UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q/A
            (Amendment No. 1)





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


SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended February 29, 2008





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


SECURITIES EXCHANGE ACT OF 1934





Commission file number: 0-19049





FORTUNE INDUSTRIES, INC.


(Exact name of Registrant as specified in its charter)





INDIANA

                    

                    20-2803889(State or other jurisdiction of incorporation or organization)

                    

                    (IRS Employer Identification Number)





6402 Corporate Drive

                    

                    46278Indianapolis, IN

                    

                    (Zip Code)(Address of principal executive offices)





(317) 532-1374


(Registrant’s telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





Yes T No £





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





Large accelerated filer

                    £

                    

                    Accelerated filer

                    £Non-accelerated filer

                    £

                    

                    Smaller reporting company

                    T(Do not check if a smaller reporting company)








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


Yes o No x





As of April 14, 2008, 11,391,823 shares of the Company’s $0.10 per share par value common stock were outstanding.







1





FORTUNE INDUSTRIES, INC.


FORM 10-Q/A


For The Quarterly Period Ended February 29, 2008





INDEX








PagePART  I.    Financial InformationITEM 1.  Financial StatementsConsolidated Balance Sheets as of February 29, 2008 (unaudited, restated) and August 31, 2007

                    4Consolidated Statements of Operations for the three and six month periods ended February 29, 2008 and February 28, 2007 (unaudited)

                    6Consolidated Statement of Changes in Shareholders’ Equity for the six month period ended February 29, 2008 (unaudited)

                    7Consolidated Statements of Cash Flows for the six month periods ended February 29, 2008 and February 28, 2007 (unaudited)

                    8Notes to the Unaudited Interim Consolidated Financial Statements (restated)

                    10ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

                    35ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

                    45ITEM 4. Controls and Procedures

                    45PART II.    Other InformationITEM 1.    Legal Proceedings

                    46ITEM 1A. Risk Factors

                    46ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

                    46ITEM 3.    Defaults Upon Senior Securities

                    46ITEM 4.    Submission of Matters to a Vote of Security Holders

                    46ITEM 5.    Other Information

                    46ITEM 6.    Exhibits

                    46Signatures

                    47





2




Explanatory Note The purpose of Amendment No. 1 to the Company’s Quarterly Report for the quarter ended February 29, 2008 is to reclassify long term debt from our
            credit facility loan to current debt as a result of covenant violations and disclose put options related to our ESG acquisition.
             
            For convenience, this amended Quarterly Report on Form 10-Q/A sets forth the original filing in its entirety, as amended where necessary to reflect the restatement. The following sections were revised to reflect this restatement:  ·

                    Part I, Item 1. Consolidated Balance Sheets, and Notes to the Consolidated Financial Statements, and ·

                    Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   The financial statements and other disclosures in the amended Quarterly Report on Form 10-Q/A do not reflect any events that have occurred after the Quarterly Report on Form 10-Q was initially filed on April 14, 2008. The following table sets forth
            the effects of the restatement on previously reported consolidated financial statements as of, and for the six months ended, February 29, 2008: February 29,  2008As Previously  
                        Reported

                    

                    RestatedConsolidated Balance Sheet Data:Short-term debt and current maturities of long-term debt (Note 9)

                    

                    

                    $

                    2,213

                    

                    $

                    17,299Total Current Liabilities

                    

                    

                    $

                    47,074

                    

                    $

                    62,160Long-Term Debt, less current maturities (Note 9)

                    

                    

                    $

                    15,339

                    

                    $

                    253Total Long-Term Liabilities

                    

                    

                    $

                    20,998

                    

                    $

                    5,912    
 3


PART 1 - FINANCIAL INFORMATION


Item 1. Financial Statements.





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(DOLLARS IN THOUSANDS)





February 29,

                        2008

                        (Unaudited
                            Restated)

                    

                    

                    August 31,

                        2007

                        (Audited
                            Restated)ASSETSCURRENT ASSETSCash and equivalents

                    

                    $

                    4,341

                    

                    

                    $

                    9,830Restricted cash (Note 1)

                    

                    

                    5,611

                    

                    

                    

                    5,091Accounts receivable, net (Note 4)

                    

                    

                    17,570

                    

                    

                    

                    21,157Costs and estimated earnings in excess of billings on uncompleted contracts (Note 5)

                    

                    

                    5,155

                    

                    

                    

                    1,279Inventory, net (Note 6)

                    

                    

                    4,955

                    

                    

                    

                    6,656Deferred tax asset (Note 11)

                    

                    

                    1,535

                    

                    

                    

                    1,535Prepaid expenses and other current assets

                    

                    

                    1,503

                    

                    

                    

                    2,840Total Current Assets

                    

                    

                    40,670

                    

                    

                    

                    48,388OTHER ASSETSProperty, plant & equipment, net (Note 7)

                    

                    

                    11,790

                    

                    

                    

                    12,238Long-term accounts receivable (Note 4)

                    

                    

                    1,064

                    

                    

                    

                    770Goodwill (Note 8)

                    

                    

                    18,461

                    

                    

                    

                    18,461Other intangible assets, net (Note 8)

                    

                    

                    6,834

                    

                    

                    

                    7,450Other long-term assets

                    

                    

                    806

                    

                    

                    

                    1,048Total Other Assets

                    

                    

                    38,955

                    

                    

                    

                    39,967TOTAL ASSETS

                    

                    $

                    79,625

                    

                    

                    $

                    88,355





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements





4





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS (CONTINUED)


(DOLLARS IN THOUSANDS)





February 29, 2008

                        (Unaudited
                            Restated)

                    

                    

                    August 31,

                        2007

                        (Audited
                            Restated)LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESLine of credit (Note 9)

                    

                    $

                    15,000

                    

                    

                    $

                    15,000Short-term debt and current maturities of long-term debt (Note 9)

                    

                    

                    17,299

                    

                    

                    

                    18,416Current maturities of convertible term note (Note 9)

                    

                    

                    2,727

                    

                    

                    

                    2,727Variable interest entity line of credit (Note 9)

                    

                    

                    2,200

                    

                    

                    

                    2,200Variable interest entity current maturities of long-term debt (Note 9)

                    

                    

                    2,694

                    

                    

                    

                    503Accounts payable

                    

                    

                    5,753

                    

                    

                    

                    9,168Health and workers' compensation reserves

                    

                    

                    5,137

                    

                    

                    

                    5,128Accrued expenses

                    

                    

                    10,031

                    

                    

                    

                    9,239Billings in excess of costs and estimated earnings on uncompleted contracts (Note 5)

                    

                    

                    845

                    

                    

                    

                    1,178Other current liabilities

                    

                    

                    474

                    

                    

                    

