8,740 during fiscal 2008 as a result of triggering events primarily within its Business Solutions, Ultraviolet Technologies and Electronics Integration segments.  Triggering events include a) blatant violation of non-compete agreements with certain terminated employees within the Business Solutions segment coupled with
            the Company’s inability or willingness to enforce such agreements, b) a substantial change in the customer mix and number of worksite employees within the Business Solutions segment, c) losses incurred within certain operating units, d) significant downsizing of personnel and operations, and e) restructuring of management.





The Company has elected to perform the annual impairment test of recorded goodwill and other indefinite-lived intangible assets as required by SFAS 142 as of the end of fiscal fourth quarter. The results of this annual impairment test indicated that the fair value of the Business Solutions segment, as of August 31, 2008, exceeded the carrying, or book value, including goodwill, and therefore recorded
            goodwill and other indefinite-lived intangible assets were not subject to impairment. The annual impairment test indicated that the fair value of the Ultraviolet Technologies and the Electronics Integration segments, as of August 31, 2008, were lower than the carrying, or book value, including goodwill and intangible assets, and therefore recorded goodwill and intangible assets were subject to impairment. The required annual impairment test may result in future periodic
            write-downs.


11


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 equity securities, receivables, and payables approximate fair value.





Stock-based Compensation: The Company accounts for stock-based compensation under the provisions of SFAS No. 123R, “Share-Based Payment” using the modified prospective method.  The Company recognizes compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards.





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.





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 $131 and $115 for the three month periods ended November 30, 2008 and 2007, respectively.  Research and development expense is recorded in the Company’s Ultraviolet Technologies segment.





Advertising Costs:Adverting costs including marketing, advertising, publicity, promotion and other distribution costs are expensed as incurred and totaled $94 and $151 for the three months ended November 30, 2008 and 2007, 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 during of the three months ended November 30, 2008 and
            2007.





Self Insurance: The Company’s holding company and various subsidiaries have elected to act as a self-insurer for certain costs related to employee health 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 $1,500.





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 $11,500. 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
            $1,750.  Under the insurance policy established at ESG, the deductible liability is limited to $350 per incident, with no aggregate liability limit.


12


New Accounting Pronouncements





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. The adoption of SFAS 157 did not have a material effect 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.  The adoption of EITF 06-6 did not have a material effect on our 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. The adoption of SFAS 159 did not have a material effect on our financial statements.





In December 2007, the FASB issued SFAS No. 141R “Business Combinations.”  SFAS 141R establishes the principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business
            combination.  SFAS 141R also requires certain disclosures to enable uses of the financial statements to evaluate the nature and financial effects of the business combination.  Acquisition costs associated with the business combination will generally be expensed as incurred.  SFAS 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008.  Early adoption is not permitted.  Acquisitions, if
            any, after the effective date will be accounted for in accordance with SFAS No. 141R.





In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.”  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United
            States.  It is effective on November 15, 2008.  The adoption of this statement is not expected to have a material effect on the Company’s financial statements.





NOTE 2 – DISPOSITION OF ASSETS AND PRO FORMA RESULTS





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





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





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





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





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


13





AssetsCash and equivalents

                                

                                $

                                556Accounts receivable, net

                                

                                

                                12,927Costs and estimated earnings in excess of billings on uncompleted contracts

                                

                                

                                3,292Inventory, net

                                

                                

                                4,073Deferred tax asset

                                

                                

                                46Prepaid expenses and other current assets

                                

                                

                                790Property, plant & equipment, net

                                

                                

                                3,527Goodwill

                                

                                

                                152Other long term assets

                                

                                

                                13Total Assets

                                

                                

                                25,376LiabilitiesAccounts payable

                                

                                

                                4,248Accrued expenses

                                

                                

                                1,510Billings in excess of costs and estimated earnings on uncompleted contracts

                                

                                

                                402Line of credit

                                

                                

                                5,500Other liabilities

                                

                                

                                476Total Liabilities

                                

                                

                                12,136Net Assets

                                

                                $

                                13,240Cash considertation - related party term note offset

                                

                                $

                                10,000Term note receivable - three year

                                

                                

                                3,240Total consideration

                                

                                $

                                13,240





Pro Forma Financial Statements





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





·

                    To eliminate the impact of consolidating Fisbeck Fortune Development, LLC (“FFD”) which prior to completion of the sales transaction was considered a variable interest entity in conjunction with FIN 46R. With the sale of the Subsidiaries and the cancellation of the lease agreement between Fortune Industries, Inc. and FFD the primary
                            beneficiary relationship between the entities ceased to exist.


·

                    To eliminate the results of operations of the Subsidiaries sold.


·

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


14





For the Three Months EndedNovember 30,

                                    

                                    

                                    November 30,

                                    

                                    

                                    November 30,2008

                                    

                                    

                                    2007

                                    

                                    

                                    2006Revenues

                                    

                                    $

                                    16,741

                                    

                                    

                                    $

                                    20,369

                                    

                                    

                                    $

                                    18,925Cost of Revenues

                                    

                                    

                                    13,340

                                    

                                    

                                    

                                    16,255

                                    

                                    

                                    

                                    15,046Gross Profit

                                    

                                    

                                    3,401

                                    

                                    

                                    

                                    4,114

                                    

                                    

                                    

                                    3,879Operating ExpensesSelling, general and administrative expenses

                                    

                                    

                                    3,148

                                    

                                    

                                    

                                    3,473

                                    

                                    

                                    

                                    3,237Depreciation and amortization

                                    

                                    

                                    169

                                    

                                    

                                    

                                    353

                                    

                                    

                                    

                                    142Total Operating Expenses

                                    

                                    

                                    3,317

                                    

                                    

                                    

                                    3,826

                                    

                                    

                                    

                                    3,379Operating Income

                                    

                                    

                                    84

                                    

                                    

                                    

                                    288

                                    

                                    

                                    

                                    500Other Income (Expense)

                                    

                                    

                                    31

                                    

                                    

                                    

                                    78

                                    

                                    

                                    

                                    (28

                                    )Income Before Provision for Income Taxes

                                    

                                    

                                    115

                                    

                                    

                                    

                                    366

                                    

                                    

                                    

                                    472Provision for income taxes

                                    

                                    

                                    24

                                    

                                    

                                    

                                    55

                                    

                                    

                                    

                                    28Net Income

                                    

                                    

                                    91

                                    

                                    

                                    

                                    311

                                    

                                    

                                    

                                    444Preferred stock dividends

                                    

                                    

                                    370

                                    

                                    

                                    

                                    370

                                    

                                    

                                    

                                    370Net Income (Loss) available to common shareholder

                                    

                                    $

                                    (279

                                    )

                                    

                                    $

                                    (59

                                    )

                                    

                                    $

                                    74Basic income (loss) per common share

                                    

                                    $

                                    (0.02

                                    )

                                    

                                    $

                                    (0.01

                                    )

                                    

                                    $

                                    0.01Diluted income (loss) per common share

                                    

                                    $

                                    (0.02

                                    )

                                    

                                    $

                                    (0.01

                                    )

                                    

                                    $

                                    0.01





NOTE 3 – 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 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.





Effective November 30, 2008, the Company terminated its building lease for its corporate facilities with Fisbeck-Fortune Development, LLC.  No early termination penalties were incurred by the Company.  In addition, the Company sold its James H. Drew and Nor-cote subsidiaries which were leasing the remainder of the facilities from Fisbeck-Fortune Development, LLC.  Refer to Note
            2 for further details.  The termination of the lease and the sale of the subsidiaries provided for a triggering event under FIN 46.  As a result, effective November 30, 2008, the Company is no longer considered the primary beneficiary of the variable interest entity and is not required to consolidate Fisbeck-Fortune Development as of this date.





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, 2008 consisted of the following:


15





August 31,2008(Audited)AssetsCash

                                    

                                    $

                                    20Prepaid expenses

                                    

                                    

                                    11Property, plant and equipment

                                    

                                    

                                    6,002Other assets

                                    

                                    

                                    1Total Assets

                                    

                                    $

                                    6,034Liabilities and Members EquityAccounts payable

                                    

                                    $

                                    15Line of credit

                                    

                                    

                                    2,200Current maturities of long-term debt

                                    

                                    

                                    3,752Accrued expenses

                                    

                                    

                                    104Long-term debt

                                    

                                    

                                    4816,552Members equity (deficit)

                                    

                                    

                                    (517

                                    )Total Liabilities and Members Equity (Deficit)

                                    

                                    $

                                    6,034





For the three month period ended November 30, 2007, the consolidation of the VIE included income of $195 comprised of $433 in rental income, offset by a $126 charge to interest expense, a $49 charge to depreciation expense, a $47 loss on disposal of property, plant, and equipment, and $16 in administrative and other miscellaneous expenses





NOTE 4 – ACQUISITIONS





Acquisitions





During the three month period ended November 30, 2008, the Company had no acquisitions.





The Company acquired ESG in March 2007 details of which are included in previous filings. 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.  During the year ended August 31, 2008, the sellers earned 120,000 shares based on their annual EBITDA.  The
            Company entered into an agreement in which the sellers may put (put option) the 217,143 shares issued at closing to the Company 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 other long term liabilities, 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





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.


16


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 details of which are included in previous filings. 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 majority shareholders individually entered into an agreement in which the sellers may put (put option) the 258,824 shares issued at closing to the majority shareholders during the thirty (30) day period that begins on February 1, 2009.





