##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended February 28, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 0-19049
 FORTUNE DIVERSIFIED INDUSTRIES, INC.
  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
  þ o
  o þ
  o þ




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##### Table of Contents



FORTUNE DIVERSIFIED INDUSTRIES, INC.
FORM 10-Q
For The Quarterly Period Ended February 28, 2006
 INDEX
  
 PagePART
I.Financial InformationITEM
1. Financial StatementsConsolidated Statements of Operations for the three and six month periods ended
February 28, 2006 and 2005 (unaudited)
    
    
    3Consolidated Balance Sheets as of February 28, 2006 (unaudited) and August 31, 2005
    
    
    4Consolidated Statement of Changes in Shareholders Equity for the six month period
ended February 28, 2006 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the six month periods ended February 28,
2006 and 2005 (unaudited)
    
    
    7Notes to the Consolidated Financial Statements
    
    
    9ITEM
2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27ITEM 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    35ITEM
4.Controls and Procedures
    
    
    36PART
II.Other InformationITEM 1.Legal Proceedings
    
    
    36ITEM 1A.Risk Factors
    
    
    36ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36ITEM 3.Defaults Upon Senior Securities
    
    
    36ITEM 4.Submission of Matters to a Vote of Security Holders
    
    
    36ITEM 5.Other Information
    
    
    36ITEM 6.Exhibits
    
    
    36Signatures
    
    
    37Certification of CEOCertification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO
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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 Three Month Period Ended
    
    
    Six Month Period EndedFebruary 28,
    
    
    February 28,
    
    
    February 28,
    
    
    February 28,2006
    
    
    2005
    
    
    2006
    
    
    2005NET REVENUESNet revenues wireless infrastructure services
    
    $
    3,065
    
    
    $
    2,321
    
    
    $
    7,358
    
    
    $
    5,023Net revenues wireless infrastructure products
    
    
    12,990
    
    
    
    7,514
    
    
    
    29,767
    
    
    
    19,512Net revenues manufacturing and distribution
    
    
    5,976
    
    
    
    4,680
    
    
    
    11,611
    
    
    
    10,364Net revenues business solutions (gross billings of $77,496 and $38,455 less worksite
employee payroll costs of $66,171 and $32,821 for the three months ended
February 28, 2006 and 2005, respectively; and gross billings of $147,946 and
$73,043 less worksite employee payroll costs of $126,883 and $62,745 for the
six months ended February 26, 2006 and 2005, respectively)
    
    
    11,325
    
    
    
    5,634
    
    
    
    21,063
    
    
    
    10,298TOTAL NET REVENUES
    
    
    33,356
    
    
    
    20,149
    
    
    
    69,799
    
    
    
    45,197COST OF REVENUESCost of revenues wireless infrastructure services
    
    
    1,731
    
    
    
    1,595
    
    
    
    4,746
    
    
    
    3,395Cost of revenues wireless infrastructure products
    
    
    11,504
    
    
    
    7,097
    
    
    
    26,485
    
    
    
    17,701Cost of revenues manufacturing and distribution
    
    
    4,432
    
    
    
    3,424
    
    
    
    8,410
    
    
    
    7,518Cost of revenues business solutions
    
    
    8,155
    
    
    
    4,324
    
    
    
    15,386
    
    
    
    7,984TOTAL COST OF REVENUES
    
    
    25,822
    
    
    
    16,440
    
    
    
    55,027
    
    
    
    36,598GROSS PROFIT
    
    
    7,534
    
    
    
    3,709
    
    
    
    14,772
    
    
    
    8,599OPERATING EXPENSESSelling, general and administrative expenses
    
    
    6,082
    
    
    
    4,445
    
    
    
    11,539
    
    
    
    7,998Depreciation and amortization
    
    
    543
    
    
    
    354
    
    
    
    1,024
    
    
    
    731Total Operating Expenses
    
    
    6,625
    
    
    
    4,799
    
    
    
    12,563
    
    
    
    8,729OPERATING INCOME (LOSS)
    
    
    909
    
    
    
    (1,090
    )
    
    
    2,209
    
    
    
    (130
    )OTHER INCOME (EXPENSE)Interest income
    
    
    86
    
    
    
    18
    
    
    
    142
    
    
    
    18Interest expense
    
    
    (598
    )
    
    
    (323
    )
    
    
    (1,142
    )
    
    
    (589
    )Gain (loss) on investments in marketable securities, net
    
    
    5
    
    
    
    (13
    )
    
    
    5
    
    
    
    (42
    )Exchange rate gain (loss)
    
    
    2
    
    
    
    16
    
    
    
    (3
    )
    
    
    59Other income (expense)
    
    
    (5
    )
    
    
    68
    
    
    
    56
    
    
    
    127Total Other Income (Expense)
    
    
    (510
    )
    
    
    (234
    )
    
    
    (942
    )
    
    
    (427
    )NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
    
    
    399
    
    
    
    (1,324
    )
    
    
    1,267
    
    
    
    (557
    )Provision for Income Taxes
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    64NET INCOME (LOSS)
    
    
    399
    
    
    
    (1,324
    )
    
    
    1,246
    
    
    
    (621
    )Preferred Stock Dividends
    
    
    83
    
    
    
    
    
    
    
    83
    
    
    
    NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    362
    
    
    $
    (1,324
    )
    
    $
    1,163
    
    
    $
    (621
    )BASIC INCOME (LOSS) PER COMMON SHARE
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.11
    
    
    $
    (0.06
    )Basic weighted average shares outstanding
    
    
    10,559,843
    
    
    
    10,318,559
    
    
    
    10,559,843
    
    
    
    10,318,559DILUTED INCOME (LOSS) PER COMMON SHARE
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.10
    
    
    $
    (0.06
    )Diluted weighted average shares outstanding
    
    
    12,067,814
    
    
    
    10,318,559
    
    
    
    11,472,267
    
    
    
    10,318,559
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
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FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETSCash and equivalents
    
    $
    4,196
    
    
    $
    3,787Restricted savings account
    
    
    1,604
    
    
    
    1,484Marketable securities
    
    
    1,427
    
    
    
