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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 November 30, 2006
 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.
  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
 
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FORTUNE INDUSTRIES, INC.
FORM 10-Q
For The Quarterly Period Ended November 30, 2006
 INDEX
 PagePART I. Financial InformationITEM 1. Financial StatementsConsolidated Balance Sheets as of November 30, 2006 (unaudited) and August 31, 2006
    
    3Consolidated Statements of Operations for the three month period ended November 30, 2006 and 2005 (unaudited)
    
    5Consolidated Statement of Changes in Shareholders Equity for the three month period ended November 30, 2006 (unaudited)
    
    6Consolidated Statements of Cash Flows for the three month periods ended November 30, 2006 and 2005 (unaudited)
    
    7Notes to the Consolidated Financial Statements
    
    9ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    25ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    34ITEM 4. Controls and Procedures
    
    35PART II. Other InformationITEM 1. Legal Proceedings
    
    35ITEM 1A. Risk Factors
    
    35ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    35ITEM 3. Defaults Upon Senior Securities
    
    35ITEM 4. Submission of Matters to a Vote of Security Holders
    
    35ITEM 5. Other Information
    
    36ITEM 6. Exhibits
    
    36Signatures
    
    36CertificationCertificationCertificationCertification
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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (DOLLARS IN THOUSANDS)
 November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETSCash and equivalents
    
    $
    7,104
    
    
    $
    3,632Restricted cash
    
    
    3,462
    
    
    
    3,462Marketable equity securities (Note 3)
    
    
    2,943
    
    
    
    1,281Accounts receivable, net (Note 4)
    
    
    26,185
    
    
    
    25,731Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 5)
    
    
    4,260
    
    
    
    4,500Inventory, net
    
    
    6,579
    
    
    
    6,761Deferred tax asset (Note 8)
    
    
    1,535
    
    
    
    1,535Prepaid expenses and other current assets
    
    
    1,527
    
    
    
    1,922Total Current Assets
    
    
    53,595
    
    
    
    48,824OTHER ASSETSProperty, plant & equipment, net (Note 6)
    
    
    12,934
    
    
    
    6,323Long-term accounts receivable (Note 4)
    
    
    1,223
    
    
    
    1,276Goodwill
    
    
    11,984
    
    
    
    11,984Other intangible assets, net
    
    
    4,135
    
    
    
    4,299Other long-term assets
    
    
    1,508
    
    
    
    1,579Total Other Assets
    
    
    31,784
    
    
    
    25,461TOTAL ASSETS
    
    $
    85,379
    
    
    $
    74,285
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
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FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
 November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of long-term debt (Note 7)
    
    $
    2,124
    
    
    $
    2,124Current maturities of convertible term note (Note 7)
    
    
    1,818
    
    
    
    1,364Variable interest entity line of credit (Note 7)
    
    
    2,200
    
    
    
    Variable interest entity current maturities of long-term debt (Note 7)
    
    
    503
    
    
    
    Accounts payable
    
    
    6,080
    
    
    
    9,324Health and workers compensation reserves
    
    
    3,701
    
    
    
    3,363Accrued expenses
    
    
    5,534
    
    
    
    5,449Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 5)
    
    
    2,683
    
    
    
    1,968Other current liabilities
    
    
    2,091
    
    
    
    1,849Total Current Liabilities
    
    
    26,734
    
    
    
    25,441LONG-TERM LIABILITIESLine of credit (Note 7)
    
    
    7,725
    
    
    
    3,330Long-term debt, less current maturities (Note 7)
    
    
    17,847
    
    
    
    18,213Convertible term note (Note 7)
    
    
    5,455
    
    
    
    6,136Variable interest entity long-term debt, less current maturities (Note 7)
    
    
    4,937
    
    
    
    Other long-term liabilities
    
    
    215
    
    
    
    215Total Long-Term Liabilities
    
    
    36,179
    
    
    
    27,894Total Liabilities
    
    
    62,913
    
    
    
    53,335MINORITY INTEREST IN VARIABLE INTEREST ENTITY
    
    
    738
    
    
    
    SHAREHOLDERS EQUITYCommon stock, $0.10 par value; 150,000,000 authorized;
10,524,722 and 10,522,722 issued and outstanding at
November 30, 2006 and August 31, 2006, respectively
    
    
    1,053
    
    
    
    1,053Preferred stock, $0.10 par value; 1,000,000 authorized;
66,180 issued and outstanding at November 30, 2006
and August 31, 2006
    
    
    6,618
    
    
    
    6,618Additional paid-in capital and warrants outstanding
    
    
    17,633
    
    
    
    17,633Accumulated deficit
    
    
    (3,792
    )
    
    
    (4,518
    )Accumulated other comprehensive income
    
    
    216
    
    
    
    164Total Shareholders Equity
    
    
    21,728
    
    
    
    20,950TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    85,379
    
    
    $
    74,285
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
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FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 (UNAUDITED)
 Three Month Period EndedNovember 30,
    
    
    November 30,2006
    
    
    2005REVENUESService revenues
    
    $
    15,002
    
    
    $
    14,067Product revenues
    
    
    25,682
    
    
    
    22,376TOTAL REVENUES
    
    
    40,684
    
    
    
    36,443COST OF REVENUESService cost of revenues
    
    
    11,235
    
    
    
    10,239Product cost of revenues
    
    
    20,675
    
    
    
    18,966TOTAL COST OF REVENUES
    
    
    31,910
    
    
    
    29,205GROSS PROFIT
    
    
    8,774
    
    
    
    7,238OPERATING EXPENSESSelling, general and administrative expenses
    
    
    6,431
    
    
    
    5,457Depreciation and amortization
    
    
    718
    
    
    
    481Total Operating Expenses
    
    
    7,149
    
    
    