NOTE 5 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE





Accounts receivable and contracts receivable are summarized as follows:





November 30,

                                    2008

                                    (Unaudited)

                                

                                

                                August 31,

                                    2008

                                    (Audited)Account receivable

                                

                                $

                                2,907

                                

                                

                                $

                                12,786Contracts receivableProgress billing

                                

                                

                                -

                                

                                

                                

                                5,077Retainages

                                

                                

                                -

                                

                                

                                

                                8972,907

                                

                                

                                

                                18,760Less allowance for doubtful accounts and sales returns

                                

                                

                                (297

                                )

                                

                                

                                (1,555

                                )$

                                2,610

                                

                                

                                $

                                17,205Long-term accounts receivable

                                

                                $

                                -

                                

                                

                                $

                                865





NOTE 6 – CONTRACTS IN PROGRESS





Information related to contracts in progress is summarized as follows:





November 30,

                                        2008

                                        (Unaudited)

                                    

                                    

                                    August 31,

                                        2008

                                        (Audited)Costs incurred on uncompleted contracts

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    20,904Estimated earnings recognized to date on uncompleted contracts

                                    

                                    

                                    -

                                    

                                    

                                    

                                    3,910-

                                    

                                    

                                    

                                    24,814Less bilings on uncompleted contracts

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (22,661

                                    )$

                                    -

                                    

                                    

                                    $

                                    2,153





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





November 30,

                                        2008

                                        (Unaudited)

                                    

                                    

                                    August 31,

                                        2008

                                        (Audited)Costs and estimated earnings in excess of billings on uncompleted contracts

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    2,785Billings in excess of costs and estimated earnings on uncompleted contracts

                                    

                                    

                                    -

                                    

                                    

                                    

                                    632$

                                    -

                                    

                                    

                                    $

                                    2,153


17


NOTE 7 – INVENTORY





Inventories are summarized as follows:





November 30,

                                    2008

                                    (Unaudited)

                                

                                

                                August 31,

                                    2008

                                    (Audited)Raw materials

                                

                                $

                                -

                                

                                

                                $

                                766Work-in-process

                                

                                

                                -

                                

                                

                                

                                21Finished goods

                                

                                

                                13

                                

                                

                                

                                4,19013

                                

                                

                                

                                4,977Less inventory reserve

                                

                                

                                -

                                

                                

                                

                                (610

                                )$

                                13

                                

                                

                                $

                                4,367





NOTE 8 - PROPERTY, PLANT AND EQUIPMENT





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





November 30,

                                    2008

                                    (Unaudited)

                                

                                

                                August 31,

                                    2008

                                    (Audited)Land and building

                                

                                $

                                -

                                

                                

                                $

                                8,960Machinery and equipment

                                

                                

                                -

                                

                                

                                

                                6,586Research equipment

                                

                                

                                -

                                

                                

                                

                                371Office equipment

                                

                                

                                2,565

                                

                                

                                

                                5,229Vehicles

                                

                                

                                394

                                

                                

                                

                                3,173Leasehold improvements

                                

                                

                                100

                                

                                

                                

                                4543,059

                                

                                

                                

                                24,773Less accumulated depreciation

                                

                                

                                (2,026

                                )

                                

                                

                                (14,024

                                )$

                                1,033

                                

                                

                                $

                                10,749





The provision for depreciation amounted to $196, of which $0 is included in cost of revenues, and $487, of which $206 is included in cost of revenues, for the three-month periods ended November 30, 2008 and 2007, respectively.  Gains on disposal of assets totaled $3 for the three month period ended November 30, 2008 related to various office equipment disposals.  Losses on disposal of
            assets totaling $46 was recorded for the three-month period ended November 30, 2007 related to various building, office equipment, and vehicle disposals.  A total of $6,144 net of $682 of accumulated depreciation is included in the property, plant and equipment at November 30, 2007, related to a consolidated variable interest entity.  Effective November 30, 2008, the Company is no longer required to consolidate the variable interest entity.  Refer to
            Notes 2 and 3 for further details.





NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS





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





Business

                                            Solutions

                                        

                                        

                                        Transportation Infrastructure

                                        

                                        

                                        TotalGoodwill at August 31, 2008

                                        

                                        $

                                        12,339

                                        

                                        

                                        $

                                        152

                                        

                                        

                                        $

                                        12,491Goodwill disposition with sale of division

                                        

                                        

                                        -

                                        

                                        

                                        

                                        (152

                                        )

                                        

                                        

                                        (152

                                        )Goodwill at November 30, 2008

                                        

                                        $

                                        12,339

                                        

                                        

                                        $

                                        -

                                        

                                        

                                        $

                                        12,339





The total amount of goodwill that is deductible for tax purposes is $9,462 and $9,476 at November 30, 2008 and 2007, respectively.  The Company recognized impairment on certain goodwill within its Ultraviolet Technologies segment of $4,694 and its Electronics Integration segment of $1,276 for the year ended August 31, 2008 based upon losses incurred within operating units and significant
            downsizing of personnel and operations.





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


18





November 30, 2008(Unaudited)Gross

                                    Carrying

                                    Amount

                                

                                

                                Accumulated Amortization

                                

                                

                                Net Book

                                    Value

                                

                                

                                Weighted

                                    Average

                                    Amortization

                                    Period (in

                                    years)Customer relationships

                                

                                $

                                4,063

                                

                                

                                $

                                1,153

                                

                                

                                $

                                2,910

                                

                                

                                

                                10Tradename (not subject to amortization)

                                

                                

                                590

                                

                                

                                

                                -

                                

                                

                                

                                590$

                                4,653

                                

                                

                                $

                                1,153

                                

                                

                                $

                                3,500





August 31, 2008(Audited)Gross

                                    Carrying

                                    Amount

                                

                                

                                Accumulated Amorization

                                

                                

                                Net Book

                                    Value

                                

                                

                                Weighted

                                    Average

                                    Amortization

                                    Period (in

                                    years)Customer relationships

                                

                                $

                                4,063

                                

                                

                                $

                                1,051

                                

                                

                                $

                                3,012

                                

                                

                                

                                10Tradename (not subject to amortization)

                                

                                

                                590

                                

                                

                                

                                -

                                

                                

                                

                                590$

                                4,653

                                

                                

                                $

                                1,051

                                

                                

                                $

                                3,602





Intangible asset amortization expense is $180 and $410 for the three month periods ended November 30, 2008 and 2007, respectively, which includes $78 and $102  of amortization related to loan origination fees, respectively.  The Company recognized impairment charges amounting to $2,770 during fiscal 2008 as a result of triggering events primarily within its Business Solutions and
            Ultraviolet Technologies.  Triggering events include a) blatant violation of non-compete agreements with certain terminated employees within the Business Solutions segment coupled with the Company’s inability or willingness to enforce such agreements, b) a substantial change in the customer mix and number of worksite employees within the Business Solutions segment, c) losses incurred within certain operating units, d) significant downsizing of personnel and
            operations, and e) restructuring of management.





Amortization expense on intangible assets currently owned by the Company at November 30, 2008 for each of the next five fiscal years is as follows:





2009

                                    

                                    $

                                    3052010

                                    

                                    

                                    4062011

                                    

                                    

                                    4062012

                                    

                                    

                                    4062013

                                    

                                    

                                    4062014 and thereafter

                                    

                                    

                                    1,571Total

                                    

                                    $

                                    3,500


19


NOTE 10 - DEBT ARRANGEMENTS





The Company’s debt liabilities consisted of the following:





November 30,

                                                        2008

                                                        (Unaudited)

                                                    

                                                    

                                                    August 31,

                                                        2008

                                                        (Audited)Debt with majority shareholderTerm loan note due May 5, 2011.  Interest at LIBOR plus 1.75% adjusted annually on June 1 until maturity.  The loan requires a guarantee fee of 1.88% beginning June 5, 2008.  The loan is secured by all assets and a personal guarantee of the Company’s Chief Executive Officer.  Reduction in debt of $10,000 with
                                                            disposition of divisions.  Remainder converted to preferred stock on November 30, 2008.

                                                    

                                                    $

                                                    -

                                                    

                                                    

                                                    $

                                                    32,000Term note due in monthly installments of $3 including interest at 4.0% through September 2008.  The loan is secured by vehicles and equipment.  The loan was repaid in September 2008.

                                                    

                                                    

                                                    -

                                                    

                                                    

                                                    

                                                    2Notes payableRevolving line of credit due May 31, 2010.  Availability is limited to the lesser of $6 million or the borrowing base amount which is calculated monthly.  Interest at prime minus .5%.  The loan is secured by certain assets of the Company and limited personal guaranties of the two majority shareholders (the Chairman of the Board
                                                            and the CEO of the Company).  The loan is subject to certain covenants including a minimum tangible net worth and current ratio requirements.  The note was sold on November 30, 2008.  Refer to Note 2 for further details.

                                                    

                                                    

                                                    -

                                                    

                                                    

                                                    

                                                    3,250Term note due in monthly installments of $1, including interest at 4.3% through October 2009. The loan is secured by a vehicle.  The remainder of the term notes were sold on November 30, 2008.  Refer to Note 2 for further details.

                                                    

                                                    

                                                    10

                                                    

                                                    

                                                    

                                                    274Convertible Term NoteConvertible term note due in monthly installments of $227 plus interest at the Prime Rate plus 3.0% (subject to adjustments as described below) through maturity date, November 30, 2008.  The loan is guaranteed by the Company’s two majority shareholders.  The loan was repaid in November 2008.

                                                    

                                                    

                                                    -

                                                    

                                                    

                                                    

                                                    3,405Variable interest entityRevolving line of credit promissory note due August 29, 2008.  Interest at LIBOR plus 1.6%.  The loan is secured by real estate and personal guarantees of the Company’s two majority shareholders.  Refer to Note 3 for further details.

                                                    

                                                    

                                                    -

                                                    

                                                    

                                                    

                                                    2,200Various 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.  Refer to Note 3 for
                                                            further details.

                                                    

                                                    

                                                    -

                                                    

                                                    

                                                    

                                                    4,233Capital leasesVarious notes due in monthly installments of $2 including interest at ranges from 2.3% to 7.51% through November 2010. The loans are secured by equipment.

                                                    

                                                    

                                                    55

                                                    

                                                    

                                                    

                                                    66Total debt obligations

                                                    

                                                    

                                                    65

                                                    

                                                    

                                                    

                                                    45,430Less current maturities

                                                    

                                                    

                                                    (38

                                                    )

                                                    

                                                    

                                                    (10,790

                                                    )Long-term portion of outstanding debt

                                                    

                                                    $

                                                    27

                                                    

                                                    

                                                    $

                                                    34,640


20


Fiscal year principal payments due on long-term debt outstanding at November 30, 2008 are approximately as follows:




2009

                                    

                                    $

                                    382010

                                    

                                    

                                    212011

                                    

                                    

                                    62012

                                    

                                    

                                    -2013

                                    

                                    

                                    -2014 and thereafter

                                    

                                    

                                    -$

                                    65





Credit Facility Loan and Security Agreement





Effective June 2, 2008, the Company entered into a $32,000 term loan note with its majority shareholder and Chairman of the Board of Directors.  The credit facility replaced the Company’s Term Loan Note in the amount of $16,648 in principal and interest and the Revolving Line of Credit Promissory Note in the amount of $15,056 in principal and interest.  The credit facility matures
            on May 5, 2011 and bears interest at the one year LIBOR plus 1.75% adjusted on June 1 of each year until maturity.  In addition, the loan requires a guarantee fee of 1.88% beginning June 5, 2008.  The loan is secured by substantially all assets of the Company and personally guaranteed up to 50% by the Chief Executive Officer of the Company.  On December 11, 2008, the Company terminated the $32,000 Term Loan Note with an outstanding balance of $21,700
            after the completion of the debt reduction for the disposition of assets with the Company’s majority shareholder and Chairman of the Board of Directors of the Company (the “Chairman”).  This termination was effective as of November 30, 2008.  The Company satisfied the Note in connection with the disposition of assets as set forth in Note 2, and did not incur any early termination penalties.  Refer to Note 2 for further details.