                    725Total Current Liabilities

                    

                    

                    62,160

                    

                    

                    

                    64,284LONG-TERM LIABILITIESLong-term debt, less current maturities (Note 9)

                    

                    

                    253

                    

                    

                    

                    208Convertible term note (Note 9)

                    

                    

                    2,041

                    

                    

                    

                    2,950Line of credit term note - majority shareholder (Note 9)

                    

                    

                    1,000

                    

                    

                    

                    1,000Variable interest entity long-term debt, less current maturities (Note 9)

                    

                    

                    1,788

                    

                    

                    

                    4,559Other long-term liabilities

                    

                    

                    830

                    

                    

                    

                    1,029Total Long-Term Liabilities

                    

                    

                    5,912

                    

                    

                    

                    9,746Total Liabilities

                    

                    

                    68,072

                    

                    

                    

                    74,030MINORITY INTEREST IN VARIABLE INTEREST ENTITY (NOTE 2)

                    

                    

                    (658

                    )

                    

                    

                    236SHAREHOLDERS' EQUITY (NOTE 13)Common stock, $0.10 par value; 150,000,000 authorized; 11,391,823 issued and outstanding at February 29, 2008 and August 31, 2007, respectively

                    

                    

                    1,117

                    

                    

                    

                    1,117Preferred stock, $0.10 par value; 1,000,000 authorized; 66,180 issued and outstanding at February 29, 2008 and August 31, 2007, respectively

                    

                    

                    6,618

                    

                    

                    

                    6,618Additional paid-in capital and warrants outstanding

                    

                    

                    19,317

                    

                    

                    

                    19,317Accumulated deficit

                    

                    

                    (15,129

                    )

                    

                    

                    (12,300

                    )Accumulated other comprehensive income

                    

                    

                    288

                    

                    

                    

                    26012,211

                    

                    

                    

                    15,012Less:  Treasury stock, - and 384,500 shares of common stock outstanding at February 29, 2008 and August 31, 2007, respectively

                    

                    

                    -

                    

                    

                    

                    (923

                    )Total Shareholders' Equity

                    

                    

                    12,211

                    

                    

                    

                    14,089TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

                    

                    $

                    79,625

                    

                    

                    $

                    88,355





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements





5





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


(UNAUDITED)





Three Month Period Ended

                    

                    

                    Six Month Period EndedFebruary 29,

                    

                    

                    February 28,

                    

                    

                    February 29,

                    

                    

                    February 28,2008

                    

                    

                    2007

                    

                    

                    2008

                    

                    

                    2007REVENUESService revenues

                    

                    $

                    23,845

                    

                    

                    $

                    15,643

                    

                    

                    $

                    46,300

                    

                    

                    $

                    30,645Product revenues

                    

                    

                    18,081

                    

                    

                    

                    16,596

                    

                    

                    

                    39,383

                    

                    

                    

                    42,278TOTAL REVENUES

                    

                    

                    41,926

                    

                    

                    

                    32,239

                    

                    

                    

                    85,683

                    

                    

                    

                    72,923COST OF REVENUESService cost of revenues

                    

                    

                    19,669

                    

                    

                    

                    13,053

                    

                    

                    

                    36,984

                    

                    

                    

                    24,288Product cost of revenues

                    

                    

                    15,730

                    

                    

                    

                    14,657

                    

                    

                    

                    33,262

                    

                    

                    

                    35,332TOTAL COST OF REVENUES

                    

                    

                    35,399

                    

                    

                    

                    27,710

                    

                    

                    

                    70,246

                    

                    

                    

                    59,620GROSS PROFIT

                    

                    

                    6,527

                    

                    

                    

                    4,529

                    

                    

                    

                    15,437

                    

                    

                    

                    13,303OPERATING EXPENSESSelling, general and administrative expenses

                    

                    

                    7,415

                    

                    

                    

                    7,682

                    

                    

                    

                    14,380

                    

                    

                    

                    14,113Depreciation and amortization

                    

                    

                    727

                    

                    

                    

                    1,084

                    

                    

                    

                    1,418

                    

                    

                    

                    1,802Impairment (Note 1)

                    

                    

                    -

                    

                    

                    

                    2,027

                    

                    

                    

                    -

                    

                    

                    

                    2,027Total Operating Expenses

                    

                    

                    8,142

                    

                    

                    

                    10,793

                    

                    

                    

                    15,798

                    

                    

                    

                    17,942OPERATING LOSS

                    

                    

                    (1,615

                    )

                    

                    

                    (6,264

                    )

                    

                    

                    (361

                    )

                    

                    

                    (4,639

                    )OTHER INCOME (EXPENSE)Interest income

                    

                    

                    78

                    

                    

                    

                    96

                    

                    

                    

                    157

                    

                    

                    

                    187Interest expense

                    

                    

                    (805

                    )

                    

                    

                    (808

                    )

                    

                    

                    (1,728

                    )

                    

                    

                    (1,655

                    )Gain (loss) on disposal of assets

                    

                    

                    (1

                    )

                    

                    

                    (411

                    )

                    

                    

                    (47

                    )

                    

                    

                    (411

                    )Gain on investments in marketable securities, net (Note 1)

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    17Exchange rate gain (loss)

                    

                    

                    20

                    

                    

                    

                    (8

                    )

                    

                    

                    39

                    

                    

                    

                    (9

                    )Other income (expense)

                    

                    

                    8

                    

                    

                    

                    (10

                    )

                    

                    

                    13

                    

                    

                    

                    12Total Other Income (Expense)

                    

                    

                    (700

                    )

                    

                    

                    (1,141

                    )

                    

                    

                    (1,566

                    )

                    

                    

                    (1,859

                    )LOSS BEFORE MINORITY INTEREST IN VARIABLE INTEREST ENTITY

                    

                    

                    (2,315

                    )

                    

                    

                    (7,405

                    )

                    

                    

                    (1,927

                    )

                    

                    

                    (6,498

                    )Minority Interest in Variable Interest Entity (Note 2)

                    

                    

                    273

                    

                    

                    

                    124

                    

                    

                    

                    468

                    

                    

                    

                    164LOSS BEFORE PROVISION FOR INCOME TAXES

                    

                    

                    (2,588

                    )

                    

                    

                    (7,529

                    )

                    

                    

                    (2,395

                    )

                    

                    

                    (6,662

                    )Provision for income taxes (Note 11)

                    

                    

                    127

                    

                    

                    

                    102

                    

                    

                    

                    186

                    

                    

                    

                    119NET LOSS

                    

                    

                    (2,715

                    )

                    

                    

                    (7,631

                    )

                    

                    

                    (2,581

                    )

                    

                    

                    (6,781

                    )Preferred stock dividends

                    