    5,938OPERATING INCOME
    
    
    1,625
    
    
    
    1,300OTHER INCOME (EXPENSE)Interest income
    
    
    91
    
    
    
    56Interest expense
    
    
    (847
    )
    
    
    (544
    )Gain on investments in marketable securities, net (Note 3)
    
    
    17
    
    
    
    Exchange rate loss
    
    
    (1
    )
    
    
    (5
    )Other income
    
    
    22
    
    
    
    61Total Other Income (Expense)
    
    
    (718
    )
    
    
    (432
    )INCOME BEFORE MINORITY INTEREST IN
VARIABLE INTEREST ENTITY
    
    
    907
    
    
    
    868Minority Interest in Variable Interest Entity (Note 11)
    
    
    40
    
    
    
    INCOME BEFORE PROVISION FOR INCOME TAXES
    
    
    867
    
    
    
    868Provision for income taxes (Note 8)
    
    
    17
    
    
    
    21NET INCOME
    
    
    850
    
    
    
    847Preferred stock dividends
    
    
    124
    
    
    
    NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    726
    
    
    $
    847BASIC INCOME PER COMMON SHARE
    
    $
    0.07
    
    
    $
    0.08Basic
weighted average shares outstanding
    
    
    10,524,722
    
    
    
    10,559,843DILUTED INCOME PER COMMON SHARE
    
    $
    0.06
    
    
    $
    0.08Diluted weighted average shares outstanding
    
    
    12,242,284
    
    
    
    10,726,256
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
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FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
 (DOLLARS IN THOUSANDS)
 (UNAUDITED)
 Additional
    
    
    
    
    
    
    AccumulatedPaid-in Capital
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Preferred
    
    
    and Warrants
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    ComprehensiveStock
    
    
    Stock
    
    
    Outstanding
    
    
    Deficit
    
    
    Income
    
    
    Equity
    
    
    IncomeBALANCE AT AUGUST 31, 2006
    
    $
    1,053
    
    
    $
    6,618
    
    
    $
    17,633
    
    
    $
    (4,518
    )
    
    $
    164
    
    
    $
    20,950Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    850
    
    
    
    
    
    
    
    850
    
    
    
    850Preferred Stock Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124
    )
    
    
    
    
    
    
    (124
    )
    
    
    Foreign currency translation
adjustments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11
    
    
    
    11Unrealized
gains on investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    24
    
    
    
    24Reclassification adjustments for realized
gains & losses included in net income,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    17
    
    
    
    17Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    902BALANCE AT NOVEMBER 30, 2006
    
    $
    1,053
    
    
    $
    6,618
    
    
    $
    17,633
    
    
    $
    (3,792
    )
    
    $
    216
    
    
    $
    21,728
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements
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FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (DOLLARS IN THOUSANDS)
 (UNAUDITED)
 Three Month Period EndedNovember 30,
    
    
    November 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet Income
    
    $
    850
    
    
    $
    847Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    718
    
    
    
    481Gain on sale of investments
    
    
    (17
    )
    
    
    Changes in certain operating assets and liabilities:Restricted cash
    
    
    
    
    
    
    (5
    )Accounts receivable, net
    
    
    (454
    )
    
    
    (1,757
    )Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    240
    
    
    
    (1,162
    )Inventory, net
    
    
    182
    
    
    
    697Prepaid assets and other current assets
    
    
    400
    
    
    
    753Other long-term assets
    
    
    67
    
    
    
    (146
    )Accounts payable
    
    
    (3,244
    )
    
    
    395Health and workers compensation reserves
    
    
    338
    
    
    
    (62
    )Accrued expenses and other current liabilities
    
    
    284
    
    
    
    (1,230
    )Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    715
    
    
    
    239Net Cash Provided by (Used in) Operating Activities
    
    
    79
    
    
    
    (950
    )CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (330
    )
    
    
    (644
    )Purchases of marketable securities
    
    
    11
    
    
    
    (11
    )Acquisition of productive assets and businesses
    
    
    
    
    
    
    (262
    )Net Cash Used in Investing Activities
    
    
    (319
    )
    
    
    (917
    )CASH FLOWS FROM FINANCING ACTIVITIESNet borrowings (payments) under line of credit
    
    
    4,395
    
    
    
    (3,953
    )Borrowings on available for sale investment account
    
    
    
    
    
    
    800Payments on long-term debt
    
    
    (366
    )
    
    
    (763
    )Debt issuance costs
    
    
    
    
    
    
    (692
    )Borrowings (payments) from convertible debentures
    
    
    (227
    )
    
    
    7,500Dividends on preferred stock
    
    
    (124
    )
    
    
    Net Cash Provided by Financing Activities
    
    
    3,678
    
    
    
    2,892Consolidation of variable interest entity
    
    
    23
    
    
    
    Effect of exchange rate changes on cash
    
    
    11
    
    
    
    (41
    )NET INCREASE IN CASH AND EQUIVALENTS
    
    
    3,472
    
    
    
    984CASH AND EQUIVALENTSBeginning of Period
    
    
    3,632
    
    
    
    3,787End of Period
    
    $
    7,104
    
    
    $
    4,771
 See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.
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FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
 Three Month Period EndedNovember 30,
    
    
    November 30,2006
    
    
    2005SUPPLEMENTAL DISCLOSURESInterest paid
    
    $
    561
    
    
    $
    798Income taxes paid
    
    $
    9
    
    
    $
    21Unrealized
net gain on marketable equity securities
    
    $
    24
    
    
    $
    Consolidation of Variable Interest EntityCash
    
    $
    23Available for sale investments
    
    
    1,615Prepaid expenses and other current assets
    
    
    5Property, Plant and Equipment
    
    
    6,773Other long-term assets
    
    
    5Total Assets
    
    $
    8,421Line of credit
    
    $
    2,200Current maturities of long-term debt
    
    
    503Accrued expenses
    
    
    43Long-term debt
    
    
    4,937Minority interest
    
    
    738Total Liabilities and Minority Interest
    
    $
    8,421Non-cash investing and financing activities:Issuance of preferred stock for debt extinguishment
    