    2,199Accounts receivable, net
    
    
    18,997
    
    
    
    21,358Costs and estimated earnings in excess of billings
on uncompleted contracts
    
    
    4,126
    
    
    
    2,681Inventory, net
    
    
    7,128
    
    
    
    8,315Deferred tax asset
    
    
    1,014
    
    
    
    1,014Prepaid expenses and other current assets
    
    
    1,509
    
    
    
    1,790Total Current Assets
    
    
    40,001
    
    
    
    42,628OTHER ASSETSProperty, plant & equipment, net
    
    
    5,685
    
    
    
    5,064Goodwill
    
    
    11,926
    
    
    
    11,680Other intangible assets, net
    
    
    4,395
    
    
    
    4,705Accounts receivable  long term
    
    
    600
    
    
    
    600Other long term assets
    
    
    1,551
    
    
    
    409Total Other Assets
    
    
    24,157
    
    
    
    22,458TOTAL ASSETS
    
    $
    64,158
    
    
    $
    65,086
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
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FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESLines of credit
    
    $
    14,532
    
    
    $
    18,998Current maturities of long-term debt
    
    
    2,652
    
    
    
    2,675Accounts payable
    
    
    5,003
    
    
    
    7,095Health and workers compensation reserves
    
    
    3,213
    
    
    
    4,000Accrued expenses
    
    
    5,095
    
    
    
    6,288Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    1,964
    
    
    
    2,101Other current liabilities
    
    
    468
    
    
    
    271Total Current Liabilities
    
    
    32,927
    
    
    
    41,428LONG-TERM LIABILITIESLong-term debt, less current maturities
    
    
    3,494
    
    
    
    4,898Convertible term note
    
    
    7,500
    
    
    
    Line of credit  related party
    
    
    
    
    
    
    6,618Other long-term liabilities
    
    
    350
    
    
    
    69Total Long-term Liabilities
    
    
    11,344
    
    
    
    11,585Total Liabilities
    
    
    44,271
    
    
    
    53,013STOCKHOLDERS EQUITYCommon stock, $0.10 par value; 150,000,000 authorized;
10,559,843 issued and outstanding at February 28, 2006
and August 31, 2005
    
    
    1,046
    
    
    
    1,046Preferred stock, $0.10 par value; 1,000,000 authorized;
66,180 and 0 issued and outstanding at February 28, 2006
and August 31, 2005, respectively
    
    
    6,618
    
    
    
    Additional paid-in capital and warrants outstanding
    
    
    17,440
    
    
    
    17,340Accumulated deficit
    
    
    (5,243
    )
    
    
    (6,406
    )Accumulated other comprehensive income
    
    
    26
    
    
    
    93Total Stockholders Equity
    
    
    19,887
    
    
    
    12,073TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    64,158
    
    
    $
    65,086
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
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FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
 AdditionalPaid-in
    
    
    
    
    
    
    AccumulatedCapital
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Preferred
    
    
    and Warrants
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholders'
    
    
    ComprehensiveStock
    
    
    Stock
    
    
    Outstanding
    
    
    Deficit
    
    
    Income
    
    
    Equity
    
    
    IncomeBALANCE AT AUGUST 31, 2005
    
    $
    1,046
    
    
    $
    
    
    
    $
    17,340
    
    
    $
    (6,406
    )
    
    $
    93
    
    
    $
    12,073Issuance of 66,180 shares of preferred stock
    
    
    
    
    
    
    6,618
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,618
    
    
    $
    Purchase accounting adjustment
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,246
    
    
    
    
    
    
    
    1,246
    
    
    
    1,246Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83
    )
    
    
    
    
    
    
    (83
    )
    
    
    Translation adjustments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )
    
    
    (10
    )Unrealized gains (losses) on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    (57
    )
    
    
    (57
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,179BALANCE AT FEBRUARY 28, 2006
    
    $
    1,046
    
    
    $
    6,618
    
    
    $
    17,440
    
    
    $
    (5,243
    )
    
    $
    26
    
    
    $
    19,887
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
 6




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FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
 Six Month Period EndedFebruary 28,
    
    
    February 28,2006
    
    
    2005OPERATING ACTIVITIESNet Income (Loss)
    
    $
    1,246
    
    
    $
    (621
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,024
    
    
    
    731(Gain) Loss on sale of investments
    
    
    (5
    )
    
    
    42Loss on disposal of fixed assets
    
    
    
    
    
    
    5(Increase) decrease in certain operating assets:Restricted cash
    
    
    (120
    )
    
    
    Accounts receivable, net
    
    
    2,361
    
    
    
    2,204Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    (1,445
    )
    
    
    (220
    )Inventory, net
    
    
    1,200
    
    
    
    (608
    )Prepaid assets and other current assets
    
    
    281
    
    
    
    60Other long term assets
    
    
    (184
    )
    
    
    (43
    )Increase (decrease) in certain operating liabilities:Accounts payable
    
    
    (2,092
    )
    
    
    1,052Health and workers compensation reserves
    
    
    (787
    )
    
    
    12Accrued expenses and other current liabilities
    
    
    (896
    )
    
    
    (1,634
    )Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    (137
    )
    
    
    (42
    )Due to related party
    
    
    
    
    
    
    (26
    )Other long-term liabilities
    
    
    15
    
    
    
    Net Cash Provided by Operating Activities
    
    
    461
    
    
    
    912INVESTING ACTIVITIESCapital expenditures
    
    
    (1,378
    )
    
    
    (451
    )Purchases of marketable securities
    
    
    (34
    )
    
    
    (99
    )Acquisition of productive assets and businesses, net of cash received
    
    
    (262
    )
    
    
    (690
    )Net Cash Used in Investing Activities
    
    
    (1,674
    )
    
    
    (1,240
    )FINANCING ACTIVITIESDividends on preferred stock
    
    
    (83
    )
    
    
    Proceeds from convertible debentures
    
    
    6,808
    
    
    
    Borrowings on short term debt
    
    
    
    
    
    
    800Borrowings on marketable securities account
    
    
    800
    
    
    
    Net borrowings (payments) under line of credit
    
    
    (4,466
    )
    