                    

                    124

                    

                    

                    

                    124

                    

                    

                    

                    248

                    

                    

                    

                    248NET LOSS AVAILABLE TO COMMON SHAREHOLDERS

                    

                    $

                    (2,839

                    )

                    

                    $

                    (7,755

                    )

                    

                    $

                    (2,829

                    )

                    

                    $

                    (7,029

                    )BASIC LOSS PER COMMON SHARE

                    

                    $

                    (0.25

                    )

                    

                    $

                    (0.73

                    )

                    

                    $

                    (0.25

                    )

                    

                    $

                    (0.66

                    )Basic weighted average shares outstanding

                    

                    

                    11,391,823

                    

                    

                    

                    10,628,219

                    

                    

                    

                    11,391,823

                    

                    

                    

                    10,576,185DILUTED LOSS PER COMMON SHARE

                    

                    $

                    (0.22

                    )

                    

                    $

                    (0.63

                    )

                    

                    $

                    (0.22

                    )

                    

                    $

                    (0.57

                    )Diluted weighted average shares outstanding

                    

                    

                    12,658,637

                    

                    

                    

                    12,281,760

                    

                    

                    

                    12,714,263

                    

                    

                    

                    12,240,371




See Accompanying Notes to Unaudited Interim Consolidated Financial Statements




6





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Common

                        Stock

                    

                    

                    Treasury

                        Stock

                    

                    

                    Preferred

                        Stock

                    

                    

                    Additional

                        Paid-in Capital

                        and Warrants

                        Outstanding

                    

                    

                    Accumulated

                        Deficit

                    

                    

                    Accumulated

                        Other

                        Comprehensive

                        Income

                    

                    

                    Total

                        Shareholders'

                        Equity

                    

                    

                    Comprehensive

                        LossBALANCE AT AUGUST 31, 2007

                    

                    $

                    1,117

                    

                    

                    $

                    (923

                    )

                    

                    $

                    6,618

                    

                    

                    $

                    19,317

                    

                    

                    $

                    (12,300

                    )

                    

                    $

                    260

                    

                    

                    $

                    14,089Net loss

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    (2, 581

                    )

                    

                    

                    -

                    

                    

                    

                    (2,581

                    )

                    

                    

                    (2,581

                    )Preferred Stock Dividends

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    (248

                    )

                    

                    

                    -

                    

                    

                    

                    (248

                    )

                    

                    

                    -Foreign currency translation adjustments, net of tax

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    28

                    

                    

                    

                    28

                    

                    

                    

                    28Distribution of 384,500 shares from variable interest entity

                    

                    

                    -

                    

                    

                    

                    923

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    923

                    

                    

                    

                    -Total comprehensive loss

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    $

                    (2,553

                    )BALANCE AT FEBRUARY 29, 2008

                    

                    $

                    1,117

                    

                    

                    $

                    -

                    

                    

                    $

                    6,618

                    

                    

                    $

                    19,317

                    

                    

                    $

                    (15,129

                    )

                    

                    $

                    288

                    

                    

                    $

                    12,211





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements





7





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Six Month Period EndedFebruary 29, 2008

                    

                    

                    February 28, 2007CASH FLOWS FROM OPERATING ACTIVITIESNet Loss

                    

                    $

                    (2,581

                    )

                    

                    $

                    (6,781

                    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization

                    

                    

                    1,845

                    

                    

                    

                    1,802Provision for (gains) losses on accounts receivable

                    

                    

                    (23

                    )

                    

                    

                    423Gain on sale of investments

                    

                    

                    -

                    

                    

                    

                    (9

                    )Loss on disposal of assets

                    

                    

                    47

                    

                    

                    

                    411Stock based compensation

                    

                    

                    -

                    

                    

                    

                    50Minority interest in variable interest entity income

                    

                    

                    468

                    

                    

                    

                    164Impairment on intangible assets

                    

                    

                    -

                    

                    

                    

                    2,027Changes in certain operating assets and liabilities:Restricted cash

                    

                    

                    (520

                    )

                    

                    

                    245Accounts receivable

                    

                    

                    3,610

                    

                    

                    

                    6,333Costs and estimated earnings in excess of billings on uncompleted contracts

                    

                    

                    (3,876

                    )

                    

                    

                    2,293Inventory, net

                    

                    

                    1,701

                    

                    

                    

                    (122

                    )Prepaid assets and other current assets

                    

                    

                    1,337

                    

                    

                    

                    773Other long-term assets

                    

                    

                    (329

                    )

                    

                    

                    564Accounts payable

                    

                    

                    (3,415

                    )

                    

                    

                    (4,934

                    )Health and workers' compensation reserves

                    

                    

                    9

                    

                    

                    

                    1,020Accrued expenses and other current liabilities

                    

                    

                    541

                    

                    

                    

                    (1,162

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

                    

                    

                    (333

                    )

                    

                    

                    459Net Cash Provided by (Used in) Operating Activities

                    

                    

                    (1,519

                    )

                    

                    

                    3,556CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures

                    

                    

                    (989

                    )

                    

                    

                    (798

                    )Variable interest entity proceeds from sale of assets

                    

                    

                    390

                    

                    

                    

                    -Proceeds from sales of marketable securities

                    

                    

                    -

                    

                    

                    

                    1,153Acquisition of productive assets and businesses, net of cash received

                    

                    

                    -

                    

                    

                    

                    (719

                    )Net Cash Used in Investing Activities

                    

                    

                    (599

                    )

                    

                    

                    (364

                    )CASH FLOWS FROM FINANCING ACTIVITIESNet borrowings under line of credit

                    

                    

                    -

                    

                    

                    

                    2,581Payments on short and long term debt

                    

                    

                    (1,072

                    )

                    

                    

                    (912

                    )Variable interest entity payments on long-term debt

                    

                    

                    (580

                    )

                    

                    

                    (80

                    )Debt issuance costs

                    

                    

                    (150

                    )

                    

                    

                    -Payments from convertible debentures

                    

                    

                    (909

                    )

                    

                    

                    (914

                    )Dividends on preferred stock

                    

                    

                    (248

                    )

                    

                    

                    (248

                    )Proceeds from variable interest entity member contributions

                    

                    

                    70

                    

                    

                    

                    87Distributions to variable interest entity members

                    

                    

                    (510

                    )

                    

                    

                    (59

                    )Net Cash Provided by (Used in) Financing Activities

                    

                    

                    (3,399

                    )

                    

                    

                    455Effect of exchange rate changes on cash

                    

                    

                    28

                    

                    

                    

                    15NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS

                    

                    

                    (5,489

                    )

                    

                    

                    3,662CASH AND EQUIVALENTSBeginning of Period

                    

                    

                    9,830

                    

                    

                    

                    3,632End of Period

                    

                    $

                    4,341

                    

                    

                    $

                    7,294





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.