    
    
    
    
    $
    6,618Issuance of warrants in connection with loan refinancing
    
    
    
    
    
    
    266$
    6,884Acquisition 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 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
 Comprehensive Income (Loss
 Estimates
  Revenue and Cost Recognition:
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Cash and Equivalents:
 Restricted Cash:
 Marketable Equity Securities:
 Accounts Receivable:
 11




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Inventories:
 Shipping and Handling:
 Property, Plant, Equipment, and Depreciation:
  Goodwill and Other Indefinite-Lived Intangible Assets:
  Long-lived Assets:
 Fair Value of Financial Instruments:
 Stock-based Compensation:
 Income per Common Share:
 Income Taxes:
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Research and Development Costs:
 Warrants Issued With Convertible Debt:
  Self Insurance:
   Workers Compensation:
 NOTE 2  ACQUISITIONS AND PRO FORMA RESULTS
 Acquisitions
  Pro Forma Results
  13




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Three Month Period EndedNovember 30,
    
    
    November 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Net revenue
    
    $
    40,684
    
    
    $
    36,788Operating income (loss)
    
    $
    1,625
    
    
    $
    1,300Net income (loss) available to common shareholders
    
    $
    726
    
    
    $
    847Basic income (loss) per common share
    
    $
    0.07
    
    
    $
    0.08Diluted income (loss) per common share
    
    $
    0.06
    
    
    $
    0.08
 NOTE 3  INVESTMENTS IN MARKETABLE EQUITY SECURITIES
  November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Amortized cost
    
    $
    3,150
    
    
    $
    1,310Net unrealized loss
    
    
    (207
    )
    
    
    (16
    )Estimated fair value
    
    $
    2,943
    
    
    $
    1,281
  NOTE 4  ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE
  November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Amounts currently due
    
    $
    13,192
    
    
    $
    13,856Contracts in processProgress billing
    
    
    12,712
    
    
    
    11,683Retainages
    
    
    1,675
    
    
    
    1,60627,579
    
    
    
    27,145Less allowance for doubtful accounts and sales returns
    
    
    (1,394
    )
    
    
    (1,414
    )$
    26,185
    
    
    $
    25,731Long-term accounts receivable
    
    $
    1,223
    
    
    $
    1,276
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NOTE 5  CONTRACTS IN PROGRESS
  November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Costs incurred on uncompleted contracts
    
    $
    40,227
    
    
    $
    36,700Estimated earnings recognized to date on uncompleted
contracts
    
    
    8,457
    
    
    
    7,41648,684
    
    
    
    44,116Less billings on uncompleted contracts
    
    
    (47,107
    )
    
    
    (41,584
    )$
    1,577
    
    
    $
    2,532
  November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    $
    4,260
    
    
    $
    4,500Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    2,683
    
    
    
    1,968$
    1,577
    
    
    $
    2,532
 NOTE 6  PROPERTY, PLANT AND EQUIPMENT
  November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Land
    
    $
    1,496
    
    
    $
    351Building
    
    
    7,674
    
    
    
    1,540Machinery and equipment
    
    
    7,012
    
    
    
    6,934Research equipment
    
    
    394
    
    
    
    389Office equipment
    
    
    4,964
    
    
    
    4,857Vehicles
    
    
    3,634
    
    
    
    3,633Leasehold improvements
    
    
    325
    
    
    
    31625,500
    
    
    
    18,020Less accumulated depreciation
    
    
    (12,566
    )
    
    
    (11,697
    )$
    12,934
    
    
    $
    6,323
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NOTE 7  DEBT ARRANGEMENTS
  November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Notes payable:Revolving line of
credit promissory note
due August 31, 2008.
Interest at LIBOR plus
1.75% or 1.50% upon
achievement of certain
financial performance
criteria. The loan is
secured by the
business assets of the
Company.
    
    $
    7,725
    
    
    $
    3,330Term loan due in
monthly installments
of $167 plus interest
at LIBOR plus 1.75% or
1.50% upon achievement
of certain financial
performance criteria
through maturity date,
August 31, 2011. The
loan is secured by the
business assets of the
Company and personal
guarantees of the
Companys two majority
shareholders (the
Chairman of the Board
and the CEO of the
Company).
    
    
    19,666
    
    
    
    20,000Various term notes due
in monthly
installments of $6,
including interest at
ranges from 4.9% to
9.03% through April
2010. The loans are
secured by vehicles
and equipment.
    
    
    167
    
    
    
    173Convertible Term Note:Convertible term note
due in monthly
installments of $227
plus interest at the
Prime Rate plus 3.0%
(subject to
adjustments as
described below)
through maturity date,
November 30, 2008.
The loan is guaranteed
by the Companys two
majority shareholders.
    
    
    7,273
    
    
    
    7,500Debt with shareholder:Term note due in
monthly installments
of $3 including
interest at 4.0%
through September
2008. The loan is
secured by vehicles
and equipment.
    
    
    51
    
    
    
    63Variable Interest EntityRevolving line of
credit promissory note
due July 26, 2007.
Interest at LIBOR plus
1.6%. The loan is
secured by real estate
and personal
guarantees of the
Companys two majority
shareholders.
    