    
    1,830Borrowings on long-term debt
    
    
    
    
    
    
    48Payments on long-term debt
    
    
    (1,427
    )
    
    
    (1,391
    )Net Cash Provided by Financing Activities
    
    
    1,632
    
    
    
    1,287Effect of exchange rate changes on cash
    
    
    (10
    )
    
    
    65NET INCREASE IN CASH AND EQUIVALENTS
    
    
    409
    
    
    
    1,024CASH AND EQUIVALENTSBeginning of Period
    
    
    3,787
    
    
    
    3,527End of Period
    
    $
    4,196
    
    
    $
    4,551
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
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FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
 Six Month Period EndedFebruary 28,
    
    
    February 28,2006
    
    
    2005SUPPLEMENTAL DISCLOSURESInterest paid
    
    $
    1,053
    
    
    $
    356Taxes paid
    
    $
    21
    
    
    $
    Unrealized net gain (loss) on marketable securities
    
    $
    (57
    )
    
    $
    115Non-cash investing and financing activitiesIssuance of preferred stock for debt extinguishment
    
    $
    6,618
    
    
    $
    Issuance of warrants in connection with loan refinancing
    
    
    266
    
    
    
    $
    6,884
    
    
    $
    Acquisition of Audio Video Revolution, Inc.Fair value of assets acquired
    
    $
    262Cash paid
    
    
    262Liabilities recorded
    
    $
    
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
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FORTUNE DIVERSIFIED 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
 Basis of Presentation
 Nature of Business:
   
  
  
   Principles of Consolidation:
 Foreign Currency Translation:
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Comprehensive Income (Loss):
 Estimates:
  Revenue and Cost Recognition:
   10




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Cash and Equivalents:
 Marketable Securities:
 Accounts Receivable:
 Inventories:
 Shipping and Handling:
 Property, Plant, Equipment, and Depreciation:
 11




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Goodwill and Other Indefinite-Lived Intangible Assets:
  Long-lived Assets:
 Fair Value of Financial Instruments:
 Stock-based Compensation:
   12




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Income per Common Share:
  Income Taxes:
 Research and Development Costs:
 Warrants Issued With Convertible Debt:
  Self Insurance:
  Workers Compensation:
 NOTE 2  ACQUISITIONS AND PRO FORMA RESULTS
 Acquisitions
  13




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Audio Video Revolution, Inc.
   Inventory, net
    
    $
    13Property, Plant and equipment, net
    
    
    59Goodwill
    
    
    190$
    262Cash consideration
    
    $
    262$
    262
 Pro Forma Results
  Three Month Period Ended
    
    
    Six Month Period EndedFebruary 28,
    
    
    February 28,
    
    
    February 28,
    
    
    February 28,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Net revenue
    
    $
    33,356
    
    
    $
    23,644
    
    
    $
    69,799
    
    
    $
    52,967Cost of revenues
    
    
    25,822
    
    
    
    19,127
    
    
    
    55,027
    
    
    
    42,845Gross profit
    
    
    7,534
    
    
    
    4,517
    
    
    
    14,772
    
    
    
    10,122Operating expenses
    
    
    6,625
    
    
    
    5,552
    
    
    
    12,563
    
    
    
    10,180Operating income
    
    
    909
    
    
    
    (1,036
    )
    
    
    2,209
    
    
    
    (58
    )Other income (expense)
    
    
    (510
    )
    
    
    (203
    )
    
    
    (942
    )
    
    
    (416
    )Net income (loss) before provision
for income taxes
    
    
    399
    
    
    
    (1,239
    )
    
    
    1,267
    
    
    
    (474
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    64Net income (loss)
    
    
    399
    
    
    
    (1,239
    )
    
    
    1,246
    
    
    
    (538
    )Preferred stock dividend
    
    
    83
    
    
    
    
    
    
    
    83
    
    
    
    Net income available to common shareholders
    
    $
    316
    
    
    $
    (1,239
    )
    
    $
    1,163
    
    
    $
    (538
    )Basic income (loss) per common share
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    0.11
    
    
    $
    (0.05
    )Basic weighted average number of common
shares outstanding
    
    
    10,559,843
    
    
    
    10,318,559
    
    
    
    10,559,843
    
    
    
    10,318,559Diluted income (loss) per common share
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    0.10
    
    
    $
    (0.05
    )Diluted weighted average number of common
shares outstanding
    
    
    12,067,814
    
    
    
    10,318,559
    
    
    
    11,472,267
    
    
    
    10,318,559
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NOTE 3  ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE
  February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Amounts currently due
    
    $
    15,270
    
    
    $
    16,178Contracts in processProgress billing
    
    
    3,698
    
    
    
    5,075Retainages
    
    
    1,589
    
    
    
    1,75220,557
    
    
    
    23,005Less allowance for doubtful accounts and sales returns
    
    
    (1,560
    )
    
    
    (1,647
    )$
    18,997
    
    
    $
    21,358Accounts receivable  long-term
    
    $
    600
    
    
    $
    600
 NOTE 4  INVENTORIES
  February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Raw materials
    
    $
    814
    
    
    $
    757Work-in-process
    
    
    29
    
    
    
    39Finished goods
    
    
    6,520
    
    
    
    7,8967,363
    
    
    
    8,692Less inventory reserve
    
    
    (235
    )
    
    
    (377
    )$
    7,128
    
    
    $
    8,315
 15




---



##### Table of Contents



NOTE 5  COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
  February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Costs incurred on uncompleted contracts
    
    $
    30,046
    
    
    $
    25,744Estimated earnings recognized to date on uncompleted contracts
    
    
    6,889
    
    
    
    5,41236,935
    
    
    
    31,156Less billings on uncompleted contracts
    
    
    (34,773
    )
    
    
    (30,576
    )$
    2,162
    
    
    $
    580
  February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    $
    4,126
    
    
    $
    2,681Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    1,964
    
    
    
    2,101$
    2,162
    
    
    $
    580
 NOTE 6  INVESTMENTS IN MARKETABLE EQUITY SECURITIES
  February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Amortized cost
    
    $
    2,284
    
    
    $
    2,221Borrowings on investments
    
    
    (800
    )
    