On June 10, 2008, the Company’s wholly-owned subsidiary, James H. Drew Corporation, entered into a $6 million revolving line of credit with Key Bank.  Availability under the credit facility is the lesser of $6 million or the borrowing base amount, which is calculated monthly as a percentage of the Company’s eligible assets.  The revolving line of credit incurs interest at the
            Prime Rate minus 0.5% and matures on May 31, 2010. The credit facility is secured by certain assets of the James H. Drew and limited personal guaranties of Fortune’s two majority shareholders.  The credit facility is subject to certain covenants including a minimum tangible net worth and current ratio requirements.  Outstanding borrowings on this line of credit amounted to $3,250 at August 31, 2008.  The Company had $2,750 availability under the
            line of credit at August 31, 2008.  In November 2008, the Company utilized borrowing availability under this line of credit to pay off the remaining balance due on the convertible notes with Laurus Master Fund.  Effective November 30, 2008, James H. Drew Corporation was sold and the revolving line of credit with Key Bank was no longer a liability of the Company.  Refer to Note 2 for further details.





Cancellation of Line of Credit - Related Party





On June 30, 2008, the Company exchanged 66,180 shares of non-voting Series A Preferred Stock with $0.10 par value and a dividend of $7.50 per share for 66,180 shares of non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10.00 per share.





As described in Note 14, on June 30, 2008, the Company issued 13,000 shares of non-voting Series B Preferred Stock with a par value of $0.10 per share and a dividend of $10.00 per share in consideration for the termination of the Company’s Term Loan Note in the amount of $1,300 with its majority shareholder.  The unsecured Term Note was due on November 1, 2010 and paid interest at LIBOR plus
            3.0%.





On December11, 2008, the Company exchanged 79,180 shares of non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10 per share for 79,180 shares of non-voting Series C Preferred Stock with $0.10 par value and a dividend of $5 per share in years one and two subsequent to the transaction date, $6 per share in year three subsequent to the transaction date and $7 per share
            thereafter.





As described in Note 14, on December 11, 2008 with an effective date of November 30, 2008, the Company issued 217,000 shares of non-redeemable, non-voting cumulative Series C preferred stock with a par value of $0.10 per share and an annual dividend of $5 per share in years one and two subsequent to the transaction date, $6 per share in year three subsequent to the transaction date and $7 per share
            thereafter. The shares were issued in consideration for the termination of the Company’s Term Loan Note in the amount of $21,700 with its majority shareholder.  Refer to Note 2 for further details.


21


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. (“Laurus”), in the principal amount of $7,500.  The note was paid in full in November 2008.  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





•

                    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.  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 was repaid in full on November 21, 2008 and therefore is not convertible into the Company’s common stock as of November 30, 2008.  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.


22


•

                    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.





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 matches 25% up to 4% of an employee’s compensation.  The Company is not required to contribute to the plan but may make a discretionary contribution.





NOTE 12 - DISCONTINUED OPERATIONS





Effective November 30, 2008, the Company ceased its operations in Kingston Sales Corporation and Telecom Technology, Corporation, which were part of the Electronics Integration segment.  The results of the above are reported in discontinued operations in the accompanying consolidated balance sheets, statements of operations, and statements of cash flows as of, and for the three months ending
            November 30, 2008.  The segment results in Note 22 for the three months ending November 30, 2008 reflect the reclassification of the discontinued operations.  Revenues from discontinued operations were $830 and $869 for the three months ending November 30, 2008 and 2007, respectively.  The net losses from discontinued operations were $60 and $288 for the three months ending November 30, 2008 and 2007, respectively.





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 one million shares of common stock.  During the period ended November 30, 2008, 658,800 restricted
            share units were issued under this plan.





Warrants





In connection with the disposition of assets referred to in Note 2, the Company issued the Chairman and majority shareholder 2,200,000 warrants that are each convertible into one share of common stock with an exercise price of $ .40 per share.  The remaining contractual term on these warrants is through November 30, 2018.





NOTE 14- SHAREHOLDERS’ EQUITY (DEFICIT)





Common Stock





The following are the details of the Company's common stock as of November 30, 2008 and August 31, 2008:


23





Number of SharesAuthorized

                                

                                

                                Issued

                                

                                

                                Outstanding

                                

                                

                                AmountNovember 30, 2008Common stock, $0.10 par value

                                

                                

                                150,000,000

                                

                                

                                

                                11,632,173

                                

                                

                                

                                11,632,173

                                

                                

                                $

                                1,182August 31, 2008Common stock, $0.10 par value

                                

                                

                                150,000,000

                                

                                

                                

                                11,383,373

                                

                                

                                

                                11,383,373

                                

                                

                                $

                                1,117





There were a total of 658,800 shares issued for the period ended November 30, 2008.  There was a total 10,000 shares that were retired during the period ended November 30, 2008.





At November 30, 2008 the Company had 473,800 shares of common stock under the terms of a restricted share unit agreement entered into as part of the Company’s Employee Stock.  The Company also had 2,200,000 outstanding warrants issued as part of the disposition of assets transaction and 286,090 outstanding warrants issued as part of the Laurus transaction.





Preferred Stock





The following are the details of the Company's non-voting preferred stock as of November 30, 2008 and August 31, 2008:





Number of SharesAuthorized

                                    

                                    

                                    Issued

                                    

                                    

                                    Outstanding

                                    

                                    

                                    AmountNovember 30, 2008:Preferred stock, Series A $0.10 par value

                                    

                                    

                                    1,000,000

                                    

                                    

                                    

                                    66,180

                                    

                                    

                                    

                                    -

                                    

                                    

                                    $

                                    -Preferred stock, Series B $0.10 par value

                                    

                                    

                                    1,000,000

                                    

                                    

                                    

                                    79,180

                                    

                                    

                                    

                                    -

                                    

                                    

                                    $

                                    -Preferred stock, Series C $0.10 par value

                                    

                                    

                                    1,000,000

                                    

                                    

                                    

                                    296,180

                                    

                                    

                                    

                                    296,180

                                    

                                    

                                    $

                                    29,618August 31, 2008:Preferred stock, Series A $0.10 par value

                                    

                                    

                                    1,000,000

                                    

                                    

                                    

                                    66,180

                                    

                                    

                                    

                                    -

                                    

                                    

                                    $

                                    -Preferred stock, Series B $0.10 par value

                                    

                                    

                                    1,000,000

                                    

                                    

                                    

                                    79,180

                                    

                                    

                                    

                                    79,180

                                    

                                    

                                    $

                                    7,918





On November 30, 2005, the Company issued 66,180 shares of $0.10 par value non-voting Series A 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.  On June 30, 2008, the Company exchanged the 66,180 shares of non-voting Series A Preferred Stock with $0.10 par value and a dividend of $7.50 per share for 66,180 shares of non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10.00 per share.





In addition on June 30, 2008, the Company issued 13,000 shares of non-voting Series B Preferred Stock with a par value of $0.10 per share and a dividend of $10.00 per share in consideration for the termination of the Company’s Term Loan Note in the amount of $1,300 with its majority shareholder.  The unsecured Term Loan Note was due on November 1, 2010 and paid interest at LIBOR plus
            3.0%.





On November 30, 2008, the Company exchanged the 79,180 shares non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10.00 per share for non-voting Series C Preferred Stock with $0.10 par value and annual dividends of $5 per share in years ending November 30, 2009 and 2010, $6 per share in the year ending November 30, 2011 and $7 per share thereafter. The dividends will be paid on a
            pro-rata basis monthly.





Effective November 30, 2008, the Company issued 217,000 shares of $0.10 par value non-voting Series C 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 June 5, 2008.  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 $5 per share in years ending November 30, 2009 and 2010, $6 per share in the year ending November 30, 2011 and $7 per share thereafter. Dividends of $198 and $124 were paid for the three months ended November 30, 2008 and 2007, respectively.





Treasury Stock





The Company had no outstanding shares of treasury stock at November 30, 2008 or August 31, 2008.


24


NOTE 15- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)





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





Foreign

                                    Currency

                                    Adjustments

                                

                                

                                Accumulated

                                    Other

                                    Comprehensive

                                    IncomeBalance at August 31, 2008

                                

                                $

                                192

                                

                                

                                $

                                192Period change

                                

                                

                                (192

                                )

                                

                                

                                (192

                                )Balance at November 30, 2008

                                

                                $

                                -

                                

                                

                                $

                                -





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 per common share and diluted income per common share:





Three Month Period EndedNovember 30,

                                    2008

                                    (Unaudited)

                                

                                

                                November 30,

                                    2007

                                    (Unaudited)Net Income Available to Common Shareholders

                                

                                $

                                44

                                

                                

                                $

                                10Basic Income per Common Share

                                

                                $

                                -

                                

                                

                                $

                                -Basic weighted average number of common shares outstanding

                                

                                

                                11,388,222

                                

                                

                                

                                11,391,823Diluted Income per Common Share

                                

                                $

                                -

                                

                                

                                $

                                -Diluted weighted average number of common shares outstanding

                                

                                

                                11,766,980

                                

                                

                                

                                12,768,981




NOTE 17- OPERATING LEASE COMMITMENTS





Property Lease Commitments





Segment

                            

                            Location(s)

                            

                            DescriptionBusiness Solutions

                            

                            Richmond, IN (1); Indianapolis, IN (2); Brentwood, TN (3); Provo, UT (4); Tucson, AZ (5); Loveland, CO (6)

                            

                            Offices





(1)

                    The lease on this property is with the former Chief Operating Officer of the Company.  The operating lease agreement provides for monthly base rent of $4 through August 31, 2010, with nominal annual increases. The agreement also includes a one-year renewal option.





(2)

                    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.