    
    2,200
    
    
    
    Various term loans due
in monthly
installments totaling
$44 plus interest at
ranges from LIBOR plus
1.5% to LIBOR plus
1.6%. The loans
mature at dates
ranging from February
2009 through April
2011. The notes are
secured by real estate
and personal
guarantees of the
Companys two majority
shareholders.
    
    
    5,440
    
    
    
    Capital leases:Various notes due in
monthly installments
of $5 including
interest at ranges
from 2.3% to 11.6%
through June 2010. The
loans are secured by
computers and
equipment.
    
    
    87
    
    
    
    101Total debt
    
    
    42,609
    
    
    
    31,167Less current maturities
    
    
    (6,645
    )
    
    
    (3,488
    )Long-term portion of outstanding debt
    
    $
    35,964
    
    
    $
    27,679
 16




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##### Table of Contents



2007
    
    $
    5,3182008
    
    
    13,0572009
    
    
    9,5092010
    
    
    2,2702011
    
    
    2,0002012 and thereafter
    
    
    10,455$
    42,609
 Credit Facility Loan and Security Agreement
   Revolving Line of Credit  Variable Interest Entity
  Convertible Term Note
   17




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##### Table of Contents



NOTE 8  INCOME TAXES
  November 30,
    
    
    August 31,2006
    
    
    2006(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
    )
    
    
    (78.6
    )0.0
    %
    
    
    (39.0
    )%
  November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Current:Federal
    
    $
    339
    
    
    $
    753State
    
    
    56
    
    
    
    124394
    
    
    
    877Deferred:Federal
    
    
    (272
    )
    
    
    (328
    )State
    
    
    (45
    )
    
    
    (54
    )(317
    )
    
    
    (382
    )Change in valuation allowance
    
    
    (60
    )
    
    
    (920
    )Net income tax (benefit)
    
    $
    17
    
    
    $
    (423
    )
  November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Deferred Tax Assets:Current:Allowances for doubtful accounts and inventory
    
    $
    644
    
    
    $
    596Accrued liabilities and other
    
    
    591
    
    
    
    900Noncurrent:Amortization of covenants
    
    
    (84
    )
    
    
    (84
    )Depreciation
    
    
    (289
    )
    
    
    (233
    )
 18




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##### Table of Contents



November 30,
    
    
    August 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Net operating losses and other carryforwards
    
    
    2,724
    
    
    
    2,4673,585
    
    
    
    3,646Valuation allowance
    
    
    (2,050
    )
    
    
    (2,111
    )$
    1,535
    
    
    $
    1,535
  NOTE 9  PER SHARE DATA
  Three Month Period EndedNovember 30,
    
    
    November 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Net Income Available to Common Shareholders
    
    $
    726
    
    
    $
    847Basic Income Per Common Share
    
    $
    0.07
    
    
    $
    0.08Basic weighted average number of common shares outstanding
    
    
    10,524,722
    
    
    
    10,559,843Diluted Income Per Common Share:
    
    $
    0.06
    
    
    $
    0.08Diluted weighted average number of common shares outstanding
    
    
    12,242,284
    
    
    
    10,726,256
  NOTE 10  RELATED PARTY TRANSACTIONS
    19




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##### Table of Contents



Other Related Party Transactions
  PSM Agreement
  Guarantees
  NOTE 11  VARIABLE INTEREST ENTITY
    AssetsCash
    
    $
    23Marketable equity securities
    
    
    1,615Other current assets
    
    
    5Property and equipment
    
    
    6,773Other assets
    
    
    5$
    8,421Liabilities and Shareholders EquityLine of credit
    
    $
    2,200Current maturities of long-term debt
    
    
    503
 20




---



##### Table of Contents



Accrued expenses
    
    
    43Long-term debt, net of current maturities
    
    
    4,9377,683Shareholders equity
    
    
    738$
    8,421
  NOTE 12  SEGMENT INFORMATION
   Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    OperatingInfrastructure
    
    
    Solutions (1)
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    Total3-Months Ended November 30, 2006Revenues
    
    $
    8,996
    
    
    $
    11,630
    
    
    $
    12,747
    
    
    $
    3,049
    
    
    $
    4,257
    
    
    $
    40,679Cost of revenues
    
    
    6,532
    
    
    
    9,181
    
    
    
    11,243
    
    
    
    1,723
    
    
    
    3,231
    
    
    
    31,910Gross profit
    
    
    2,464
    
    
    
    2,449
    
    
    
    1,504
    
    
    
    1,326
    
    
    
    1,026
    
    
    
    8,769Operating expensesSelling, general and administrative
    
    
    1,802
    
    
    
    1,569
    
    
    
    773
    
    
    
    1,134
    
    
    
    666
    
    
    
    5,944Depreciation and amortization
    
    
    115
    
    
    
    142
    
    
    
    138
    
    
    
    109
    
    
    
    23
    
    
    
    527Total operating expenses
    
    
    1,917
    
    
    
    1,711
    
    
    
    911
    
    
    
    1,243
    
    
    
    689
    
    
    
    6,471Segment operating income (loss)
    
    $
    547
    
    
    $
    738
    
    
    $
    593
    
    
    $
    83
    
    
    $
    337
    
    
    $
    2,298
 Holding
    
    
    Consolidated
    
    
    VIE
    
    
    SegmentCompany
    
    
    VIE
    
    
    Elimination
    
    
    Totals3-Months Ended November 30, 2006 (continued)Revenues
    
    $
    
    
    
    $
    226
    
    
    $
    (221
    )
    
    $
    40,684Cost of revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,910Gross profit
    
    
    
    
    
    
    226
    
    
    
    (221
    )
    
    
    8,774Operating expensesSelling, general and administrative
    
    
    708
    
    
    
    
    
    
    
    (221
    )
    
    
    6,431Depreciation and amortization
    
    
    142
    
    
    