    
    Net unrealized loss
    
    
    (57
    )
    
    
    (22
    )Estimated fair value
    
    $
    1,427
    
    
    $
    2,199
  16




---



##### Table of Contents



NOTE 7  PROPERTY, PLANT AND EQUIPMENT
  February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Land and building
    
    $
    1,951
    
    
    $
    1,951Machinery and equipment
    
    
    6,398
    
    
    
    5,615Research equipment
    
    
    385
    
    
    
    420Office equipment
    
    
    4,396
    
    
    
    4,131Vehicles
    
    
    3,134
    
    
    
    3,067Leasehold improvements
    
    
    238
    
    
    
    14516,502
    
    
    
    15,329Less accumulated depreciation
    
    
    (10,817
    )
    
    
    (10,265
    )$
    5,685
    
    
    $
    5,064
  NOTE 8  GOODWILL AND OTHER INTANGIBLE ASSETS
  WIRELESS
INFRASTRUCTURE
    
    
    MANUFACTURING
AND
DISTRIBUTION
    
    

BUSINESS
SOLUTIONS
    
    

HOLDING
COMPANY
    
    

SEGMENT
TOTALSGoodwill
at August
31, 2005
    
    $
    1,423
    
    
    $
    5,970
    
    
    $
    4,287
    
    
    $
    
    
    
    $
    11,680Goodwill
acquired
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190Goodwill
adjustment
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    56Impairment
losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Goodwill
at February
28, 2006
    
    $
    1,613
    
    
    $
    5,970
    
    
    $
    4,343
    
    
    $
    
    
    
    $
    11,926
   17




---



##### Table of Contents



FEBRUARY 28, 2006
    
    
    AUGUST 31, 2005(Unaudited)
    
    
    (Audited)WEIGHTED
    
    
    
    
    
    
    
    
    
    
    WEIGHTEDGROSS
    
    
    
    
    
    
    AVERAGE
    
    
    GROSS
    
    
    
    
    
    
    AVERAGECARRYING
    
    
    ACCUMULATED
    
    
    AMORT
    
    
    CARRYING
    
    
    ACCUMULATED
    
    
    AMORTAMOUNT
    
    
    AMORTIZATION
    
    
    PERIOD
    
    
    AMOUNT
    
    
    AMORTIZATION
    
    
    PERIODCustomer relationships
    
    $
    3,222
    
    
    $
    512
    
    
    10 YRS
    
    $
    3,222
    
    
    $
    352
    
    
    10 YRSNon-compete
    
    
    1,229
    
    
    
    345
    
    
    5 YRS
    
    
    1,229
    
    
    
    222
    
    
    5 YRSNon-compete
    
    
    100
    
    
    
    61
    
    
    3 YRS
    
    
    100
    
    
    
    44
    
    
    3 YRSNon-compete
    
    
    200
    
    
    
    28
    
    
    10 YRS
    
    
    200
    
    
    
    18
    
    
    10 YRSIntangible assets subject
to amortization
    
    
    4,751
    
    
    
    946
    
    
    8 YRS
    
    
    4,751
    
    
    
    636
    
    
    8 YRSTradename
    
    
    590
    
    
    
    
    
    
    
    
    
    
    
    590
    
    
    
    
    
    
    
    Intangible assets not
subject to amortization
    
    
    590
    
    
    
    
    
    
    
    
    
    
    
    590
    
    
    
    
    
    
    
    Total
    
    $
    5,341
    
    
    $
    946
    
    
    8 YRS
    
    $
    5,341
    
    
    $
    636
    
    
    8 YRS
   2006
    
    $
    3122007
    
    
    6262008
    
    
    6102009
    
    
    5232010
    
    
    4552011 and thereafter
    
    
    1,279Total
    
    $
    3,805
 NOTE 9  LINE OF CREDIT AND DEBT ARRANGEMENTS
 Line of Credit
    18




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##### Table of Contents



Long-term debt arrangements
  February 28,
    
    
    August 31,2006
    
    
    2005Description
of debt outstanding:
    
    (Unaudited)
    
    
    (Audited)Notes payable to
financial
institutions:Due in monthly installment of
$40 plus interest at .5% less
than the credit facilitys
Prime Rate through maturity
date, July 15, 2009. The loan
is secured by the business
assets of the Company, with a
second lien on assets pledged
by a shareholder.
    
    $
    1,680
    
    
    $
    1,920Due in monthly installment of
$33 plus interest at .5% less
than the credit facilitys
Prime Rate through maturity
date, July 15, 2009. The loan
is secured by the business
assets of the Company, with a
second lien on assets pledged
by a shareholder.
    
    
    1,367
    
    
    
    1,567Due in monthly installment of
$33 plus interest at .5% less
than the credit facilitys
Prime Rate through maturity
date, April 30, 2009. The loan
is secured by the business
assets of the Company, with a
second lien on assets pledged
by a shareholder.
    
    
    1,238
    
    
    
    1,466Due in monthly installment of
$55 plus interest at .5% less
than the credit facilitys
Prime Rate through maturity
date, April 30, 2007. The loan
is secured by the business
assets of the Company, with a
second lien on assets pledged
by a shareholder.
    
    
    825
    
    
    
    1,210Due in monthly installment of
$50 plus interest at .5% less
than the credit facilitys
Prime Rate through maturity
date, April 30, 2007. The loan
is secured by the business
assets of the Company, with a
second lien on assets pledged
by a shareholder.
    
    
    650
    
    
    
    950Due in monthly installments of
$6, including interest at
ranges from 4.9% to 9.03%
through April 2010. The loan is
secured by vehicles and
equipment.
    
    
    194
    
    
    
    233Convertible Term
Note:Due in monthly installment 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 two shareholders.
    
    
    7,500
    
    
    
    Debt with
shareholder:Due in monthly installments of
$3 including interest at 4.0%
through September 2008. The
loan is secured by vehicles and
equipment.
    
    
    78
    
    
    
    94Capital
leases:Due in monthly installments of
$4 including interest at ranges
from 2.3% to 11.6% through June
2010. The loan is secured by
computers and equipment.
    