8





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Six Month Period EndedFebruary 29, 2008

                    

                    

                    February 28, 2007SUPPLEMENTAL DISCLOSURESInterest paid

                    

                    $

                    1,758

                    

                    

                    $

                    1,266Income taxes paid

                    

                    $

                    184

                    

                    

                    $

                    72Unrealized net gain on marketable equity securities

                    

                    $

                    -

                    

                    

                    $

                    29Non-cash investing and financing activities:Stock distribution to variable interest entity members

                    

                    $

                    923

                    

                    

                    $

                    -Acquisition of Precision Employee Management, LLCFair value of assets acquired

                    

                    $

                    -

                    

                    

                    $

                    2,376Common stock consideration

                    

                    

                    -

                    

                    

                    

                    1,276Cash paid

                    

                    $

                    -

                    

                    

                    $

                    1,100





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.





9





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED,


EXCEPT PER SHARE DATA)


(UNAUDITED)





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





General





Basis of Presentation: The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2007 Annual Report on Form 10-K filed by Fortune Industries, Inc. (which, together with its subsidiaries unless the context requires otherwise, shall be referred to
            herein as the “Company”).  The accompanying unaudited consolidated financial statements have been prepared by the Company without audit. These unaudited financial statements contain, in the opinion of management, all adjustments (consisting of normal accruals and other recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented in conformity with accounting
            principles generally accepted in the United States. The operating results for the six month period ended February 29, 2008 are not necessarily indicative of the operating results to be expected for the full fiscal year.





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





Principles of Consolidation:  The accompanying consolidated financial statements include the accounts of Fortune Industries, Inc. and its wholly-owned subsidiaries, and a variable interest entity (“VIE”) as described in Note 2. Nor-Cote International, Inc. (“Nor-Cote”), a wholly-owned subsidiary, contains foreign
            subsidiaries from the United Kingdom, China, Singapore, and Mexico which have been eliminated in consolidation at the Nor-Cote subsidiary level. All significant inter-company accounts and transactions of the Company have been eliminated.





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





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





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





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





10





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





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





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





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





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





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





11





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





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





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





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





Restricted Cash: Restricted cash includes certificates of deposits and letters of credit issued as collateral under its health and accident benefit program, its workers compensation program, and certain general insurance coverage related to the Company’s Business Solutions segment. At February 29, 2008, the Company had $5,611 in total restricted
            cash.  Of this, $1,725 is restricted for employer contributions to various health and accident benefit programs established under third party actuarial analysis, $3,525 is restricted for various workers compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credits in accordance with various state regulations.





Marketable Securities: Marketable securities include common stocks classified as available for sale investments in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The securities are carried at fair value based on current
            market quotations. Unrealized holding gains and losses, net of tax, are not included in "net income," but are accounted for as "other comprehensive income" and reflected as a separate component of the change in shareholders’ equity. The cost of securities used to compute realized gains and losses is based on specifically identified securities. The fair value of investment securities is determined by currently available market prices. Dividends on marketable equity securities
            are recognized in income when declared.  The net tax effect of the unrealized gain (loss) after consideration of the valuation allowance is insignificant and is not included in deferred tax asset or accumulated other comprehensive income.  There were no realized gains and losses for the three month period ended February 29, 2008 and February 28, 2007. For the six month period ended February 29, 2008 and February 28, 2007 there were $0 and $17, respectively, of
            realized gains from the sale of marketable securities.





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





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





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





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





12





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





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





The Company has elected to perform the annual impairment test of recorded goodwill and other indefinite-lived intangible assets as required by SFAS 142 as of the end of fiscal fourth quarter. The results of this annual impairment test indicated that the fair value of each of the reporting units as of August 31, 2007, exceeded the carrying, or book value, including goodwill, and therefore recorded goodwill
            and other indefinite-lived intangible assets were not subject to impairment.  The required annual impairment test may result in future periodic write-downs.





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





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





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





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





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





Research and Development Costs: Research and development costs are expensed as incurred and totaled $128 and $162 for the three month periods ended February 29, 2008 and February 28, 2007, respectively.  Research and development costs are expensed as incurred and totaled $243 and $289 for the six month periods ended February 29, 2008 and
            February 28, 2007, respectively.  Research and development expense is recorded in the Company’s Ultraviolet Technologies segment.





Advertising Costs: Adverting costs including marketing, advertising, publicity, promotion and other distribution costs are expensed as incurred and totaled $131 and $43 for the three months ended February 29, 2008 and February 28, 2007, respectively.  Adverting costs including marketing, advertising, publicity, promotion and
            other distribution costs are expensed as incurred and totaled $282 and $123 for the six months ended February 29, 2008 and February 28, 2007, respectively.





13





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





Debt and equity issuances may have features, which allow the holder to convert at beneficial conversion terms, which are then measured using similar valuation techniques and amortized to interest expense in the case of debt or recorded as dividends in the case of preferred stock instruments.  No issuances have beneficial conversion terms during the three and six months ended February 29, 2008 and
            February 28, 2007.





Self Insurance: The Company’s holding company and various subsidiaries have elected to act as a self-insurer for certain costs related to employee health programs. Costs resulting from non-insured losses are estimated and charged to income when incurred. The Company has purchased insurance which limits its annual exposure for individual claims
            to $70 and which limits its aggregate annual exposure to approximately $1,500.





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





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





New Accounting Pronouncements





In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.  SAB 108 was effective during our three month period ending February 29,
            2008.  The adoption of this statement did not have a material impact on our financial position or results of operations during the three month period ending February 29, 2008.





In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements”, which provides guidance for using fair value to measure assets and liabilities.  SFAS 157 only applies when other standards require or permit the fair value measurement of assets and liabilities and does not expand the use of fair value to new circumstances. SFAS
            No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company does not expect this statement to have a material impact on its financial position, results of operations or cash flows.





In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which allows companies to choose to measure certain financial instruments and other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  We are in the process of determining the effect, if any, that
            the potential adoption of SFAS 159 will have on our consolidated financial statements.





FASB statement No. 160 “Noncontrolling Interest in Consolidated Financial Statements-an amendment of ARB No. 51” was issued December of 2007.  This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  The guidance will become effective as of the beginning of a company’s
            fiscal year beginning after December 15, 2008. The Company has not determined the effect that the adoption of SFAS 160 will have on its consolidated financial statements.