    49
    
    
    
    
    
    
    
    718Total operating expenses
    
    
    850
    
    
    
    49
    
    
    
    (221
    )
    
    
    7,149Segment operating income (loss)
    
    $
    (850
    )
    
    $
    177
    
    
    $
    
    
    
    $
    1,625
 
 (1)
    
    Gross billings of $82,916 less worksite employee payroll costs of $71,286. 21




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##### Table of Contents



Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    OperatingInfrastructure
    
    
    Solutions (1)
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    Total3-Months Ended November 30, 2005
(restated)Revenues
    
    $
    6,824
    
    
    $
    9,738
    
    
    $
    14,102
    
    
    $
    2,697
    
    
    $
    3,082
    
    
    $
    36,443Cost of revenues
    
    
    5,259
    
    
    
    7,231
    
    
    
    12,734
    
    
    
    1,488
    
    
    
    2,493
    
    
    
    29,205Gross profit
    
    
    1,565
    
    
    
    2,507
    
    
    
    1,368
    
    
    
    1,209
    
    
    
    589
    
    
    
    7,238Operating expensesSelling, general
and administrative
    
    
    1,160
    
    
    
    1,381
    
    
    
    716
    
    
    
    1,034
    
    
    
    472
    
    
    
    4,763Depreciation and
amortization
    
    
    69
    
    
    
    153
    
    
    
    102
    
    
    
    93
    
    
    
    31
    
    
    
    448Total operating
expenses
    
    
    1,229
    
    
    
    1,534
    
    
    
    818
    
    
    
    1,127
    
    
    
    503
    
    
    
    5,211Segment operating
income (loss)
    
    $
    336
    
    
    $
    973
    
    
    $
    550
    
    
    $
    82
    
    
    $
    86
    
    
    $
    2,027
 Holding
    
    
    Consolidated
    
    
    VIE
    
    
    SegmentCompany
    
    
    VIE
    
    
    Elimination
    
    
    Totals3-Months Ended November 30, 2005 (continued, restated)Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    36,443Cost of revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,205Gross profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,238Operating expensesSelling, general and administrative
    
    
    694
    
    
    
    
    
    
    
    
    
    
    
    5,457Depreciation and amortization
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    481Total operating expenses
    
    
    727
    
    
    
    
    
    
    
    
    
    
    
    5,938Segment operating income (loss)
    
    $
    (727
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,300
 
 (1)
    
    Gross billings of $70,450 less worksite employee payroll costs of $60,712. 22




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##### Table of Contents



Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    OperatingInfrastructure
    
    
    Solutions
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    TotalAs of November 30, 2006 (Unaudited)Current AssetsCash and equivalents
    
    $
    (848
    )
    
    $
    6,803
    
    
    $
    (22
    )
    
    $
    760
    
    
    $
    115
    
    
    $
    6,808Restricted cash
    
    
    
    
    
    
    3,462
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,462Marketable equity securities
    
    
    
    
    
    
    1,293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,293Accounts receivable, net
    
    
    10,186
    
    
    
    1,684
    
    
    
    10,659
    
    
    
    2,018
    
    
    
    2,084
    
    
    
    26,631Costs and estimated earnings in excess
of billings on uncompleted contracts
    
    
    2,892
    
    
    
    
    
    
    
    1,368
    
    
    
    
    
    
    
    
    
    
    
    4,260Inventory, net
    
    
    185
    
    
    
    21
    
    
    
    3,161
    
    
    
    1,842
    
    
    
    1,370
    
    
    
    6,579Deferred tax asset
    
    
    
    
    
    
    876
    
    
    
    659
    
    
    
    
    
    
    
    
    
    
    
    1,535Prepaid expenses and
other current assets
    
    
    263
    
    
    
    549
    
    
    
    322
    
    
    
    176
    
    
    
    27
    
    
    
    1,337Total Current Assets
    
    
    12,678
    
    
    
    14,688
    
    
    
    16,147
    
    
    
    4,796
    
    
    
    3,596
    
    
    
    51,905Other AssetsProperty, plant & equipment, net
    
    
    1,343
    
    
    
    424
    
    
    
    1,599
    
    
    
    1,983
    
    
    
    241
    
    
    
    5,590Accounts receivable  long term
    
    
    
    
    
    
    
    
    
    
    1,223
    
    
    
    
    
    
    
    
    
    
    
    1,223Goodwill
    
    
    1,497
    
    
    
    4,153
    
    
    
    152
    
    
    
    4,695
    
    
    
    1,487
    
    
    
    11,984Other intangible assets, net
    
    
    338
    
    
    
    3,168
    
    
    
    
    
    
    
    629
    
    
    
    
    
    
    
    4,135Other long term assets
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    23
    
    
    
    25
    
    
    
    76Total Other Assets
    
    
    3,178
    
    
    
    7,773
    
    
    
    2,974
    
    
    
    7,330
    
    
    
    1,753
    
    
    
    23,008Total Assets
    
    $
    15,856
    
    
    $
    22,461
    
    
    $
    19,121
    
    
    $
    12,126
    
    
    $
    5,349
    
    
    $
    74,913
 Holding
    
    
    Consolidated
    
    
    SegmentCompany
    
    
    VIE
    
    
    TotalsAs of November 30, 2006 (continued, Unaudited)Current AssetsCash and equivalents
    
    $
    273
    
    
    $
    23
    
    
    $
    7,104Restricted cash
    
    
    
    
    
    
    
    
    
    
    3,462Marketable equity securities
    
    
    35
    
    
    
    1,615
    
    
    
    2,943Accounts receivable, net
    
    
    (446
    )
    
    
    
    
    
    
    26,185Costs and estimated earnings in excess
of billings on uncompleted contracts
    