    
    114
    
    
    
    133Total debt
    
    
    13,646
    
    
    
    7,573Less current maturities
    
    
    (2,652
    )
    
    
    (2,675
    )Long-term portion of outstanding debt
    
    $
    10,994
    
    
    $
    4,898
 19




---



##### Table of Contents



2006
    
    $
    1,3412007
    
    
    3,7732008
    
    
    4,0762009
    
    
    4,4172010
    
    
    39$
    13,646
 Cancellation of Line of Credit-Related Party
  Convertible Term Note
   
    
    the average closing price of the Companys common stock as reported by
Bloomberg, L.P. for the five trading days immediately preceding the
repayment date is greater than or equal to 109% of the conversion
price of the Note, set in the Note at $5.50 per share (based upon the
conversion price of $5.50, the average closing price required would be
$6.00);
 
    
    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.
  20




---



##### Table of Contents




    
    a failure to make payments under the Note when due;
 
    
    a material breach of the transaction documents by the Company;
 
    
    bankruptcy related events;
 
    
    a change of control transaction without prior approval; and
 
    
    events of default under certain other agreements to which the Company is a party.
   
    
    Laurus may not convert the Note or exercise the Warrant for a number
of shares that would cause all shares then held by Laurus to exceed
4.99% of the Companys outstanding shares of common stock unless there
has been an event of default or Laurus provides the Company with
seventy-five days prior notice.
 
    
    Laurus agreed that it would not acquire in aggregate more than
2,108,764 shares of common stock through the conversion of the Note or
the Warrant or through any agreement related thereto unless the
Companys shareholders approved such issuance.
   NOTE 10  SHAREHOLDERS EQUITY
 Common Stock
  21




---



##### Table of Contents



Number of SharesAuthorized
    
    
    Issued
    
    
    Outstanding
    
    
    AmountFebruary 28, 2006 (Unaudited)Common stock, $0.10 par value
    
    
    150,000,000
    
    
    
    10,559,843
    
    
    
    10,559,843
    
    
    $
    1,046August 31, 2005 (Audited)Common stock, $0.10 par value
    
    
    150,000,000
    
    
    
    10,559,843
    
    
    
    10,559,843
    
    
    $
    1,046
  Preferred Stock
  Number of SharesAuthorized
    
    
    Issued
    
    
    Outstanding
    
    
    AmountFebruary 28, 2006 (Unaudited)Preferred stock, $0.10 par value
    
    
    1,000,000
    
    
    
    66,180
    
    
    
    66,180
    
    
    $
    6,618August 31, 2005 (Audited)Preferred stock, $0.10 par value
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    $
    
  NOTE 11  INCOME TAXES
  February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Tax at U.S. Federal statutory rate
    
    
    34.0
    %
    
    
    34.0
    %State and local taxes, net of federal benefit
    
    
    5.6
    
    
    
    5.6Other
    
    
    
    
    
    
    Change in valuation allowance
    
    
    (39.6
    )
    
    
    (39.6
    )0.0
    %
    
    
    0.0
    %
 22




---



##### Table of Contents



February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Current:Federal
    
    $
    518
    
    
    $
    (41
    )State
    
    
    114
    
    
    
    72632
    
    
    
    31Deferred:Federal
    
    
    19
    
    
    
    (567
    )State
    
    
    3
    
    
    
    (318
    )22
    
    
    
    (855
    )Change in valuation allowance
    
    
    (633
    )
    
    
    936Net income tax (benefit)
    
    $
    21
    
    
    $
    82
  February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Deferred Tax Assets:Current:Allowances for doubtful accounts and inventory
    
    $
    731
    
    
    $
    850Accrued liabilities and other
    
    
    669
    
    
    
    524Noncurrent:Amortization of covenants
    
    
    294
    
    
    
    304Depreciation
    
    
    (84
    )
    
    
    (91
    )Net operating losses and other carryforwards
    
    
    1,802
    
    
    
    2,4583,412
    
    
    
    4,045Valuation allowance
    
    
    (2,398
    )
    
    
    (3,031
    )$
    1,014
    
    
    $
    1,014
  23




---



##### Table of Contents



NOTE 12  PER SHARE DATA
  Three Month Period Ended
    
    
    Six Month Period EndedFebruary 28,
    
    
    February 28,
    
    
    February 28,
    
    
    February 28,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Net Income Available to CommonShareholders
    
    $
    316
    
    
    $
    (1,324
    )
    
    $
    1,163
    
    
    $
    (621
    )Basic Income Per Common Share
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.11
    
    
    $
    (0.06
    )Basic weighted average number ofcommon shares outstanding
    
    
    10,559,843
    
    
    
    10,318,559
    
    
    
    10,559,843
    
    
    
    10,318,559Diluted Income Per Common Share:
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.10
    
    
    $
    (0.06
    )Diluted weighted average number ofcommon shares outstanding
    
    
    12,067,814
    
    
    
    10,318,559
    
    
    
    11,472,267
    
    
    
    10,318,559
  NOTE 13  RELATED PARTY TRANSACTIONS
     24




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##### Table of Contents



February 28,
    
    
    August 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)Note receivable from subsidiary employee
    
    $
    300
    
    
    $
    300Long-term line of credit
    
    
    
    
    
    
    (6,618
    )Installment notes payable
    
    
    (44
    )
    
    
    (94
    )Net assets (liabilities)
    
    $
    256
    
    
    $
    (6,412
    )
  NOTE 14  SEGMENT INFORMATION
  Wireless
    
    
    Manufacturing and
    
    
    Business
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Distribution
    
    
    Solutions
    
    
    Company
    
    
    TotalsThree Month Period EndedFebruary 28, 2006 (Unaudited)Net revenues
    
    $
    16,055
    
    
    $
    5,976
    
    
    $
    11,325
    
    
    $
    
    
    
    $
    33,356Cost of revenues
    
    
    13,235
    
    
    
    4,432
    
    
    
    8,155
    
    
    
    
    
    
    
    25,822Gross profit
    
    
    2,820
    
    
    
    1,544
    
    
    
    3,170
    
    
    
    
    
    
    