25


(3)

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





(4)

                    The Company maintains an operating lease agreement that provides for monthly base rent of $26 through January 31, 2012 and is increased 5% annually.  The lessee pays most expenses related to repairs, maintenance, property taxes, and insurance.  The lessor is required to carry minimal amounts of insurance.





(5)

                    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.





(6)

                    The Company maintains an operating lease agreement that provides for monthly base rent of $3 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.





Rent expense under these agreements amounted to $147 and $654 for the three months ending November 30, 2008 and 2007, respectively.





Future minimum commitments under these agreements at November 30, 2008 are approximately as follows:





Facilities2009

                                

                                $

                                6582010

                                

                                

                                5682011

                                

                                

                                1,0142012

                                

                                

                                -2013

                                

                                

                                -2014 and thereafter

                                

                                

                                -$

                                2,240





NOTE 18 - RELATED PARTY TRANSACTIONS





The following is a summary of related party amounts included in the consolidated financial statements at November 30, 2008 and August 31, 2008, respectively:





November 30,

                                    2008

                                    (Unaudited)

                                

                                

                                August 31,

                                    2008

                                    (Audited)Assets:Long-term note receivable

                                

                                $

                                3,240

                                

                                

                                $

                                -Liabilities:Long-term line of credit

                                

                                

                                -

                                

                                

                                

                                (32,000

                                )Installment notes payable

                                

                                

                                -

                                

                                

                                

                                (2

                                )Net assets (liabilities)

                                

                                $

                                3,240

                                

                                

                                $

                                (32,002

                                )





The note receivable represents a loan with a business owned by the Company’s majority shareholders in connection with the disposition of the assets.  Refer to Note 2 for further details. The loan expires on November 30, 2011 and bears interest at the Prime Rate plus 1%.  Beginning on December 30, 2008 and each month thereafter, interest will be paid.  Commencing on
            December 30, 2009, monthly principal payments of $50 are due and commencing on December 30, 2010, monthly principal payments of $100 are due.





In addition, the Company had $1,300 borrowed at March 31, 2008 under a long-term unsecured line of credit with the Company’s majority shareholder.  Effective June 30, 2008, the Company issued 13,000 shares of $0.10 par value Series B preferred stock to the Company’s majority shareholder as consideration for cancellation of this debt obligation.  On November 30, 2008, the
            13,000 shares of $0.10 par value Series B preferred stock was exchanged for 13,000 shares of $0.10 par value Series C preferred stock.


26


The term loan represents a loan from the Company’s majority shareholder and matures on May 5, 2011.  See Note 10 for further details.  Effective November 30, 2008, the Company issued 217,000 shares of $0.10 par value Series C preferred stock to the Company’s majority shareholder as consideration for cancellation of this debt obligation.  Refer to Note 2 and 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 September 30, 2008.  The notes were repaid in September 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 three months ending November 30, 2008 and 2007, respectively:





November 30,

                                    2008

                                    (Unaudited)

                                

                                

                                November 30,

                                    2007

                                    (Unaudited)Revenues:Electronics Integration (1)

                                

                                $

                                5

                                

                                

                                $

                                -Total

                                

                                

                                5

                                

                                

                                

                                -Expenses:Business Solutions (2)

                                

                                

                                105

                                

                                

                                

                                87Wireless Infrastructure (3) (4) (5)

                                

                                

                                39

                                

                                

                                

                                223Transportation Infrastructure (6)

                                

                                

                                75

                                

                                

                                

                                117Ultraviolet Technologies (7)

                                

                                

                                21

                                

                                

                                

                                21Electronics Integration (3)

                                

                                

                                44

                                

                                

                                

                                45Holding Company (8) (9) (10)

                                

                                

                                420

                                

                                

                                

                                245Total

                                

                                $

                                704

                                

                                

                                $

                                738





(1)

                    During the three months ending November 30, 2008, the Company’s TTC subsidiary performed $5 worth of services for a business owned by the Company’s two majority shareholders.


(2)

                    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 August 2010. The agreement provides for base rent of $4 per month with nominal annual increases.  Rent and related expense of $12 was recognized for the
                            three months ended November 30, 2008 and 2007, 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 a former employee is a member of the limited liability company.  The lease is due to expire January 31, 2012.  Rent and related expense of $78 and $75 were recognized for the three months ended November 30, 2008
                            and 2007, respectively.  The Company’s ESG subsidiary holds a lease for an office building in Tucson, AZ from a Company owned by a former employee.  The lease is for a period of three years and expires in January 2010.  Rent and related expenses of $15 were recognized for the three months ended November 30, 2008 and 2007, respectively.


(3)

                    The Company maintained an operating lease agreement for the rental of a building with a limited liability company owned by the Company’s two majority shareholders.  A majority of the Company’s subsidiaries maintain offices and or warehouse space in the facility. The lease agreement includes a ten-year term with one option
                            to extend the lease term for a one-year period. The lease was terminated on November 30, 2008.  The agreement provides for a monthly base rent of $28 per month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs.  Rent and related expenses of $82 and $255 were recognized for the three months ended November 30, 2008and 2007,
                            respectively.


(4)

                    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 $1 was recognized for the three months ending November 30, 2008 and 2007, respectively.  The debt was repaid in November
                            2008.


(5)

                    The Company’s Fortune Wireless subsidiary maintains an operating lease agreement for rental of a building with a limited liability company owned by the Company’s two majority shareholders. The operating lease agreement provides for monthly base rent of $4 through April 30, 2011, adjusted annually to fair market value. The building
                            was sold and the lease was terminated in November 2007.  Rent and related expenses of $12 was recognized for the three months ended November 30, 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 owned by the Company’s two majority shareholders. The lease agreement includes a five-year term with one option to extend the lease term for a one-year
                            period and provides for base rent of $25 per month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs.  Rent and related expenses of $75 and $117 were recognized for the three months ending November 30, 2008 and 2007, respectively.


27


(7)

                    The Company’s Nor-Cote subsidiary maintains an operating lease agreement for rental of a building with a limited liability company owned by the Company’s two majority shareholders.  The agreement provides for monthly base rent of $7 and expires in August 2009. The base rent shall be adjusted annually to fair market value.
                            The Agreement also includes one renewal option, which allows the Company to extend the lease term for an additional year.  Rent and related expenses of $21were recognized for the three months ending November 30, 2008 and 2007, respectively.


(8)

                    The Company maintains an operating lease agreement for the rental of a building with a limited liability company 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 $88 per
                            month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs.  The lease was terminated on November 30, 2008.  Rent and related expenses of $263 and $227 were recognized for the three months ending November 30, 2008 and 2007, respectively.


(9)

                    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 $7 and $18 for the three months ending November 30, 2008 and 2007, respectively.


(10)

                    Guarantee fees approved by the Company’s Board of Directors were paid during the three months ending November 30, 2008 to the Company’s Chief Executive Officer in the amount of $150.  The fees were associated with the Chief Executive Officer providing personal guarantees for a substantial portion of the Company’s debt obligations.





Other Related Party Transactions





The Company’s majority 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, and CSM.  The put/ call options range in price from $1 to $4 per common share.  During fiscal
            year 2008, the majority shareholders acquired 102,843 shares of the Company’s common stock related to option agreements with CSM for approximately $1,062.  During fiscal 2007, the majority shareholders acquired 2,489,000 shares of the Company’s common stock related to option agreements with Nor-Cote and PSM for approximately $12,050.





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 would 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 decrease in the valuation allowance for deferred income tax assets was $436 and $181 at November 30, 2008 and 2007,
            respectively.  The valuation allowance relates primarily to net operating loss carry forwards, tax credit carry forwards, 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 November 30, 2008, management believes it is more likely than not that the majority of net deferred income tax assets will not be realized.





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 that 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.


28


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 us 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 November 30, 2008, the Company had approximately $5.6 million in restricted cash primarily to secure obligations under its PEO contracts in the Business Solutions segment.





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 $3 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 - 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:


29





Segment & Entity

                        

                        Business ActivityBusiness SolutionsProfessional Staff Management, Inc. and subsidiaries; CSM, Inc. and subsidiaries and related entities; Employer Solutions Group, Inc. and related entities; Precision Employee Management, LLC

                        

                        Provider of outsourced human resource servicesWireless InfrastructureFortune Wireless, Inc.; Magtech Services, Inc.; Cornerstone Wireless Construction Services, Inc.; James Westbrook & Associates, LLC

                        

                        Provider turnkey development services for the deployment of wireless networks





Transportation InfrastructureJames H. Drew Corp. and subsidiaries

                        

                        Installer of fiber optic, smart highway systems, traffic signals, street signs, high mast and ornamental lighting, guardrail, wireless communications, and fabrications of structural steelUltraviolet TechnologiesNor-Cote International, Inc. and subsidiaries

                        

                        Manufacturer of UV curable screen printing ink productsElectronics IntegrationKingston Sales Corporation; Commercial Solutions, Inc.; Telecom Technology, Corp.

                        

                        Distributor and installer of home and commercial electronics





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





Business

                                

                                

                                Wireless

                                

                                

                                Transportation

                                

                                

                                Ultraviolet

                                

                                

                                Electronics

                                

                                

                                Holding

                                

                                

                                SegmentSolutions (1)

                                

                                

                                Infrastructure

                                

                                

                                Infrastructure

                                

                                

                                Technologies

                                

                                

                                Integration

                                

                                

                                Company

                                

                                

                                Totals3-Months Ended November 30, 2008Revenue

                                

                                $

                                16,741

                                

                                

                                $

                                3,312

                                

                                

                                $

                                12,090

                                

                                

                                $

                                2,771

                                

                                

                                $

                                1,251

                                

                                

                                $

                                -

                                

                                

                                $

                                36,165Cost of revenue

                                

                                

                                13,340

                                

                                

                                

                                2,458

                                

                                

                                

                                10,747

                                

                                

                                

                                1,596

                                

                                

                                

                                912

                                

                                

                                

                                -

                                

                                

                                

                                29,053Gross profit

                                

                                

                                3,401

                                

                                

                                

                                854

                                

                                

                                

                                1,343

                                

                                

                                

                                1,175

                                

                                

                                

                                339

                                

                                

                                

                                -

                                

                                

                                

                                7,112Operating expensesSelling, general and administrative

                                

                                

                                3,160

                                

                                

                                

                                650

                                

                                

                                

                                781

                                

                                

                                

                                1,320

                                

                                

                                

                                238

                                

                                

                                

                                220

                                

                                

                                

                                6,369Depreciation and amortization

                                

                                

                                169

                                

                                

                                

                                11

                                

                                

                                

                                5

                                

                                

                                

                                59

                                

                                

                                

                                1

                                

                                

                                

                                131

                                

                                

                                

                                376Total operating expenses

                                

                                

                                3,329

                                

                                

                                

                                661

                                

                                

                                

                                786

                                

                                

                                

                                1,379

                                

                                

                                

                                239

                                

                                

                                

                                351

                                

                                

                                

                                6,745Segment operating income (loss)

                                

                                $

                                72

                                

                                

                                $

                                193

                                

                                

                                $

                                557

                                

                                

                                $

                                (204

                                )

                                

                                $

                                100

                                

                                

                                $

                                (351

                                )

                                

                                $

                                367





(1) Gross billings of $149,548 less worksite employee payroll costs of $132,808.