    
    
    
    
    
    
    
    
    
    4,260Inventory, net
    
    
    
    
    
    
    
    
    
    
    6,579Deferred tax asset
    
    
    
    
    
    
    
    
    
    
    1,535Prepaid expenses and
other current assets
    
    
    185
    
    
    
    5
    
    
    
    1,527Total Current Assets
    
    
    47
    
    
    
    1,643
    
    
    
    53,595Other AssetsProperty, plant & equipment, net
    
    
    571
    
    
    
    6,773
    
    
    
    12,934Accounts receivable  long term
    
    
    
    
    
    
    
    
    
    
    1,223Goodwill
    
    
    
    
    
    
    
    
    
    
    11,984Other intangible assets, net
    
    
    
    
    
    
    
    
    
    
    4,135Other long term assets
    
    
    1,428
    
    
    
    4
    
    
    
    1,508Total Other Assets
    
    
    1,999
    
    
    
    6,777
    
    
    
    31,784Total Assets
    
    $
    2,046
    
    
    $
    8,420
    
    
    $
    85,379
 23




---



##### Table of Contents



Wireless
    
    
    Business
    
    
    Transportation
    
    
    Ultraviolet
    
    
    Electronics
    
    
    OperatingInfrastructure
    
    
    Solutions
    
    
    Infrastructure
    
    
    Technologies
    
    
    Integration
    
    
    TotalAs of August 31, 2006 (Audited)Current AssetsCash and equivalents
    
    $
    (791
    )
    
    $
    4,308
    
    
    $
    78
    
    
    $
    594
    
    
    $
    (187
    )
    
    $
    4,002Restricted cash
    
    
    
    
    
    
    3,462
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,462Marketable equity securities
    
    
    
    
    
    
    1,246
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,246Accounts receivable, net
    
    
    9,632
    
    
    
    1,858
    
    
    
    10,701
    
    
    
    1,884
    
    
    
    2,260
    
    
    
    26,335Costs and estimated earnings in excess
of billings on uncompleted contracts
    
    
    2,269
    
    
    
    
    
    
    
    2,231
    
    
    
    
    
    
    
    
    
    
    
    4,500Inventory, net
    
    
    218
    
    
    
    30
    
    
    
    3,154
    
    
    
    1,721
    
    
    
    1,638
    
    
    
    6,761Deferred tax asset
    
    
    
    
    
    
    876
    
    
    
    659
    
    
    
    
    
    
    
    
    
    
    
    1,535Prepaid expenses and
other current assets
    
    
    255
    
    
    
    623
    
    
    
    424
    
    
    
    286
    
    
    
    22
    
    
    
    1,610Total Current Assets
    
    
    11,583
    
    
    
    12,403
    
    
    
    17,247
    
    
    
    4,485
    
    
    
    3,733
    
    
    
    49,451Other AssetsProperty, plant & equipment, net
    
    
    1,311
    
    
    
    448
    
    
    
    1,686
    
    
    
    1,997
    
    
    
    299
    
    
    
    5,741Accounts receivable  long term
    
    
    
    
    
    
    
    
    
    
    1,276
    
    
    
    
    
    
    
    
    
    
    
    1,276Goodwill
    
    
    1,497
    
    
    
    4,153
    
    
    
    152
    
    
    
    4,695
    
    
    
    1,487
    
    
    
    11,984Other intangible assets, net
    
    
    359
    
    
    
    3,289
    
    
    
    
    
    
    
    651
    
    
    
    
    
    
    
    4,299Other long term assets
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    14
    
    
    
    87
    
    
    
    129Total Other Assets
    
    
    3,167
    
    
    
    7,918
    
    
    
    3,114
    
    
    
    7,357
    
    
    
    1,873
    
    
    
    23,429Total Assets
    
    $
    14,750
    
    
    $
    20,321
    
    
    $
    20,361
    
    
    $
    11,842
    
    
    $
    5,606
    
    
    $
    72,880
 Holding
    
    
    Consolidated
    
    
    SegmentCompany
    
    
    VIE
    
    
    TotalsAs of August 31, 2006 (continued, Audited)Current AssetsCash and equivalents
    
    $
    (370
    )
    
    $
    
    
    
    $
    3,632Restricted cash
    
    
    
    
    
    
    
    
    
    
    3,462Marketable equity securities
    
    
    35
    
    
    
    
    
    
    
    1,281Accounts receivable, net
    
    
    (604
    )
    
    
    
    
    
    
    25,731Costs and estimated earnings in excess
of billings on uncompleted contracts
    
    
    
    
    
    
    
    
    
    
    4,500Inventory, net
    
    
    
    
    
    
    
    
    
    
    6,761Deferred tax asset
    
    
    
    
    
    
    
    
    
    
    1,535Prepaid expenses and
other current assets
    
    
    312
    
    
    
    
    
    
    
    1,922Total Current Assets
    
    
    (627
    )
    
    
    
    
    
    
    48,824Other AssetsProperty, plant & equipment, net
    
    
    582
    
    
    
    
    
    
    
    6,323Accounts receivable  long term
    
    
    
    
    
    
    
    
    
    
    1,276Goodwill
    
    
    
    
    
    
    
    
    
    
    11,984Other intangible assets, net
    
    
    
    
    
    
    
    
    
    
    4,299Other long term assets
    
    
    1,450
    
    
    
    
    
    
    
    1,579Total Other Assets
    
    
    2,032
    
    
    
    
    
    
    
    25,461Total Assets
    
    $
    1,405
    
    
    $
    
    
    
    $
    74,285
 24




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##### Table of Contents



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, 2006. 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
     Wireless Infrastructure Segment
  Site Acquisition
  Engineering, Architecture and Design
 25