NOTE 2 – VARIABLE INTEREST ENTITY





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





14





The Company leases a total of five facilities from a consolidated variable interest entity, a related-party referenced earlier whose primary purpose is to own and lease these properties to the Company. As of February 29, 2008, the VIE is wholly owned by the Company’s Chairman of the Board and its Chief Executive Officer.  The VIE does not have any other significant
            assets.  Although the Company does not have direct ownership interests in the VIE, it is considered the primary beneficiary as interpreted by FIN 46R due to implicit interests generated from personal guarantees from the Company’s majority shareholders on certain debt instruments and leasing arrangements of the VIE.





The real estate owned by the VIE consists of land, buildings and building improvements, which were subject to mortgages under which the lender has no recourse to the Company.  The non-cash consolidation of the assets and liabilities of the variable interest entity at February 29, 2008 and August 31, 2007 consisted of the following:





February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited,
                            Restated)AssetsCash

                    

                    $

                    57

                    

                    

                    $

                    79Prepaid expenses and other current assets

                    

                    

                    -

                    

                    

                    

                    10Property, plant and equipment

                    

                    

                    6,097

                    

                    

                    

                    6,626Other assets

                    

                    

                    2

                    

                    

                    

                    3$

                    6,156

                    

                    

                    $

                    6,718Liabilities and Members Equity (Deficit)Accounts payable

                    

                    $

                    7

                    

                    

                    $

                    -Line of credit

                    

                    

                    2,200

                    

                    

                    

                    2,200Current maturities of long-term debt

                    

                    

                    2,694

                    

                    

                    

                    503Accrued expenses

                    

                    

                    125

                    

                    

                    

                    143Long-term debt, net of current maturities

                    

                    

                    1,788

                    

                    

                    

                    4,5596,814

                    

                    

                    

                    7,405Members equity (deficit)

                    

                    $

                    (658

                    )

                    

                    

                    236Less: Treasury Stock

                    

                    

                    -

                    

                    

                    

                    (923

                    )$

                    6,156

                    

                    

                    $

                    6,718





For the three month period ended February 29, 2008, the consolidation of the VIE included income of $274 comprised of $421 in rental income, offset by a $100 charge to interest expense, and a $48 charge to depreciation expense.  For the three month period ended February 28, 2007, the consolidation of the VIE included income of $124 comprised of $358 in rental income, offset by a $142 charge to
            interest expense, a $50 charge to depreciation expense, and $42 in administrative and other miscellaneous expenses.  For the six month period ended February 29, 2008, the consolidation of the VIE included income of $469 comprised of $854 in rental income, offset by a $226 charge to interest expense, a $97 charge to depreciation expense, a $47 loss on disposal of property, plant, and equipment, and $16 in administrative and other miscellaneous expenses.  For the
            six month period ended February 28, 2007, the consolidation of the VIE included income of $163 comprised of $584 in rental income, offset by a $280 charge to interest expense, a $99 charge to depreciation expense, and $42 in administrative and other miscellaneous expenses.




NOTE 3 - ACQUISITIONS AND PRO FORMA RESULTS





Acquisitions





During the six month period ended February 29, 2008, the Company had no acquisitions.


The Company acquired Employer Solutions Group in March 2007 details of which are included in previous filings. Of the 577,143 total shares issued; 217,143 shares were issued to the sellers at closing and 360,000 contingent shares are held in escrow and may be earned based on the EBITDA schedule below.  The Company entered into an agreement in which the sellers may put (put option) the 217,143 shares issued at closing to
            the Company during the thirty (30) day period that begins on March 1, 2010.  The Company recorded $814 related to the put option on the 217,143 shares as other long term liabilities, since the Company is not able to control whether such options can be put to the Company during the required time period.  The contingent shares are earned based on the table below:   (3)EBITDA TargetMinimum

                    

                    

                    Maximum

                    

                    

                    

                    Total SharesYear 1 - 3/1/2008*

                    

                    $

                    1,600

                    

                    

                    $

                    1,800

                    

                    

                    

                    

                    120,000Year 2 - 3/1/2009*

                    

                    $

                    1,600

                    

                    

                    $

                    2,000

                    

                    

                    

                    

                    120,000Year 3 - 3/1/2010*

                    

                    $

                    1,600

                    

                    

                    $

                    2,400

                    

                    

                    

                    

                    120,000360,000closing share price*

                    

                    

                    4.20$

                    1,512,000(3) Earn-out of 360,000 shares vests ratably over 3 years based on annual EBITDA    The earn out of $1,512,000 (360,000 shares at $4.20/share) is included as a component of the purchase allocation based on Company EBITDA projections over this period combined with expected synergies gained  from working with the Company’s existing PEO subsidiaries included in the Business Solutions segment.  As a
            result management deemed the likelihood for sellers to earn all the contingent stock to be more than likely at the date of the transaction.


Pro Forma Results





The following unaudited pro forma data summarize the results of operations for the periods indicated as if the ESG and Precision acquisitions that were described in the Company’s prior periodic filings had been completed as of the beginning of the periods presented.  The pro forma data give effect to actual operating results prior to the
            acquisitions and adjustments to interest expense and income taxes.  No effect has been given to cost reductions or operating synergies in this presentation.  These pro forma amounts do not purport to be indicative of the results that would have actually been achieved if the acquisition had occurred as of the beginning of the periods presented or that may be achieved in the future.




15




Three Month Period Ended

                    

                    

                    Six Month Period EndedFebruary 29,

                    

                    

                    February 28,

                    

                    

                    February 29,

                    

                    

                    February 28,2008

                    

                    

                    2007

                    

                    

                    2008

                    

                    

                    2007(Unaudited)

                    

                    

                    (Unaudited)

                    

                    

                    (Unaudited)

                    

                    

                    (Unaudited)Net revenue

                    

                    $

                    41,926

                    

                    

                    $

                    39,534

                    

                    

                    $

                    85,683

                    

                    

                    $

                    90,171Operating loss

                    

                    $

                    (1,615

                    )

                    

                    $

                    (6,122

                    )

                    

                    $

                    (361

                    )

                    

                    $

                    (5,532

                    )Net loss available to common shareholders

                    

                    $

                    (2,839

                    )

                    

                    $

                    (7,593

                    )

                    

                    $

                    (2,829

                    )

                    

                    $

                    (7,765

                    )Basic loss per common share

                    

                    $

                    (0.25

                    )

                    

                    $

                    (0.73

                    )

                    

                    $

                    (0.25

                    )

                    

                    $

                    (0.73

                    )Diluted loss per common share

                    

                    $

                    (0.22

                    )

                    

                    $

                    (0.62

                    )

                    

                    $

                    (0.22

                    )

                    

                    $

                    (0.63

                    )




NOTE 4 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE





Accounts receivable and contracts receivable are summarized as follows:





February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Accounts receivable

                    

                    $

                    14,887

                    