Business

                                    Solutions (1)

                                

                                

                                Wireless

                                    Infrastructure

                                

                                

                                Transportation

                                    Infrastructure

                                

                                

                                Ultraviolet

                                    Technologies

                                

                                

                                Electronics

                                    Integration

                                

                                

                                Operating

                                    Total3-Months Ended November 30, 2007Revenue

                                

                                $

                                20,369

                                

                                

                                $

                                5,527

                                

                                

                                $

                                11,580

                                

                                

                                $

                                3,266

                                

                                

                                $

                                3,013

                                

                                

                                $

                                43,755Cost of revenue

                                

                                

                                16,255

                                

                                

                                

                                3,841

                                

                                

                                

                                10,258

                                

                                

                                

                                1,882

                                

                                

                                

                                2,611

                                

                                

                                

                                34,847Gross profit

                                

                                

                                4,114

                                

                                

                                

                                1,686

                                

                                

                                

                                1,322

                                

                                

                                

                                1,384

                                

                                

                                

                                402

                                

                                

                                

                                8,908Operating expensesSelling, general and administrative

                                

                                

                                3,386

                                

                                

                                

                                1,080

                                

                                

                                

                                815

                                

                                

                                

                                1,301

                                

                                

                                

                                425

                                

                                

                                

                                7,007Depreciation and amortization

                                

                                

                                353

                                

                                

                                

                                41

                                

                                

                                

                                4

                                

                                

                                

                                70

                                

                                

                                

                                14

                                

                                

                                

                                482Impairment

                                

                                

                                -

                                

                                

                                

                                

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                

                                

                                

                                

                                -Total operating expenses

                                

                                

                                3,739

                                

                                

                                

                                1,121

                                

                                

                                

                                819

                                

                                

                                

                                1,371

                                

                                

                                

                                439

                                

                                

                                

                                7,489Segment operating income (loss)

                                

                                $

                                375

                                

                                

                                $

                                565

                                

                                

                                $

                                503

                                

                                

                                $

                                13

                                

                                

                                $

                                (37

                                )

                                

                                $

                                1,419


30





Holding

                                        Company

                                    

                                    

                                    Consolidated

                                        VIE

                                    

                                    

                                    VIE

                                        Elimination

                                    

                                    

                                    Segment

                                        Totals3-months ended November 30, 2007Revenue

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    433

                                    

                                    

                                    $

                                    (431

                                    )

                                    

                                    $

                                    43,757Cost of revenue

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    34,847Gross profit

                                    

                                    

                                    -

                                    

                                    

                                    

                                    433

                                    

                                    

                                    

                                    (431

                                    )

                                    

                                    

                                    8,910Operating expensesSelling, general and administrative

                                    

                                    

                                    372

                                    

                                    

                                    

                                    17

                                    

                                    

                                    

                                    (431

                                    )

                                    

                                    

                                    6,965Depreciation and amortization

                                    

                                    

                                    160

                                    

                                    

                                    

                                    49

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    691Impairment

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -Total operating expenses

                                    

                                    

                                    532

                                    

                                    

                                    

                                    66

                                    

                                    

                                    

                                    (431

                                    )

                                    

                                    

                                    7,656Segment operating income (loss)

                                    

                                    $

                                    (532

                                    )

                                    

                                    $

                                    367

                                    

                                    

                                    $

                                    -

                                    

                                    

                                    $

                                    1,254





(1) Gross billings of $155,114 less worksite employee payroll costs of $134,745.





Business

                                                                    

                                                                    

                                                                    Electronics

                                                                    

                                                                    

                                                                    HoldingSolutions

                                                                    

                                                                    

                                                                    Integration

                                                                    

                                                                    

                                                                    Company

                                                                    

                                                                    

                                                                    TotalsAs of November 30, 2008 (Unaudited)Current AssetsCash and equivalents

                                                                    

                                                                    $

                                                                    2,612

                                                                    

                                                                    

                                                                    $

                                                                    -

                                                                    

                                                                    

                                                                    $

                                                                    (79

                                                                    )

                                                                    

                                                                    $

                                                                    2,533Restricted cash

                                                                    

                                                                    

                                                                    5,578

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    5,578Accounts receivable, net

                                                                    

                                                                    

                                                                    2,582

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    28

                                                                    

                                                                    

                                                                    

                                                                    2,610Costs and estimated earnings in excessof billings on uncompleted contracts

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -Inventory, net

                                                                    

                                                                    

                                                                    13

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    13Deferred tax asset

                                                                    

                                                                    

                                                                    1,489

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    1,489Prepaid expenses andother current assets

                                                                    

                                                                    

                                                                    1,011

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    58

                                                                    

                                                                    

                                                                    

                                                                    1,069Assets of discontinued operations, net

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    708

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    708Total Current Assets

                                                                    

                                                                    

                                                                    13,285

                                                                    

                                                                    

                                                                    

                                                                    708

                                                                    

                                                                    

                                                                    

                                                                    7

                                                                    

                                                                    

                                                                    

                                                                    14,000Other AssetsProperty, plant & equipment, net

                                                                    

                                                                    

                                                                    643

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    390

                                                                    

                                                                    

                                                                    

                                                                    1,033Accounts receivable - long term

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -Goodwill

                                                                    

                                                                    

                                                                    12,339

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    12,339Other intangible assets, net

                                                                    

                                                                    

                                                                    3,500

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    3,500Term note receivable-related party

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    3,240

                                                                    

                                                                    

                                                                    

                                                                    3,240Other long term assets

                                                                    

                                                                    

                                                                    22

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    21

                                                                    

                                                                    

                                                                    

                                                                    43Total Other Assets

                                                                    

                                                                    

                                                                    16,504

                                                                    

                                                                    

                                                                    

                                                                    -

                                                                    

                                                                    

                                                                    

                                                                    3,651

                                                                    

                                                                    

                                                                    

                                                                    20,155Total Assets

                                                                    

                                                                    $

                                                                    29,789

                                                                    

                                                                    

                                                                    $

                                                                    708

                                                                    

                                                                    

                                                                    

                                                                    3,658

                                                                    

                                                                    

                                                                    $

                                                                    34,155


31





Business

                                        

                                        

                                        Wireless

                                        

                                        

                                        Transportation

                                        

                                        

                                        Ultraviolet

                                        

                                        

                                        Electronics

                                        

                                        

                                        OperatingSolutions

                                        

                                        

                                        Infrastructure

                                        

                                        

                                        Infrastructure

                                        

                                        

                                        Technologies

                                        

                                        

                                        Integration

                                        

                                        

                                        TotalAs of August 31, 2008 (Audited)Current AssetsCash and equivalents

                                        

                                        $

                                        2,055

                                        

                                        

                                        $

                                        230

                                        

                                        

                                        $

                                        1,029

                                        

                                        

                                        $

                                        527

                                        

                                        

                                        $

                                        48

                                        

                                        

                                        $

                                        3,889Restricted cash

                                        

                                        

                                        5,370

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        5,370Accounts receivable, net

                                        

                                        

                                        3,093

                                        

                                        

                                        

                                        2,760

                                        

                                        

                                        

                                        8,147

                                        

                                        

                                        

                                        1,859

                                        

                                        

                                        

                                        1,442

                                        

                                        

                                        

                                        17,301Costs and estimated earnings in excessof billings on uncompleted contracts

                                        

                                        

                                        -

                                        

                                        

                                        

                                        192

                                        

                                        

                                        

                                        2,593

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        2,785Inventory, net

                                        

                                        

                                        17

                                        

                                        

                                        

                                        39

                                        

                                        

                                        

                                        2,312

                                        

                                        

                                        

                                        1,646

                                        

                                        

                                        

                                        353

                                        

                                        

                                        

                                        4,367Deferred tax asset

                                        

                                        

                                        922

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        613

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        1,535Prepaid expenses andother current assets

                                        

                                        

                                        1,263

                                        

                                        

                                        

                                        233

                                        

                                        

                                        

                                        361

                                        

                                        

                                        

                                        302

                                        

                                        

                                        

                                        65

                                        

                                        

                                        

                                        2,224Total Current Assets

                                        

                                        

                                        12,720

                                        

                                        

                                        

                                        3,454

                                        

                                        

                                        

                                        15,055

                                        

                                        

                                        

                                        4,334

                                        

                                        

                                        

                                        1,908

                                        

                                        

                                        

                                        37,471Other AssetsProperty, plant & equipment, net

                                        

                                        

                                        641

                                        

                                        

                                        

                                        306

                                        

                                        

                                        

                                        1,418

                                        

                                        

                                        

                                        1,916

                                        

                                        

                                        

                                        42

                                        

                                        

                                        

                                        4,323Accounts receivable - long term

                                        

                                        

                                        -

                                        

                                        

                                        

                                        6

                                        

                                        

                                        

                                        859

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        865Goodwill

                                        

                                        

                                        12,339

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        152

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        12,491Other intangible assets, net

                                        

                                        

                                        3,602

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        3,602Other long term assets

                                        

                                        

                                        23

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        13

                                        

                                        

                                        

                                        -

                                        

                                        

                                        

                                        36Total Other Assets

                                        

                                        

                                        16,605

                                        

                                        

                                        

                                        312

                                        

                                        

                                        

                                        2,429

                                        

                                        

                                        

                                        1,929

                                        

                                        

                                        

                                        42

                                        

                                        

                                        

                                        21,317Total Assets

                                        

                                        $

                                        29,325

                                        

                                        

                                        $

                                        3,766

                                        

                                        

                                        $

                                        17,484

                                        

                                        

                                        $

                                        6,263

                                        

                                        