    7,534Operating expensesSelling, general and administrative
    
    
    2,222
    
    
    
    1,213
    
    
    
    1,654
    
    
    
    993
    
    
    $
    6,082Depreciation and amortization
    
    
    231
    
    
    
    110
    
    
    
    156
    
    
    
    46
    
    
    
    543Total operating expense
    
    
    2,453
    
    
    
    1,323
    
    
    
    1,810
    
    
    
    1,039
    
    
    
    6,625Segment operating income (loss)
    
    $
    367
    
    
    $
    221
    
    
    $
    1,360
    
    
    $
    (1,039
    )
    
    $
    909
 Wireless
    
    
    Manufacturing and
    
    
    Business
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Distribution
    
    
    Solutions
    
    
    Company
    
    
    TotalsThree Month Period EndedFebruary 28, 2005 (Unaudited)Net revenues
    
    $
    9,835
    
    
    $
    4,680
    
    
    $
    5,634
    
    
    $
    
    
    
    $
    20,149Cost of revenues
    
    
    8,692
    
    
    
    3,424
    
    
    
    4,324
    
    
    
    
    
    
    
    16,440Gross profit
    
    
    1,143
    
    
    
    1,256
    
    
    
    1,310
    
    
    
    
    
    
    
    3,709Operating expensesSelling, general and administrative
    
    
    1,572
    
    
    
    1,647
    
    
    
    745
    
    
    
    481
    
    
    
    4,445Depreciation and amortization
    
    
    138
    
    
    
    154
    
    
    
    42
    
    
    
    20
    
    
    
    354Total operating expense
    
    
    1,710
    
    
    
    1,801
    
    
    
    787
    
    
    
    501
    
    
    
    4,799Segment operating income (loss)
    
    $
    (567
    )
    
    $
    (545
    )
    
    $
    523
    
    
    $
    (501
    )
    
    $
    (1,090
    )
 Wireless
    
    
    Manufacturing and
    
    
    Business
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Distribution
    
    
    Solutions
    
    
    Company
    
    
    TotalsSix Month Period EndedFebruary 28, 2006 (Unaudited)Net revenues
    
    $
    37,125
    
    
    $
    11,611
    
    
    $
    21,063
    
    
    $
    
    
    
    $
    69,799Cost of revenues
    
    
    31,231
    
    
    
    8,410
    
    
    
    15,386
    
    
    
    
    
    
    
    55,027Gross profit
    
    
    5,894
    
    
    
    3,201
    
    
    
    5,677
    
    
    
    
    
    
    
    14,772Operating expensesSelling, general and administrative
    
    
    4,203
    
    
    
    2,614
    
    
    
    3,035
    
    
    
    1,687
    
    
    
    11,539Depreciation and amortization
    
    
    419
    
    
    
    217
    
    
    
    310
    
    
    
    78
    
    
    
    1,024Total operating expense
    
    
    4,622
    
    
    
    2,831
    
    
    
    3,345
    
    
    
    1,765
    
    
    
    12,563Segment operating income (loss)
    
    $
    1,272
    
    
    $
    370
    
    
    $
    2,332
    
    
    $
    (1,765
    )
    
    $
    2,209
 25




---



##### Table of Contents



Wireless
    
    
    Manufacturing and
    
    
    Business
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Distribution
    
    
    Solutions
    
    
    Company
    
    
    TotalsSix Month Period EndedFebruary 28, 2005 (Unaudited)Net revenues
    
    $
    24,535
    
    
    $
    10,364
    
    
    $
    10,298
    
    
    $
    
    
    
    $
    45,197Cost of revenues
    
    
    21,096
    
    
    
    7,518
    
    
    
    7,984
    
    
    
    
    
    
    
    36,598Gross profit
    
    
    3,439
    
    
    
    2,846
    
    
    
    2,314
    
    
    
    
    
    
    
    8,599Operating expensesSelling, general and administrative
    
    
    2,511
    
    
    
    3,301
    
    
    
    1,366
    
    
    
    820
    
    
    
    7,998Depreciation and amortization
    
    
    320
    
    
    
    291
    
    
    
    82
    
    
    
    38
    
    
    
    731Total operating expense
    
    
    2,831
    
    
    
    3,592
    
    
    
    1,448
    
    
    
    858
    
    
    
    8,729Segment operating income (loss)
    
    $
    608
    
    
    $
    (746
    )
    
    $
    866
    
    
    $
    (858
    )
    
    $
    (130
    )
 Wireless
    
    
    Manufacturing and
    
    
    Business
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Distribution
    
    
    Solutions
    
    
    Company
    
    
    TotalsAs of February 28, 2006 (Unaudited)CURRENT ASSETSCash and equivalents
    
    $
    (668
    )
    
    $
    442
    
    
    $
    4,691
    
    
    $
    (269
    )
    
    $
    4,196Restricted savings account
    
    
    
    
    
    
    
    
    
    
    1,604
    
    
    
    
    
    
    
    1,604Available for sale investments
    
    
    
    
    
    
    
    
    
    
    1,427
    
    
    
    
    
    
    
    1,427Accounts receivable, net
    
    
    13,886
    
    
    
    3,540
    
    
    
    1,586
    
    
    
    (15
    )
    
    
    18,997Costs and estimated earnings in
excess of billings
on uncompleted contracts
    
    
    4,126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,126Inventory, net
    
    
    3,447
    
    
    
    3,636
    
    
    
    45
    
    
    
    
    
    
    
    7,128Deferred tax asset
    
    
    281
    
    
    
    
    
    
    
    733
    
    
    
    
    
    
    
    1,014Prepaid expenses and
other current assets
    
    
    602
    
    
    
    217
    
    
    
    421
    
    
    
    269
    
    
    
    1,509Total Current Assets
    
    
    21,674
    
    
    
    7,835
    
    
    
    10,507
    
    
    
    (15
    )
    
    
    40,001OTHER ASSETSProperty, plant & equipment, net
    
    
    2,639
    
    
    
    2,208
    
    
    
    343
    
    
    
    495
    
    
    
    5,685Goodwill
    
    
    1,613
    
    
    
    5,970
    
    
    