                    

                    $

                    17,572Contracts receivableProgress billing

                    

                    

                    2,878

                    

                    

                    

                    4,576Retainages

                    

                    

                    1,013

                    

                    

                    

                    23918,778

                    

                    

                    

                    22,387Less allowance for doubtful accounts and sales returns

                    

                    

                    (1,208

                    )

                    

                    

                    (1,230

                    )$

                    17,570

                    

                    

                    $

                    21,157Long-term accounts receivable

                    

                    $

                    1,064

                    

                    

                    $

                    770





NOTE 5 – CONTRACTS IN PROGRESS





Information related to contracts in progress is summarized as follows:





February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Costs incurred on uncompleted contracts

                    

                    $

                    19,854

                    

                    

                    $

                    10,999Estimated earnings recognized to date on uncompleted contracts

                    

                    

                    4,544

                    

                    

                    

                    2,51124,398

                    

                    

                    

                    13,510Less billings on uncompleted contracts

                    

                    

                    (20,088

                    )

                    

                    

                    (13,409

                    )$

                    4,310

                    

                    

                    $

                    101





16





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





February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

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

                    

                    $

                    5,155

                    

                    

                    $

                    1,279Billings in excess of costs and estimated earnings on uncompleted contracts

                    

                    

                    845

                    

                    

                    

                    1,178$

                    4,310

                    

                    

                    $

                    101




NOTE 6 – INVENTORY




Inventories are summarized as follows:




February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Raw materials

                    

                    $

                    693

                    

                    

                    $

                    691Work-in-process

                    

                    

                    43

                    

                    

                    

                    29Finished goods

                    

                    

                    4,782

                    

                    

                    

                    6,3175,518

                    

                    

                    

                    7,037Less inventory reserve

                    

                    

                    (563

                    )

                    

                    

                    (381

                    )$

                    4,955

                    

                    

                    $

                    6,656




NOTE 7 - PROPERTY, PLANT AND EQUIPMENT





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





February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Land and building

                    

                    $

                    8,960

                    

                    

                    $

                    9,440Machinery and equipment

                    

                    

                    7,138

                    

                    

                    

                    6,926Research equipment

                    

                    

                    371

                    

                    

                    

                    270Office equipment

                    

                    

                    6,081

                    

                    

                    

                    5,616Vehicles

                    

                    

                    3,249

                    

                    

                    

                    3,299Leasehold improvements

                    

                    

                    465

                    

                    

                    

                    34226,264

                    

                    

                    

                    25,893Less accumulated depreciation

                    

                    

                    (14,474

                    )

                    

                    

                    (13,655

                    )$

                    11,790

                    

                    

                    $

                    12,238





The provision for depreciation amounted to $512, of which $221 is included in cost of revenues, and $617, of which $240 is included in cost of revenues, for the three month periods ended February 29, 2008 and February 28, 2007, respectively.  The provision for depreciation amounted to $999, of which $427 is included in cost of revenues, and $1,127, of which $374 is included in cost of revenues,
            for the six month periods ended February 29, 2008 and February 28, 2007, respectively.  Losses on disposal of assets totaling $1 and $0 was recorded for the three month periods ended February 29, 2008 and February 28, 2007, respectively, related to various building, office equipment, and vehicle disposals.  A total of $6,097 net of $729 of accumulated depreciation and $6,724 net of $546 of accumulated depreciation is included in the property, plant and equipment
            at February 29, 2008 and February 28, 2007, respectively, related to a consolidated variable interest entity.





NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS





There were no changes in the carrying amount of goodwill, as recorded under SFAS 142 for the three and six month periods ended February 29, 2008, respectively.





The total amount of goodwill that is deductible for tax purposes is $9,476 and $1,276 at February 29, 2008 and February 28, 2007, respectively.





17





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





February 29, 2008

                        (Unaudited)Gross

                        Carrying

                        Amount

                    

                    

                    Accumulated

                        Amortization

                    

                    

                    Net Book

                        Value

                    

                    

                    Weighted Average

                        Amortization

                        Period (in years)Customer relationships

                    

                    $

                    6,294

                    

                    

                    $

                    1,534

                    

                    

                    $

                    4,760

                    

                    

                    

                    10Non-compete

                    

                    

                    200

                    

                    

                    

                    68

                    

                    

                    

                    132

                    

                    

                    

                    5Non-compete

                    

                    

                    930

                    

                    

                    

                    186

                    

                    

                    

                    744

                    

                    

                    

                    5Non-compete

                    

                    

                    1,485

                    

                    

                    

                    877

                    

                    

                    

                    608

                    

                    

                    

                    5Total

                    

                    

                    8,909

                    

                    

                    

                    2,665

                    

                    

                    

                    6,244Tradename (not subject to amortization)

                    

                    

                    590

                    

                    

                    

                    -

                    

                    

                    

                    590Total

                    

                    $

                    9,499

                    

                    

                    $

                    2,665

                    

                    

                    $

                    6,834





August 31, 2007

                        (Audited)Gross

                        Carrying

                        Amount

                    

                    

                    Accumulated

                        Amortization

                    

                    

                    Net Book

                        Value

                    

                    

                    Weighted Average

                        Amortization

                        Period (in years)Customer relationships

                    

                    $

                    6,294

                    

                    

                    $

                    1,169

                    

                    

                    $

                    5,124

                    

                    

                    

                    10Non-compete

                    

                    

                    200

                    

                    

                    

                    58

                    

                    

                    

                    142

                    

                    

                    

                    5Non-compete

                    

                    

                    930

                    

                    

                    

                    93

                    

                    

                    

                    837

                    

                    

                    

                    5Non-compete

                    

                    

                    1,485

                    

                    

                    

                    729

                    

                    

                    

                    757

                    

                    

                    

                    5Total

                    

                    

                    8,909

                    

                    

                    

                    2,049

                    

                    

                    

                    6,860Tradename (not subject to amortization)

                    

                    

                    590

                    

                    

                    

                    -

                    

                    

                    

                    590Total

                    

                    $

                    9,499

                    

                    

                    $

                    2,049

                    

                    

                    $

                    7,450





Intangible asset amortization expense is $206 and $467 for the three month periods ended February 29, 2008 and February 28, 2007, respectively, which includes $127 and $277 of amortization related to loan origination fees, respectively.  Intangible asset amortization expense is $846 and $675 for the six month periods ended February 29, 2008 and February 28, 2007, respectively, which includes $229
            and $339 of amortization related to loan origination fees, respectively.  The Company recognized impairment on certain intangible assets in its Wireless Infrastructure and Electronics Integration segments of $0.3 million during the period ending February 28, 2007.