                                        $

                                        1,950

                                        

                                        

                                        $

                                        58,788





Holding

                                                                

                                                                

                                                                Consolidated

                                                                

                                                                

                                                                SegmentCompany

                                                                

                                                                

                                                                VIE

                                                                

                                                                

                                                                TotalsAs of August 31, 2008 (Audited)Current AssetsCash and equivalents

                                                                

                                                                $

                                                                831

                                                                

                                                                

                                                                $

                                                                20

                                                                

                                                                

                                                                $

                                                                4,740Restricted cash

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                5,370Accounts receivable, net

                                                                

                                                                

                                                                (96

                                                                )

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                17,205Costs and estimated earnings in excess of billings on uncompleted contracts

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                2,785Inventory, net

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                4,367Deferred tax asset

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                1,535Prepaid expenses and

                                                                

                                                                

                                                                

                                                                

                                                                

                                                                

                                                                

                                                                

                                                                

                                                                

                                                                -other current assets

                                                                

                                                                

                                                                114

                                                                

                                                                

                                                                

                                                                (75

                                                                )

                                                                

                                                                

                                                                2,263Total Current Assets

                                                                

                                                                

                                                                849

                                                                

                                                                

                                                                

                                                                (55

                                                                )

                                                                

                                                                

                                                                38,265Other AssetsProperty, plant & equipment, net

                                                                

                                                                

                                                                424

                                                                

                                                                

                                                                

                                                                6,002

                                                                

                                                                

                                                                

                                                                10,749Accounts receivable - long term

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                865Goodwill

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                12,491Other intangible assets, net

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                -

                                                                

                                                                

                                                                

                                                                3,602Other long term assets

                                                                

                                                                

                                                                103

                                                                

                                                                

                                                                

                                                                1

                                                                

                                                                

                                                                

                                                                140Total Other Assets

                                                                

                                                                

                                                                527

                                                                

                                                                

                                                                

                                                                6,003

                                                                

                                                                

                                                                

                                                                27,847Total Assets

                                                                

                                                                $

                                                                1,376

                                                                

                                                                

                                                                $

                                                                5,948

                                                                

                                                                

                                                                $

                                                                66,112





NOTE 23 – GOING CONCERN





The accompanying consolidated financials statements have been prepared assuming that the Company will continue as a going concern.  The Company had cash flow provided by operations of $1,824 for the three months ended November 30, 2008.   As described in Note 2, by selling the subsidiaries in four segments that overall have been underperforming and require a higher level of working
            capital investment, management believes they will be able to start generating positive cash flows immediately. The conversion of the outstanding debt to preferred stock by the Company’s majority shareholder will also result in a significant decrease in the debt service requirements in 2009. With the Company’s human capital and financial resources all focusing on the profitability of a segment that historically has generated operating income and strong cash flows from
            operations, management believes the Company will have adequate cash to fund anticipated needs through August 31, 2009.  The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.


32


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.





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” disclosed within
            Form 10-K for the year ended August 31, 2008.  Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission.





OVERVIEW





Fortune Industries 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 refer 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.




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





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




Recent Developments





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





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





Effective December 1, 2008, the Company will devote substantially all its resources on the growth and profitability of the Business Solutions segment.


33


Business Solutions Segment





The Business Solutions segment is comprised of Professional Employer Organizations (PEOs) which provide full-service human resources outsourcing services through co-employment relationships with their clients.  Companies operating in the Business Solutions Segment include Professional Staff Management, Inc. and subsidiaries (“PSM”); CSM, Inc. and subsidiaries and related entities
            (“CSM”); Precision Employee Management, LLC (“PEM”); and Employer Solutions Group, Inc. and related entities (“ESG”).  Our PEOs provide services typically managed by a company’s internal human resources and accounting departments, including payroll and tax processing and management, worker’s compensation and risk management, benefits administration, unemployment administration, human resource compliance services, 401k and
            retirement plan administration and employee assessments.  Clients represent a wide variety of industries from healthcare, professional services, software development, manufacturing logistics, telemarketing and construction. Combined, these organizations provide co-employment services to approximately 16,200 employees in all 50 states.





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.  While services are still offered under certain subsidiaries, in November 2005 we began marketing the
            consolidated services of these subsidiaries under the Fortune Wireless name brand to promote our ‘turn-key’ service offerings whereby we assist with multiple areas of wireless infrastructure under integrated contracting arrangements.  Turn-key services include site acquisition, engineering, architecture and design, and construction/technical services.





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





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/Technical Services





Construction services are 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.  Technical 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





We reduced the size and scope of our Wireless Infrastructure segment during the fiscal year ended August 31, 2007.  Some of the effects 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.  Remaining under the control of the Wireless Infrastructure segment are the engineering, architecture and design business and the site acquisition business.  These businesses have performed successfully and we believe they will continue to grow in the future.





Subsidiaries operating in the Wireless Infrastructure segment include Fortune Wireless, Inc. (“Fortune Wireless”), Magtech Services, Inc. (“Magtech”), Cornerstone Wireless Construction Services, Inc. (“Cornerstone Construction”) and James Westbrook & Associates, LLC (“JWA”).


34


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 its 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.





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





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 its 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.





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





Electronics Integration Segment





The Electronics Integration segment sells and installs a variety of electronic products and equipment, including video, sound and security products.  Subsidiaries include Kingston Sales Corporation (Kingston), Commercial Solutions, Inc. (Commercial Solutions) and Telecom Technology Corp. (TTC) d/b/a 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’s 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.   Kingston was acquired in July 2002.  Commercial Solutions began operations in December 2003.





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





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





CRITICAL ACCOUNTING POLICIES





The Company’s accounting policies, which are in compliance with accounting principles generally accepted in the United States, require application of methodologies, estimates and judgments that have a significant impact on the results reported in the Company’s financial statements.  Those policies that, in the belief of management, are critical and require the use of complex judgment in
            their application, are disclosed on the Company’s Form 10-K for the year ended August 31, 2008.  Since August 31, 2008, there have been no material changes to the Company’s critical accounting policies.





RESULTS OF OPERATIONS:  COMPARISON OF THE THREE MONTH PERIODS ENDED NOVEMBER 30, 2008 AND NOVEMBER 30, 2007





Executive Overview of Financial Results





Results of operations for the three-month period ended November 30, 2008 and 2007 are as follows:


35





Revenue for the

                                

                                

                                Operating income (loss) for the3-months ended November 30,

                                

                                

                                3-months ended November 30,2008

                                

                                

                                2007

                                

                                

                                2008

                                

                                

                                2007(Dollars in thousands)Business Solutions

                                

                                $

                                16,741

                                

                                

                                $

                                20,369

                                

                                

                                $

                                72

                                

                                

                                $

                                375Wireless Infrastructure

                                

                                

                                3,312

                                

                                

                                

                                5,527

                                

                                

                                

                                193

                                

                                

                                

                                565Transportation Infrastructure

                                

                                

                                12,090

                                

                                

                                

                                11,580

                                

                                

                                

                                557

                                

                                

                                

                                503Ultraviolet Technologies

                                

                                

                                2,771

                                

                                

                                

                                3,266

                                

                                

                                

                                (204

                                )

                                

                                

                                13Electronics Integration

                                

                                

                                1,251

                                

                                

                                

                                3,013

                                

                                

                                

                                100

                                

                                

                                

                                (37

                                )Holding Company

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                (351

                                )

                                

                                

                                (532

                                )Variable Interest Entity

                                

                                

                                -

                                

                                

                                

                                433

                                

                                

                                

                                -

                                

                                

                                

                                367Variable Interest Entity Elimination

                                

                                

                                -

                                

                                

                                

                                (431

                                )

                                

                                

                                -

                                

                                

                                

                                -Segment Totals

                                

                                $

                                36,165

                                

                                

                                $

                                43,757

                                

                                

                                $

                                367

                                

                                

                                $

                                1,254Net Income Available to Common Shareholders

                                

                                

                                

                                

                                

                                

                                $

                                44

                                

                                

                                $

                                10








Net income available to common stock shareholders was $0.04 million or $0.00 per diluted share on revenue of $36.2 million for the three month period ended November 30, 2008 compared with net income available to common stock shareholders of $0.01 million or $0.00 per diluted share on revenue of $43.8 million for the three month period ended November 30, 2007.  This represents a 17% decrease in
            revenue and a 340% percent increase in net income.





The following factors primarily contributed to the decrease in revenue for the three-month period ended November 30, 2008:





·

                    The Business Solutions decreases are due to a decrease in the total number of worksite employees as a result of the overall downturn in economic conditions.


·

                    The Wireless Infrastructure decreases are due to downsizing operations, an overall industry slowdown, and the inclusion of one large construction contract in the three-month period ended November 30, 2007.


·

                    The Ultraviolet Technologies decreases are due to decreases in sales as a result of the overall downturn in economic conditions.


·

                    The Electronics Integration decreases are due to decreases in commercial sales as a result of the overall downturn in economic conditions.





The following factors primarily contributed to the decrease in segment operating income for the three-month period ended November 30, 2008:





·

                    The Business Solutions decreases are due to unfavorable claims related to health and workers’ compensation plans and a reduction in revenue due to the decrease in the total number of worksite employees as a result of the overall downturn in economic conditions.


·

                    The Wireless Infrastructure and Ultraviolet Technologies decreases are due to decreased revenue in each of the segments.





Results by segment are described in further detail as follows:





Business Solutions





Business Solutions segment operating results for three-month period ended November 30, 2008 and 2007 are as follows:


36





Three Month Period EndedNovember 30, 2008

                                        

                                        

                                        November 30, 2007(Dollars in thousands)Revenues

                                        

                                        $

                                        16,741

                                        

                                        

                                        

                                        100

                                        %

                                        

                                        $

                                        20,369

                                        

                                        

                                        

                                        100

                                        %Cost of revenues

                                        

                                        

                                        13,340

                                        

                                        

                                        

                                        79.7

                                        %

                                        

                                        

                                        16,255

                                        

                                        

                                        

                                        79.8

                                        %Gross profit

                                        

                                        

                                        3,401

                                        

                                        

                                        

                                        20.3

                                        %

                                        

                                        

                                        4,114

                                        

                                        

                                        

                                        20.2

                                        %Operating expensesSelling, general and administrative

                                        

                                        

                                        3,160

                                        

                                        

                                        

                                        18.9

                                        %

                                        

                                        

                                        3,386

                                        

                                        

                                        

                                        16.6

                                        %Depreciation and amortization

                                        

                                        

                                        169

                                        

                                        

                                        

                                        1.0

                                        %

                                        

                                        

                                        353

                                        

                                        

                                        

                                        1.7

                                        %Total operating expenses

                                        

                                        

                                        3,329

                                        

                                        

                                        

                                        19.9

                                        %

                                        

                                        

                                        3,739

                                        

                                        

                                        

                                        18.4

                                        %Segment operating income

                                        

                                        $

                                        72

                                        

                                        

                                        

                                        0.4

                                        %

                                        

                                        $

                                        375

                                        

                                        

                                        

                                        1.8

                                        %





Revenue





Revenue for the three-month period ended November 30, 2008 was $16.7 million, compared to $20.4 million for the three-month period ended November 30, 2007, a decrease of $3.6 million or 18%.  Revenue decreased primarily due to attrition of customers and the impact of the economic slowdown on our customers.