    4,343
    
    
    
    
    
    
    
    11,926Other intangible assets, net
    
    
    168
    
    
    
    696
    
    
    
    3,531
    
    
    
    
    
    
    
    4,395Accounts receivable  long term
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600Other long term assets
    
    
    7
    
    
    
    64
    
    
    
    27
    
    
    
    1,453
    
    
    
    1,551Total Other Assets
    
    
    5,027
    
    
    
    8,938
    
    
    
    8,244
    
    
    
    1,948
    
    
    
    24,157TOTAL ASSETS
    
    $
    26,701
    
    
    $
    16,773
    
    
    $
    18,751
    
    
    $
    1,933
    
    
    $
    64,158
 Wireless
    
    
    Manufacturing and
    
    
    Business
    
    
    Holding
    
    
    SegmentInfrastructure
    
    
    Distribution
    
    
    Solutions
    
    
    Company
    
    
    TotalsAs of August 31, 2005 (Audited)CURRENT ASSETSCash and equivalents
    
    $
    414
    
    
    $
    399
    
    
    $
    3,103
    
    
    $
    (129
    )
    
    $
    3,787Restricted savings account
    
    
    
    
    
    
    
    
    
    
    1,484
    
    
    
    
    
    
    
    1,484Available for sale investments
    
    
    
    
    
    
    
    
    
    
    2,199
    
    
    
    
    
    
    
    2,199Accounts receivable, net
    
    
    16,736
    
    
    
    3,315
    
    
    
    1,304
    
    
    
    3
    
    
    
    21,358Costs and estimated earnings in
excess of billings
on uncompleted contracts
    
    
    2,681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,681Inventory, net
    
    
    4,180
    
    
    
    4,120
    
    
    
    15
    
    
    
    
    
    
    
    8,315Deferred tax asset
    
    
    451
    
    
    
    
    
    
    
    563
    
    
    
    
    
    
    
    1,014Prepaid expenses and
other current assets
    
    
    940
    
    
    
    198
    
    
    
    421
    
    
    
    231
    
    
    
    1,790Total Current Assets
    
    
    25,402
    
    
    
    8,032
    
    
    
    9,089
    
    
    
    105
    
    
    
    42,628OTHER ASSETSProperty, plant & equipment, net
    
    
    2,077
    
    
    
    2,212
    
    
    
    306
    
    
    
    469
    
    
    
    5,064Goodwill
    
    
    1,423
    
    
    
    5,970
    
    
    
    4,287
    
    
    
    
    
    
    
    11,680Other intangible assets, net
    
    
    192
    
    
    
    740
    
    
    
    3,773
    
    
    
    
    
    
    
    4,705Accounts receivable  long term
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600Other long term assets
    
    
    
    
    
    
    55
    
    
    
    18
    
    
    
    336
    
    
    
    409Total Other Assets
    
    
    4,292
    
    
    
    8,977
    
    
    
    8,384
    
    
    
    805
    
    
    
    22,458TOTAL ASSETS
    
    $
    29,694
    
    
    $
    17,009
    
    
    $
    17,473
    
    
    $
    910
    
    
    $
    65,086
 26




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 This report contains statements that constitute forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. The words expect, estimate, anticipate,
predict, believe and similar expressions and variations thereof are intended to
identify forward-looking statements. These statements appear in a number of places in this
report and include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things, trends
affecting the Companys financial condition or results of operations. The readers of this
report are cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties that could cause actual results to differ
materially. Factors that might cause or contribute to such differences, include, but are
not limited to, the risks and uncertainties that are discussed under the heading
Managements Discussion and Analysis or Plan of Operations. The Company does not
ordinarily make projections of its future operating results and undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Readers should carefully review the risk factors
disclosed within Form 10-KSB for the year ended August 31, 2005 and the other documents
filed by the Company with the Securities and Exchange Commission.
 OVERVIEW
    
  
  
   Wireless Infrastructure
  27




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##### Table of Contents



Manufacturing and Distribution
   Business Solutions
  28




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##### Table of Contents



Holding Company
  CRITICAL ACCOUNTING POLICIES
  RESULTS OF OPERATIONS: COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED FEBRUARY 28,
2006 AND FEBRUARY 28, 2005
 Executive Overview of Financial Results
  29




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##### Table of Contents



Wireless Infrastructure
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedFebruary 28,
    
    
    February 28,
    
    
    
    
    
    
    
    
    
    
    February 28,
    
    
    February 28,2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %(Unaudited)
    
    
    (Unaudited)
    
    
    Change
    
    
    Change
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    Change
    
    
    ChangeNet revenues
    
    $
    16,055
    
    
    $
    9,835
    
    
    $
    6,220
    
    
    
    63
    %
    
    $
    37,125
    
    
    $
    24,535
    
    
    $
    12,590
    
    
    
    51
    %Cost of revenues
    
    
    13,235
    
    
    
    8,692
    
    
    
    4,543
    
    
    
    52
    %
    
    
    31,231
    
    
    
    21,096
    
    
    
    10,135
    
    
    
    48
    %Gross profit
    
    
    2,820
    
    
    
    1,143
    
    
    
    1,677
    
    
    
    147
    %
    
    
    5,894
    
    
    
    3,439
    
    
    
    2,455
    
    
    
    71
    %Gross profit as % of revenue
    
    
    18
    %
    
    
    12
    %
    
    
    
    
    
    
    
    
    
    
    16
    %
    
    
    14
    %Operating expensesSelling, general and administrative
    
    
    2,222
    
    
    
    1,572
    
    
    
    650
    
    
    
    41
    %
    
    
    4,203
    
    
    
    2,511
    
    
    
    1,692
    
    
    
    67
    %Depreciation and amortization
    
    
    231
    
    
    
    138
    
    
    
    93
    
    
    
    67
    %
    
    
    419
    
    
    
    320
    
    
    
    99
    
    
    
    31
    %Total operating expense
    
    
    2,453
    
    
    
    1,710
    
    
    
    743
    
    
    
    43
    %
    
    
    4,622
    
    
    
    2,831
    
    
    
    1,791
    
    
    