Amortization expense on intangible assets currently owned by the Company at February 29, 2008 for each of the next five fiscal years is as follows:





2008

                    

                    $

                    6162009

                    

                    

                    1,1582010

                    

                    

                    1,0832011

                    

                    

                    9862012

                    

                    

                    8182013 and thereafter

                    

                    

                    2,173Total

                    

                    $

                    6,834




NOTE 9 - DEBT ARRANGEMENTS





The Company’s debt liabilities consisted of the following:





18








February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Notes payable:Revolving line of credit promissory note due August 31, 2008. Interest at LIBOR plus 2.0% or 1.75% upon achievement of certain financial performance criteria.  The loan is secured by the business assets of the Company and personal guarantees of the Company’s two majority shareholders (the Chairman of the Board and the CEO of the Company).  The loan is further
                                secured by certain marketable securities of the Company’s majority shareholder, and Chairman of the Board.

                    

                    $

                    15,000

                    

                    

                    $

                    15,000Term loan due in monthly installments of $167 plus interest at LIBOR plus 2.0% or 1.75% upon achievement of certain financial performance criteria through maturity date, August 31, 2011.  The loan is secured by the business assets of the Company and personal guarantees of the Company’s two majority shareholders. The loan is further secured by certain marketable securities
                                of the Company’s majority shareholder.

                    

                    

                    17,087

                    

                    

                    

                    18,167Various term notes due in monthly installments of $14, including interest ranging from 4.9% to 9.03% through April 2010. The loans are secured by vehicles and equipment.

                    

                    

                    361

                    

                    

                    

                    314Convertible 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.

                    

                    

                    4,768

                    

                    

                    

                    5,678Debt with majority shareholder:Unsecured line of credit promissory note due December 1, 2010.  Interest at the one-month LIBOR plus 3.0% with $8,000 available borrowings.

                    

                    

                    1,000

                    

                    

                    

                    1,000Term note due in monthly installments of $3 including interest at 4.0% through September 2008.  The loan is secured by vehicles and equipment.

                    

                    

                    16

                    

                    

                    

                    30Variable Interest EntityRevolving line of credit promissory note due May 29, 2008. Interest at LIBOR plus 1.6%.  The loan is secured by real estate and personal guarantees of the Company’s two majority shareholders.

                    

                    

                    2,200

                    

                    

                    

                    2,200Various term loans due in monthly installments totaling $44 plus interest at ranges from LIBOR plus 1.5% to LIBOR plus 1.6%.  The loans mature at dates ranging from February 2009 through April 2011. The notes are secured by real estate and personal guarantees of the Company’s two majority shareholders.

                    

                    

                    4,482

                    

                    

                    

                    5,062




Capital leases:Various notes due in monthly installments of $6 including interest at ranges from 2.3% to 11.6% through November 2010. The loans are secured by computers and equipment.

                    

                    

                    88

                    

                    

                    

                    112Total debt obligation

                    

                    

                    45,002

                    

                    

                    

                    47,563Less current maturities

                    

                    

                    (39,920

                    )

                    

                    

                    (38,846

                    )Long-term portion of outstanding debt

                    

                    $

                    5,082

                    

                    

                    $

                    8,717




Fiscal year principal payments due on long-term debt outstanding (including convertible term note) at February 29, 2008 are approximately as follows:





2008

                    

                    $

                    39,9202009

                    

                    

                    3,4232010

                    

                    

                    5832011

                    

                    

                    1,0372012 and thereafter

                    

                    

                    38$

                    45,002





Credit Facility Loan and Security Agreement





Effective August 31, 2006 and as amended by the “First Amendment to the Loan and Security Agreement” (the “Agreement”) on October 18, 2007, the Company entered into a $35,000 credit facility with Fifth Third Bank.  The credit facility replaced the parties' $25,000 credit facility, which expired on August 31, 2006. The facility includes a $20,000 term loan evidenced by a
            term loan note, which matures on August 31, 2011 and a $15,000 revolving loan evidenced by a revolving line of credit promissory note, which matures on August 31, 2008. Availability under the revolving loan is the lesser of $15,000 or the borrowing base amount, which is calculated monthly as a percentage of the Company's eligible assets. Interest is charged on the loans at LIBOR plus 2.0%, which may be reduced to LIBOR plus 1.75% if the Company meets certain performance criteria.
            The line of credit and the term loan are secured by assets of the Company and by personal guarantees of the Company’s two majority shareholders (the Chairman of the Board of Directors and CEO).  Outstanding borrowings on this line of credit amounted to $15,000 at February 29, 2008.  The Company had no availability under the line of credit at February 29, 2008.





19





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





The Company is in breach of certain covenants as of February 29, 2008 and August 31, 2007.   Under terms of the Agreement, the bank may call the loan if the Company is in violation of any restrictive covenants.





The Company is in breach of (a) the Minimum Shareholders’ Equity covenant requirement of $15,000, (b) the Maximum Funded Debt/Total Capitalization Ratio and (c) Fixed Charge Coverage Ratio covenant requirements.  Under terms of the Agreement, the bank may call the loan if the Company is in
            violation of any restrictive covenants. In the absence of waivers from the bank and in accordance with FAS 78, the Company reclassified the related notes payable as current debt. This reclassification totaled $15,086 and $16,167 as of February 29, 2008 and August 31, 2007, respectively.





Convertible Term Note





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





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





•

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





•

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





•

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





•

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




If the above criteria are not met, the Company must pay that portion or all of the monthly principal payment in cash at a rate of 102% of the respective monthly amortization amounts.  The Company had the option to postpone payment of any 12 principal payments due.  As of February 29, 2008, the Company has postponed all 12 months of principal payments.  These deferred principal
            amounts shall be due and payable, at the Company’s option, on any subsequent payment date or on the maturity date of the Note.





20





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




•

                    a failure to make payments under the Note when due;





•

                    a material breach of the transaction documents by the Company;





•

                    bankruptcy related events;





•

                    a change of control transaction without prior approval; and





•

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





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





Laurus also has the option to convert all or a portion of the Note into shares of the Company’s common stock at any time, at an initial fixed conversion price of $5.50 per share, subject to limitations and adjustment as described below. The Note is currently convertible into 866,942 shares of the Company’s common stock, excluding the conversion of any accrued interest. The conversion price is
            adjustable on a weighted average basis upon certain future issuances of securities by the Company at a price less than the conversion price then in effect. There are a number of limitations on Laurus’ ability to convert the Note and exercise the Laurus Warrant. These limitations include:





•

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





•

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





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





The Warrants were recorded at fair value and classified as a liability.  Any discount accretion is considered immaterial based on the Black-Scholes model.  The Company recorded $856 for debt issue costs, including $308 paid to affiliates of Laurus, $475 to CB Capital, and $73 for legal and professional fees. The debt issue costs are included in other assets in the accompanying
            consolidated balance sheet as of February 29, 2008.