Gross Profit





Gross profit for the three-month period ended November 30, 2008 was $3.4 million, representing 20% of revenue, compared to $4.1 million, representing 20% of revenue for the three month period ended November 30, 2007, a decrease of $0.7 million or 17%.  Gross profit as a dollar amount decreased due to the reduction in revenue.  Gross profit as a percentage of revenue did not change
            significantly.





Operating Income





Operating income for the three-month period, ended November 30, 2008 was $0.07 million, compared to $0.4 million for the three-month period ended November 30, 2007, a decrease of $0.3 million or 81%.  Operating income decreased as a direct result of the overall decrease in revenues during the three-month period ended November 30, 2008.




Wireless Infrastructure





Wireless Infrastructure segment operating results for the three-month period ended November 30, 2008 and 2007 are as follows:





Three Month Period EndedNovember 30, 2008

                                        

                                        

                                        November 30, 2007(Dollars in thousands)Revenues

                                        

                                        $

                                        3,312

                                        

                                        

                                        

                                        100

                                        %

                                        

                                        $

                                        5,527

                                        

                                        

                                        

                                        100

                                        %Cost of revenues

                                        

                                        

                                        2,458

                                        

                                        

                                        

                                        74.2

                                        %

                                        

                                        

                                        3,841

                                        

                                        

                                        

                                        69.5

                                        %Gross profit

                                        

                                        

                                        854

                                        

                                        

                                        

                                        25.8

                                        %

                                        

                                        

                                        1,686

                                        

                                        

                                        

                                        30.5

                                        %Operating expensesSelling, general and administrative

                                        

                                        

                                        650

                                        

                                        

                                        

                                        19.6

                                        %

                                        

                                        

                                        1,080

                                        

                                        

                                        

                                        19.5

                                        %Depreciation and amortization

                                        

                                        

                                        11

                                        

                                        

                                        

                                        0.3

                                        %

                                        

                                        

                                        41

                                        

                                        

                                        

                                        0.7

                                        %Total operating expenses

                                        

                                        

                                        661

                                        

                                        

                                        

                                        20.0

                                        %

                                        

                                        

                                        1,121

                                        

                                        

                                        

                                        20.3

                                        %Segment operating income

                                        

                                        $

                                        193

                                        

                                        

                                        

                                        5.8

                                        %

                                        

                                        $

                                        565

                                        

                                        

                                        

                                        10.2

                                        %





Revenue





Revenue for the three-month period ended November 30, 2008 was $3.3 million compared to $5.5 million for the three-month period ended November 30, 2007, a decrease of $2.2 million or 40%.  The decrease in revenues is primarily due downsizing operations, an overall industry slowdown, and the inclusion of one large construction contract in
            the three-month period ended November 30, 2007.


37


Gross Profit





Gross profit for the three-month period ended November 30, 2008 was $0.9 million, representing 26% of revenue, compared to $1.7 million representing 31% of revenue for the three-month period ended November 30, 2007, a decrease of $0.8 million or 49%.  Gross profit as for the three-month period ended November 30, 2008 decreased as a result of decreased revenues due to the inclusion of a large
            construction contract included in the three-month period ended November 30, 2007 and an overall increase in competition due to the industry slow down in the current period.





Operating Income





Operating income for the three-month period, ended November 30, 2008 was $0.2 million, compared to $0.6 million for the three-month period ended November 30, 2007, a decrease of $0.4 million or 66%. Operating income decreased for the three-month period ended November 30, 2008 resulting from the decrease in gross profit noted above.





Transportation Infrastructure





Transportation Infrastructure segment operating results for the three month period ended November 30, 2008 and 2007 are as follows:





Three Month Period EndedNovember 30, 2008

                                        

                                        

                                        November 30, 2007(Dollars in thousands)Revenues

                                        

                                        $

                                        12,090

                                        

                                        

                                        

                                        100

                                        %

                                        

                                        $

                                        11,580

                                        

                                        

                                        

                                        100

                                        %Cost of revenues

                                        

                                        

                                        10,747

                                        

                                        

                                        

                                        88.9

                                        %

                                        

                                        

                                        10,258

                                        

                                        

                                        

                                        88.6

                                        %Gross profit

                                        

                                        

                                        1,343

                                        

                                        

                                        

                                        11.1

                                        %

                                        

                                        

                                        1,322

                                        

                                        

                                        

                                        11.4

                                        %Operating expensesSelling, general and administrative

                                        

                                        

                                        781

                                        

                                        

                                        

                                        6.5

                                        %

                                        

                                        

                                        815

                                        

                                        

                                        

                                        7.0

                                        %Depreciation and amortization

                                        

                                        

                                        5

                                        

                                        

                                        

                                        0.0

                                        %

                                        

                                        

                                        4

                                        

                                        

                                        

                                        0.0

                                        %Total operating expenses

                                        

                                        

                                        786

                                        

                                        

                                        

                                        6.5

                                        %

                                        

                                        

                                        819

                                        

                                        

                                        

                                        7.1

                                        %Segment operating income

                                        

                                        $

                                        557

                                        

                                        

                                        

                                        4.6

                                        %

                                        

                                        $

                                        503

                                        

                                        

                                        

                                        4.3

                                        %





Revenue





Revenue for the three-month period ended November 30, 2008 was $12.1 million compared to $11.6 million for the three-month period ended November 30, 2007, an increase of $0.5 million or 4%. Revenue did not change significantly for the three-month period ended November 30, 2008.





Gross Profit





Gross profit for the three-month period ended November 30, 2008 was $1.3 million, representing 11% of revenue, compared to $1.3 million representing 11% of revenue for the three month period ended November 30, 2007, an increase of $0.02 million or 2%. Gross profit did not change significantly for the three-month period ended November 30, 2008.





Operating Income





Operating income for the three-month period ended November 30, 2008 was $0.6 million, compared to $0.5 million for the three-month period ended November 30, 2007, an increase of $0.05 million or 11%. Operating income did not change significantly for the three-month period ended November 30, 2008.





Ultraviolet Technologies





Ultraviolet Technologies segment operating results for the three-month period ended November 30, 2008 and 2007 are as follows:


38





Three Month Period EndedNovember 30, 2008

                                        

                                        

                                        November 30, 2007(Dollars in thousands)Revenues

                                        

                                        $

                                        2,771

                                        

                                        

                                        

                                        100

                                        %

                                        

                                        $

                                        3,266

                                        

                                        

                                        

                                        100

                                        %Cost of revenues

                                        

                                        

                                        1,596

                                        

                                        

                                        

                                        57.6

                                        %

                                        

                                        

                                        1,882

                                        

                                        

                                        

                                        57.6

                                        %Gross profit

                                        

                                        

                                        1,175

                                        

                                        

                                        

                                        42.4

                                        %

                                        

                                        

                                        1,384

                                        

                                        

                                        

                                        42.4

                                        %Operating expensesSelling, general and administrative

                                        

                                        

                                        1,320

                                        

                                        

                                        

                                        47.6

                                        %

                                        

                                        

                                        1,301

                                        

                                        

                                        

                                        39.8

                                        %Depreciation and amortization

                                        

                                        

                                        59

                                        

                                        

                                        

                                        2.1

                                        %

                                        

                                        

                                        70

                                        

                                        

                                        

                                        2.1

                                        %Total operating expenses

                                        

                                        

                                        1,379

                                        

                                        

                                        

                                        49.8

                                        %

                                        

                                        

                                        1,371

                                        

                                        

                                        

                                        42.0

                                        %Segment operating loss

                                        

                                        $

                                        (204

                                        )

                                        

                                        

                                        -7.4

                                        %

                                        

                                        $

                                        13

                                        

                                        

                                        

                                        0.4

                                        %





Revenue





Revenue for the three-month period ended November 30, 2008 was $2.8 million compared to $3.3 million for the three-month period ended November 30, 2007, a decrease of $0.5 million or 15%. Revenue decreased primarily due to decreased sales worldwide as a result of the economic slowdown.





Gross Profit





Gross profit for the three-month period ended November 30, 2008 was $1.2 million representing 42% of revenue, compared to $1.4 million representing 42% of revenue for the three month period ended November 30, 2007, a decrease of $0.2 or 15%.  Gross profit decreased as a result of the sales decreases noted above.





Operating Income





Operating loss for the three-month period ended November 30, 2008 was $0.2 million, compared to an operating income of $0.01 million for the three-month period ended November 30, 2007, a decrease of $0.2 million or 1667%.  Operating income decreased primarily due to a decrease in sales without a corresponding decrease in operating expenses.