    63
    %Segment operating income
    
    $
    367
    
    
    $
    (567
    )
    
    $
    934
    
    
    
    165
    %
    
    $
    1,272
    
    
    $
    608
    
    
    $
    664
    
    
    
    109
    %
 Revenues
  Gross Profit
  Operating Income
  30




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##### Table of Contents



Manufacturing and Distribution
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedFebruary 28,
    
    
    February 28,
    
    
    
    
    
    
    
    
    
    
    February 28,
    
    
    February 28,2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %(Unaudited)
    
    
    (Unaudited)
    
    
    Change
    
    
    Change
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    Change
    
    
    ChangeNet revenues
    
    $
    5,976
    
    
    $
    4,680
    
    
    $
    1,296
    
    
    
    28
    %
    
    $
    11,611
    
    
    $
    10,364
    
    
    $
    1,247
    
    
    
    12
    %Cost of revenues
    
    
    4,432
    
    
    
    3,424
    
    
    
    1,008
    
    
    
    29
    %
    
    
    8,410
    
    
    
    7,518
    
    
    
    892
    
    
    
    12
    %Gross profit
    
    
    1,544
    
    
    
    1,256
    
    
    
    288
    
    
    
    23
    %
    
    
    3,201
    
    
    
    2,846
    
    
    
    355
    
    
    
    12
    %Gross profit as % of revenue
    
    
    26
    %
    
    
    27
    %
    
    
    
    
    
    
    
    
    
    
    28
    %
    
    
    27
    %Operating expensesSelling, general and administrative
    
    
    1,213
    
    
    
    1,647
    
    
    
    (434
    )
    
    
    -26
    %
    
    
    2,614
    
    
    
    3,301
    
    
    
    (687
    )
    
    
    -21
    %Depreciation and amortization
    
    
    110
    
    
    
    154
    
    
    
    (44
    )
    
    
    -29
    %
    
    
    217
    
    
    
    291
    
    
    
    (74
    )
    
    
    -25
    %Total operating expense
    
    
    1,323
    
    
    
    1,801
    
    
    
    (478
    )
    
    
    -27
    %
    
    
    2,831
    
    
    
    3,592
    
    
    
    (761
    )
    
    
    -21
    %Segment operating income (loss)
    
    $
    221
    
    
    $
    (545
    )
    
    $
    766
    
    
    
    141
    %
    
    $
    370
    
    
    $
    (746
    )
    
    $
    1,116
    
    
    
    150
    %
 Revenues
  Gross Profit
  Operating Income
  31




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##### Table of Contents



Business Solutions
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedFebruary 28,
    
    
    February 28,
    
    
    
    
    
    
    
    
    
    
    February 28,
    
    
    February 28,2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %(Unaudited)
    
    
    (Unaudited)
    
    
    Change
    
    
    Change
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    Change
    
    
    ChangeNet revenues
    
    $
    11,325
    
    
    $
    5,634
    
    
    $
    5,691
    
    
    
    101
    %
    
    $
    21,063
    
    
    $
    10,298
    
    
    $
    10,765
    
    
    
    105
    %Cost of revenues
    
    
    8,155
    
    
    
    4,324
    
    
    
    3,831
    
    
    
    89
    %
    
    
    15,386
    
    
    
    7,984
    
    
    
    7,402
    
    
    
    93
    %Gross profit
    
    
    3,170
    
    
    
    1,310
    
    
    
    1,860
    
    
    
    142
    %
    
    
    5,677
    
    
    
    2,314
    
    
    
    3,363
    
    
    
    145
    %Gross profit as % of revenue
    
    
    28
    %
    
    
    23
    %
    
    
    
    
    
    
    
    
    
    
    27
    %
    
    
    22
    %Operating expensesSelling, general and administrative
    
    
    1,654
    
    
    
    745
    
    
    
    909
    
    
    
    122
    %
    
    
    3,035
    
    
    
    1,366
    
    
    
    1,669
    
    
    
    122
    %Depreciation and amortization
    
    
    156
    
    
    
    42
    
    
    
    114
    
    
    
    271
    %
    
    
    310
    
    
    
    82
    
    
    
    228
    
    
    
    278
    %Total operating expense
    
    
    1,810
    
    
    
    787
    
    
    
    1,023
    
    
    
    130
    %
    
    
    3,345
    
    
    
    1,448
    
    
    
    1,897
    
    
    
    131
    %Segment operating income
    
    $
    1,360
    
    
    $
    523
    
    
    $
    837
    
    
    
    160
    %
    
    $
    2,332
    
    
    $
    866
    
    
    $
    1,466
    
    
    
    169
    %
 Revenues
  Gross Profit
  Operating Income
  32




---



##### Table of Contents



Holding Company
 Operating Expense
  Interest Expense
   Income Taxes
   LIQUIDITY AND CAPITAL RESOURCES
   Operating Activities
  33




---



##### Table of Contents



Investing Activities
   Financing Activities
         34




---



##### Table of Contents



Marketable Securities
  TRANSACTIONS WITH RELATED PARTIES
   CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
  Payments Due ByContractual obligation
    
    Total
    
    

Less
than1 year
    
    
    1-2 years
    
    
    3-5 years
    
    

More
than5 yearsLong-term debt and
capital lease obligations
    
    $
    13,646
    
    
    $
    1,341
    
    
    $
    7,849
    
    
    $
    4,456
    
    
    $
    Operating lease
    
    
    4,209
    
    
    
    1,556
    
    
    
    1,902
    
    
    
    426
    
    
    
    325Total
    
    $
    17,855
    
    
    $
    2,897
    
    
    $
    9,751
    
    
    $
    4,882
    
    
    $
    325
  OFF BALANCE SHEET ARRANGEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  35




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##### Table of Contents



Item 4. Controls and Procedures
   
 PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits
   
 36




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##### Table of Contents



SIGNATURES
  Fortune Diversified Industries, Inc.
(Registrant)Date:  April 12, 2006
    By:
    /s/ John F. FisbeckJohn F. Fisbeck,Chief Executive OfficerDate:  April 12, 2006
    By:
    /s/ Amy GalloAmy Gallo,Chief Financial Officer 37