---



##### Table of Contents



Construction Management
  Technical Consulting
   Business Solutions Segment
  Transportation Infrastructure Segment
  Ultraviolet Technologies Segment
  Electronics Integration Segment
 26




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
  RESULTS OF OPERATIONS: COMPARISON OF THE THREE MONTH PERIOD ENDED NOVEMBER 30, 2006 AND NOVEMBER
30, 2005
 Executive Overview of Financial Results
  Revenues for the 3-months ended November 30,
    
    
    Operating income for the 3-months ended November 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Wireless Infrastructure
    
    $
    8,996
    
    
    $
    6,824
    
    
    $
    547
    
    
    $
    336Business Solutions
    
    
    11,630
    
    
    
    9,738
    
    
    
    738
    
    
    
    973Transportation Infrastructure
    
    
    12,747
    
    
    
    14,102
    
    
    
    593
    
    
    
    550Ultraviolet Technologies
    
    
    3,049
    
    
    
    2,697
    
    
    
    83
    
    
    
    82Electronics Integration
    
    
    4,257
    
    
    
    3,082
    
    
    
    337
    
    
    
    86Holding Company
    
    
    
    
    
    
    
    
    
    
    (850
    )
    
    
    (727
    )Variable Interest Entity
    
    
    226
    
    
    
    
    
    
    
    177
    
    
    
    Variable Interest Entity
Elimination
    
    
    (221
    )
    
    
    
    
    
    
    
    
    
    
    Segment Totals
    
    $
    40,684
    
    
    $
    36,443
    
    
    $
    1,625
    
    
    $
    1,300Net Income Available to Common Shareholders
    
    
    
    
    
    $
    726
    
    
    $
    847
   
    
    Revenue increases of $2.172 million in the Wireless Infrastructure
segment were due to additional work procured from existing
customers, price increases as a result of additional contracts
direct with wireless providers, geographic expansion and new
customer contracts related to network expansion and upgrade
services mainly in the construction management division, offset by
declines in the technical services and site acquisition divisions;
 27




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##### Table of Contents




    
    Revenue increases of $1.892 million in the Business Solutions
segment were due to an increase in the customer base and an increase
in the number of employees at several existing customers. As such, administrative
fees, workers compensation premiums, employee benefit premiums and
income taxes collected have increased; and
 
    
    Revenue increases of $1.175 million in the Electronics Integration
segment were due to new customer sales and the acquisition of AVR
in November 2005, as well as the creation of our electrical
division in July 2006.
   
    
    Gross profit decreases in the Business Solutions segment due to
unfavorable claims expense in the health and workers compensation
insurance programs;
 
    
    Interest expense increases of $0.303 million or 56% due primarily to
the Companys issuance of a $7.500 million long-term convertible
note payable in November 2005; and
 
    
    Preferred stock dividends increases of $0.124 million due to the
issuance of $6.618 million of preferred stock to the Companys majority shareholder
for the cancellation of certain debt obligations.
  Wireless Infrastructure
  Three Month Period EndedNovember 30, 2006
    
    
    November 30, 2005(Dollars in thousands)Revenue
    
    $
    8,996
    
    
    
    100
    %
    
    $
    6,824
    
    
    
    100
    %Cost of revenue
    
    
    6,532
    
    
    
    72.6
    %
    
    
    5,259
    
    
    
    77.1
    %Gross profit
    
    
    2,464
    
    
    
    27.4
    %
    
    
    1,565
    
    
    
    22.9
    %Operating expensesSelling, general and administrative
    
    
    1,802
    
    
    
    20.0
    %
    
    
    1,160
    
    
    
    17.0
    %Depreciation and amortization
    
    
    115
    
    
    
    1.3
    %
    
    
    69
    
    
    
    1.0
    %Total operating expenses
    
    
    1,917
    
    
    
    21.3
    %
    
    
    1,229
    
    
    
    19.5
    %Segment operating income
    
    $
    547
    
    
    
    6.1
    %
    
    $
    336
    
    
    
    4.9
    %
 Revenue
  Gross Profit
  28




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##### Table of Contents



Operating Income
  Business Solutions
  Three Month Period EndedNovember 30, 2006
    
    
    November 30, 2005(Dollars in thousands)Revenues
    
    $
    11,630
    
    
    
    100
    %
    
    $
    9,738
    
    
    
    100
    %Cost of revenues
    
    
    9,181
    
    
    
    78.9
    %
    
    
    7,231
    
    
    
    74.3
    %Gross profit
    
    
    2,449
    
    
    
    21.1
    %
    
    
    2,507
    
    
    
    25.7
    %Operating expensesSelling, general and administrative
    
    
    1,569
    
    
    
    13.5
    %
    
    
    1,381
    
    
    
    14.2
    %Depreciation and amortization
    
    
    142
    
    
    
    1.2
    %
    
    
    153
    
    
    
    1.6
    %Total operating expenses
    
    
    1,711
    
    
    
    14.7
    %
    
    
    1,534
    
    
    
    15.8
    %Segment operating income
    
    $
    738
    
    
    
    6.3
    %
    
    $
    973
    
    
    
    10.0
    %
 Revenue
  Gross Profit
  Operating Income
  Transportation Infrastructure
  Three Month Period EndedNovember 30, 2006
    
    
    November 30, 2005(Dollars in thousands)Revenue
    
    $
    12,747
    
    
    
    100
    %
    
    $
    14,102
    
    
    
    100
    %Cost of revenue
    
    
    11,243
    
    
    
    88.2
    %
    
    
    12,734
    
    
    
    90.3
    %Gross profit
    
    
    1,504
    
    
    
    11.8
    %
    
    
    1,368
    
    
    