Electronics Integration





Electronics Integration segment operating results for the three month period ended November 30, 2008 and 2007 are as follows:





Three Month Period EndedNovember 30, 2008

                                        

                                        

                                        November 30, 2007(Dollars in thousands)Revenues

                                        

                                        $

                                        1,251

                                        

                                        

                                        

                                        100

                                        %

                                        

                                        $

                                        3,013

                                        

                                        

                                        

                                        100

                                        %Cost of revenues

                                        

                                        

                                        912

                                        

                                        

                                        

                                        72.9

                                        %

                                        

                                        

                                        2,611

                                        

                                        

                                        

                                        86.7

                                        %Gross profit

                                        

                                        

                                        339

                                        

                                        

                                        

                                        27.1

                                        %

                                        

                                        

                                        402

                                        

                                        

                                        

                                        13.3

                                        %Operating expensesSelling, general and administrative

                                        

                                        

                                        238

                                        

                                        

                                        

                                        19.0

                                        %

                                        

                                        

                                        425

                                        

                                        

                                        

                                        14.1

                                        %Depreciation and amortization

                                        

                                        

                                        1

                                        

                                        

                                        

                                        0.1

                                        %

                                        

                                        

                                        14

                                        

                                        

                                        

                                        0.5

                                        %Total operating expenses

                                        

                                        

                                        239

                                        

                                        

                                        

                                        19.1

                                        %

                                        

                                        

                                        439

                                        

                                        

                                        

                                        14.6

                                        %Segment operating income (loss)

                                        

                                        $

                                        100

                                        

                                        

                                        

                                        8.0

                                        %

                                        

                                        $

                                        (37

                                        )

                                        

                                        

                                        -1.2

                                        %





Revenue





Revenue for the three-month period ended November 30, 2008 was $1.3 million compared to $3.0 million for the three-month period ended November 30, 2007, a decrease of $1.8 million or 59%. Revenue decreased for the three-month period ended November 30, 2008 primarily due to decreased sales volumes of television products, significant vendor supply chain backorders and decreased services work as a result
            of the economic downturn and the decision to discontinue operations within the segment.


39


Gross Profit





Gross profit for the three-month period ended November 30, 2008 was $0.3 million representing 27% of revenue, compared to $0.4 million representing 13% of revenue for the three month period ended November 30, 2007, a decrease of $0.1 million or 25%.   Gross profit dollars decreased as a direct result of the overall sales decrease.  Gross profit percentage increased as a result of
            discontinuing less profitable operations and overall expenditure reductions in the segment.





Operating Income





Operating income for the three month period ended November 30, 2008 was $0.1 million, compared to an operating loss of $0.04 million for the three month period ended November 30, 2007, an increase of $0.1 million or 370%.  The increase in operating income is a direct result of expenditure decreases and operating efficiencies recognized in the three-month period ended November 30, 2008.





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 three-month period ended November 30, 2008 were $0.35 million, compared to $0.55 million for the three-month period ended November 30,
            2007, a decrease of $0.2 million or 34%. Operating expense decreased as a result of expenditure reductions and allocating more overhead expenses to the subsidiaries.





Interest Expense





Interest expense was $0.1 million for the three-month period ended November 30, 2008, compared to $0.9 million for the three-month period ended November 30, 2007, a decrease of $0.8 million or 84%. The decrease was primarily due to eliminating the consolidation of the VIE, decreased interest rates and allocating more interest to the subsidiaries.





Income Taxes





The Company recorded a 100% valuation allowance on additions to deferred tax assets due to uncertainty regarding future profitability of the Company based on the last year’s 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 2009 would not have a material effect in the carrying value of the net deferred tax assets or liabilities.





Variable Interest Entity





The Company leases a total of five facilities from a consolidated variable interest entity, whose primary purpose is to own and lease these properties to the Company. Effective November 30, 2008, the Company terminated its lease agreement for its corporate headquarters and sold its James H. Drew and Norcote subsidiaries which leased facilities from the variable interest entity; therefore, the Company is no
            longer required to consolidate the variable interest entity because the Company is no longer the primary beneficiary as defined by FIN 46R.  The VIE does not have any other significant assets. For the three month period ended November 30, 2007, the consolidation of the VIE comprised of $0.433 million in rental income, offset by a $0.126 million charge to interest expense, a $0.049 million charge to depreciation expense, $0.047 loss on disposal of building, $0.016 million
            in administrative and other miscellaneous expenses





As described in Note 3 of the accompanying consolidated financial statements, effective November 30, 2008 the Company is no longer considered the primary beneficiary of the variable interest entity and is not required to consolidate Fisbeck-Fortune Development as of this date.





LIQUIDITY AND CAPITAL RESOURCES





Our principal sources of liquidity include cash and equivalents and proceeds from debt borrowings.  We had cash and equivalents of $2.6 million at November 30, 2008 and $4.7 million at August 31, 2008.





We had working capital of ($1.0) million at November 30, 2008 compared with $3.7 million at August 31, 2008. The decrease in working capital was primarily due to the disposition of four of our five operating segments at November 30, 2008.  Current assets are primarily comprised of cash and equivalents, net accounts receivable, and prepaid expenses. Current liabilities are primarily comprised of
            accounts payable and accrued expenses.





Total debt at November 30, 2008 was $0.07 million.  Total debt at August 31, 2008 was $45.4 million including a $3.4 million convertible term note, $3.6 million in bank debt, $32.0 million in debt to a related party, and $6.4 million in the variable interest entity’s debt.  Total unused borrowings under the line of credit were $2.8 million at August 31, 2008.  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.  Total capital expenditures were approximately $0.1 million and $0.5 million for the three-month period ended November 30, 2008 and 2007, respectively.  Sources of funds for these expenditures have primarily been from available cash flow.


40


Cash Flows





Cash flows provided by (used in) operations for the three month period ended November 30, 2008 and 2007 were $1.8 million and ($1.9) million, respectively.  This increase in operating cash flows was due primarily to the improved management and oversight of working capital assets and the disposition of capital-intensive construction assets as described in Note 2.





Net cash flow used in investing activities was $0.1 million for the three month period ended November 30, 2008 compared to $0.04 million for the three month period ended November 30, 2007.  The decrease was primarily due to the fact that no fixed assets were disposed of for cash during the three month period ending November 30, 2008.





Net cash flow used in financing activities was $3.9 million for the three month period ended November 30, 2008 compared to $2.1 million for the three month period ended November 30, 2007.  The decrease was primarily the result of making our final balloon payment for the Laurus convertible debt.





CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS





The following table summarizes our contractual obligations as of November 30, 2008:





Payments due byContractual obligation

                            

                            Total

                            

                            

                            Less than 1

                                year

                            

                            

                            1-2 years

                            

                            

                            3-5 years

                            

                            

                            More than 5

                                yearsDebt and capital lease obligations

                            

                            $

                            65

                            

                            

                            $

                            38

                            

                            

                            $

                            21

                            

                            

                            $

                            6

                            

                            

                            $

                            -Operating lease (1)

                            

                            

                            2,240

                            

                            

                            

                            658

                            

                            

                            

                            568

                            

                            

                            

                            1,014

                            

                            

                            

                            -Total

                            

                            $

                            2,305

                            

                            

                            $

                            696

                            

                            

                            $

                            589

                            

                            

                            $

                            1,020

                            

                            

                            $

                            -





(1)

                    Operating leases represent the total future minimum lease payments.





OFF BALANCE SHEET ARRANGEMENTS





As is common in the industries we operate in, 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 guarantees, letter of credit obligations and surety guarantees.





Transactions with Related Parties





We have entered into various acquisition agreements over the past three years which contain option agreements or rights between the sellers of the acquired entities and our majority shareholders, Mr. Carter Fortune and Mr. John Fisbeck, related to the Company’s stock provided as consideration under the acquisitions.  As more fully described in Note 18, the option agreements provide for put/
            call options on the Company’s common stock held by the sellers of the acquired companies.   Total estimated cash outlays by the Company’s majority shareholders, subsequent to November 30, 2008, for these options are estimated at $1.0 million and are expected to be exercised over the next six months.





We lease a total of five facilities from a VIE as described earlier in this filing. The VIE’s primary purpose is to own and lease these properties to the Company. The VIE does not have any other significant assets.  Effective November 30, 2008, the Company terminated its lease agreement for its corporate headquarters and sold its James H. Drew and Norcote subsidiaries which leased facilities
            from the variable interest entity; therefore, the Company is no longer required to consolidate the variable interest entity because the Company is no longer the primary beneficiary as defined by FIN 46R.





Guarantees





A significant portion of our debt and surety bonds are personally guaranteed by the Company’s Chairman of the Board and Chief Executive Officer.  Future changes to these guarantees would affect financing capacity of the Company.  During the fiscal year ended August 31, 2008, the Board approved the payment of certain guarantee fees to the Chief Executive Officer.  The
            Company paid guarantee fees of $0.2 million for the three months ending November 30, 2008.


41


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 situation 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 November 30, 2008, we had approximately
            $5.6 million in restricted cash primarily to secure obligations under our PEO contracts in the Business Solutions segment.





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 fail 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 $22.0 million in favor of the surety and, with the consent of our lender under our credit facility; we have granted security interests in
            certain of our assets to collateralize our obligations to the surety. 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 November 30, 2008, an aggregate of approximately $3.0 million in original face amount of bonds issued by the surety were outstanding.





Item 3.  Quantitative and Qualitative Disclosures about Market Risk





The Company is exposed to certain market risks arising from adverse changes in interest rates, primarily due to the potential effect of such changes on its variable rate line of credit and convertible term note as described in Note 10 to the consolidated financial statements.  All of the Company’s debt as of November 30, 2008 bears interest at fixed rates.





Cash and cash equivalents as of November 30, 2008 was $2.6 million and is primarily in subsidiary operating 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 three month period ended November 30, 2008. 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 three month period ended November 30, 2008. We do not currently utilize any derivative
            financial instruments to hedge foreign currency risks.





Item 4.  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, Chief Financial Officer, and Chief Operating Officer as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, including the Chief Executive Officer, Chief Financial Officer, and Chief Operating 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, Chief Financial Officer, and Chief Operating Officer the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of November 30, 2008. Based on this evaluation, the Chief Executive Officer, Chief Financial Officer, and Chief
            Operating Officer have concluded that, for the reasons more fully set forth below, the Company’s disclosure controls and procedures were not effective on November 30, 2008 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.


42


More specifically, the Company’s management has concluded that (i) additional accounting personnel were needed at certain subsidiaries at November 30, 2008 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.





PART II--OTHER INFORMATION.





Item 1. Legal Proceedings.





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





Item 1A. Risk Factors





There have been no material changes with regard to the risk factors previously disclosed in our most recent Annual Report on Form 10-K.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.





None





Item 3. Defaults Upon Senior Securities.





None




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





None





Item 5. Other Information.





None





Item 6. Exhibits





The following exhibits are included herein:





31.1

                                            Rule 15d-14(a) Certification of CEO31.2

                                            Rule 15d-14(a) Certification of CFO32.1

                                            Section 1350 Certification of CEO32.2

                                            Section 1350 Certification of CFO





SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Fortune Industries, Inc.(Registrant)Date:  January 14, 2009

                        By: /s/ John F. FisbeckJohn F. Fisbeck,Chief Executive OfficerDate:  January 14. 2009

                        By: /s/ Garth A. AllredGarth A Allred,Chief Financial Officer


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