    9.7
    %
 29




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##### Table of Contents



Three Month Period EndedNovember 30, 2006
    
    
    November 30, 2005(Dollars in thousands)Operating expensesSelling, general and administrative
    
    
    773
    
    
    
    6.1
    %
    
    
    716
    
    
    
    5.1
    %Depreciation and amortization
    
    
    138
    
    
    
    1.1
    %
    
    
    102
    
    
    
    0.7
    %Total operating expenses
    
    
    911
    
    
    
    7.1
    %
    
    
    818
    
    
    
    5.8
    %Segment operating income
    
    $
    593
    
    
    
    4.7
    %
    
    $
    550
    
    
    
    3.9
    %
 Revenue
  Gross Profit
  Operating Income
  Ultraviolet Technologies
  Three Month Period EndedNovember 30, 2006
    
    
    November 30, 2005(Dollars in thousands)Revenue
    
    $
    3,049
    
    
    
    100
    %
    
    $
    2,697
    
    
    
    100
    %Cost of revenue
    
    
    1,723
    
    
    
    56.5
    %
    
    
    1,488
    
    
    
    55.2
    %Gross profit
    
    
    1,326
    
    
    
    43.5
    %
    
    
    1,209
    
    
    
    44.8
    %Operating expensesSelling, general and administrative
    
    
    1,134
    
    
    
    37.2
    %
    
    
    1,034
    
    
    
    38.3
    %Depreciation and amortization
    
    
    109
    
    
    
    3.6
    %
    
    
    93
    
    
    
    3.4
    %Total operating expenses
    
    
    1,243
    
    
    
    40.8
    %
    
    
    1,127
    
    
    
    41.8
    %Segment operating income
    
    $
    83
    
    
    
    2.7
    %
    
    $
    82
    
    
    
    3.0
    %
 Revenue
  Gross Profit
 30




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##### Table of Contents



Operating Income
  Electronics Integration
  Three Month Period EndedNovember 30, 2006
    
    
    November 30, 2005(Dollars in thousands)Revenue
    
    $
    4,257
    
    
    
    100
    %
    
    $
    3,082
    
    
    
    100
    %Cost of revenue
    
    
    3,231
    
    
    
    75.9
    %
    
    
    2,493
    
    
    
    80.9
    %Gross profit
    
    
    1,026
    
    
    
    24.1
    %
    
    
    589
    
    
    
    19.1
    %Operating expensesSelling, general and administrative
    
    
    666
    
    
    
    15.6
    %
    
    
    472
    
    
    
    15.3
    %Depreciation and amortization
    
    
    23
    
    
    
    0.5
    %
    
    
    31
    
    
    
    1.0
    %Total operating expenses
    
    
    689
    
    
    
    16.2
    %
    
    
    503
    
    
    
    16.3
    %Segment operating income
    
    $
    337
    
    
    
    7.9
    %
    
    $
    86
    
    
    
    2.8
    %
 Revenue
  Gross Profit
  Operating Income
  Holding Company
 Operating Expense
  31




---



##### Table of Contents



Interest Expense
  Income Taxes
   Variable Interest Entity
   LIQUIDITY AND CAPITAL RESOURCES
    32




---



##### Table of Contents



Cash Flows
    CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
  Payments Due ByTotal
    
    
    Less than 1 year
    
    
    1-2 years
    
    
    3-5 years
    
    
    More than 5 years(Dollars in thousands)Contractual obligationLong-term debt and
capital lease obligations
    
    $
    34,969
    
    
    $
    3,948
    
    
    $
    17,354
    
    
    $
    13,668
    
    
    $
    Variable interest entity debt
    
    
    7,640
    
    
    
    2,704
    
    
    
    4,636
    
    
    
    300
    
    
    
    Operating lease (1)
    
    
    4,197
    
    
    
    1,920
    
    
    
    1,810
    
    
    
    331
    
    
    
    136Total
    
    $
    46,806
    
    
    $
    8,571
    
    
    $
    23,798
    
    
    $
    14,301
    
    
    $
    136
 
 (1)
    
    Operating leases represent the total future minimum lease payments, and are mainly
comprised of lease obligations between the Company and the VIE. This operating lease
expense is eliminated in the Companys consolidated statement of operations. OFF BALANCE SHEET ARRANGEMENTS
  Transactions with Related Parties
  33




---



##### Table of Contents



Guarantees
  Restricted Cash
  Payment and Performance Bonds
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
    34




---



##### 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.
  35




---



##### Table of Contents



For
    
    AgainstElection of Directors:Carter M. Fortune
    
    
    7,289,252
    
    
    
    29,089John F. Fisbeck
    
    
    7,289,247
    
    
    
    29,094Nolan R. Lackey
    
    
    7,301,564
    
    
    
    16,777David A. Berry
    
    
    7,301,704
    
    
    
    16,637P. Andy Rayl
    
    
    7,302,105
    
    
    
    16,236
 For
    
    Against
    
    WithheldRatification of Somerset CPAs, P.C.
as the Companys Independent Auditors
    
    
    7,314,959
    
    
    
    2,247
    
    
    
    1,135
 
 Item 5. Other Information.
  
 Item 6. Exhibits
  3.1
    
    Amended bylaws to revise Section 3.01 of the Companys By-Laws to make the election of a
Chief Operating Officer optional rather than mandatory (1)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
 (1)
    
    This exhibit is incorporated by reference from the Companys Current Report on Form 8-K, dated
December 27, 2006.
 
 SIGNATURES
  Fortune Industries, Inc.
(Registrant)Date:  January 16, 2007
    By:
    /s/ John F. FisbeckJohn F. Fisbeck,Chief Executive Officer Date:  January 16, 2007
    By:
    /s/ Amy GalloAmy Gallo,Chief Financial Officer 36