NOTE 10- RETIREMENT PLAN





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





The plan includes a 401(k) savings plan whereby employees can contribute and defer taxes on compensation contributed to the plan. The Company matches 25% up to 4% of an employee’s compensation.  The Company is not required to contribute to the plan but may make a discretionary contribution.




NOTE 11 - INCOME TAXES





21




The reconciliation for 2008 and 2007 of income tax expense (benefit) computed at the U.S. Federal statutory tax rate to the Company's effective income rate is as follows:





February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (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

                    )%





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





February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Current:Federal

                    

                    $

                    (651

                    )

                    

                    $

                    (1,652

                    )State

                    

                    

                    (108

                    )

                    

                    

                    (273

                    )(759

                    )

                    

                    

                    (1,925

                    )Deferred:Federal

                    

                    

                    (168

                    )

                    

                    

                    (96

                    )State

                    

                    

                    (25

                    )

                    

                    

                    (15

                    )(193

                    )

                    

                    

                    (111

                    )Change in valuation allowance

                    

                    

                    1,138

                    

                    

                    

                    2,193Net income tax (benefit)

                    

                    $

                    186

                    

                    

                    $

                    157





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





February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Deferred Tax Assets:Current:Allowances for doubtful accounts and inventory

                    

                    $

                    700

                    

                    

                    $

                    637Accrued liabilities and other

                    

                    

                    1,444

                    

                    

                    

                    1,494Noncurrent:Amortization of covenants

                    

                    

                    229

                    

                    

                    

                    270Depreciation

                    

                    

                    (412

                    )

                    

                    

                    (246

                    )Net operating losses and other carryforwards

                    

                    

                    5,016

                    

                    

                    

                    3,6846,977

                    

                    

                    

                    5,839Valuation allowance

                    

                    

                    (5,442

                    )

                    

                    

                    (4,304

                    )$

                    1,535

                    

                    

                    $

                    1,535




SFAS 109 requires a valuation allowance to reduce the deferred tax assets reported if, at February 29, 2008, the Company had federal tax operating loss based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  After consideration of all the evidence, both positive and negative, management has determined that a $5,442
            valuation allowance at February 29, 2008 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current period is $1,138.  At February 29, 2008, the Company has federal net operating loss carryforwards of approximately $9,500, which expire between 2020 and 2023. The state tax operating loss carryforwards are approximately $12,000.  The difference between federal and
            state net operating loss carryforwards represents a change in business venue in a prior period.  The Company's capital loss carryforward is approximately $47, which expires during the fiscal year ending August 31, 2010 and 2012.  The Company also incurred net operating losses related to European operations that can be carried forward indefinitely.





22





NOTE 12– EQUITY INCENTIVE PLANS AND OTHER STOCK COMPENSATION





Restricted Share Units





Effective April 13, 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan. Under terms of the 2006 Equity Incentive Plan, the Company may grant options, restricted share units and other stock-based awards to its management personnel as well as other individuals for up to one million shares of common stock.  During the period ended February 29, 2008, no restricted share
            units were issued under this plan.





Warrants





At February 29, 2008, the Company had 5,000 warrants issued and outstanding that are each convertible into one share of common stock with an exercise price of $10.00 per share. The remaining contractual term on these warrants is through June 30, 2008.




NOTE 13- SHAREHOLDERS’ EQUITY





Common Stock





The following are the details of the Company's common stock as of February 29, 2008 and August 31, 2007:








Number of SharesAuthorized

                    

                    

                    Issued

                    

                    

                    Outstanding

                    

                    

                    AmountCommon stock, $0.10 par value

                    

                    

                    150,000,000

                    

                    

                    

                    11,391,823

                    

                    

                    

                    11,391,823

                    

                    

                    $

                    1,117





There were no share issuances or retirements for the period ended February 29, 2008.




Preferred Stock





The following are the details of the Company's non-voting preferred stock as of February 29, 2008 and August 31, 2007:





Number of SharesAuthorized

                    

                    

                    Issued

                    

                    

                    Outstanding

                    

                    

                    AmountPreferred stock, $0.10 par value

                    

                    

                    1,000,000

                    

                    

                    

                    66,180

                    

                    

                    

                    66,180

                    

                    

                    $

                    6,618





On November 30, 2005, the Company issued 66,180 shares of $0.10 par value non-voting preferred stock to the Company’s majority shareholder as consideration for cancellation of certain debt obligations owed by the Company under a line of credit promissory note dated May 25, 2005. The shares are not convertible to common stock and have various restrictions pertaining to their transferability as they are
            not registered under the Securities Act of 1933.  The shares issued are single class and pay on a monthly basis an annual cash dividend of $7.50 per share. Dividends of $124 were paid for the three months ended February 29, 2008 and February 28, 2007, respectively.  Dividends of $248 were paid for the six months ended February 29, 2008 and February 28, 2007, respectively.





*Treasury Stock*





The Company’s related party consolidated variable interest entity described in Note 2 held 384,500 shares of the Company’s common stock at February 29, 2008.  The shares were distributed to the members during the period ending February 29, 2008.





23





NOTE 14- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)





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





Foreign

                        Currency

                        Adjustments

                    

                    

                    Unrealized

                        Gains (Losses)

                        on Securities

                    

                    

                    Reclassification of

                        Realized Gains

                        (Losses) included

                        in Net Income

                    

                    

                    Accumulated

                        Other

                        Comprehensive

                        IncomeBalance at August 31, 2007

                    

                    $

                    259

                    

                    

                    $

                    (41

                    )

                    

                    $

                    42

                    

                    

                    $

                    260Period change

                    

                    

                    28

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    28Balance at February 29, 2008

                    

                    $

                    287

                    

                    

                    $

                    (41

                    )

                    

                    $

                    42

                    

                    

                    $

                    288





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





NOTE 15 - PER SHARE DATA





The following presents the computation of basic income per common share and diluted income per common share:





Three Month Period Ended

                    

                    

                    Six Month Period EndedFebruary 29,

                    

                    

                    February 28,

                    

                    

                    February 29,

                    

                    

                    February 28,2008

                    

                    

                    2007

                    

                    

                    2008

                    

                    

                    2007(Unaudited)

                    

                    

                    (Unaudited)

                    

                    

                    (Unaudited)

                    

                    

                    (Unaudited)Net Income (Loss) Available to Common Shareholders

                    

                    $

                    (2,839

                    )

                    

                    $

                    (7,755

                    )

                    

                    $

                    (2,829

                    )

                    

                    $

                    (7,029

                    )Basic Income (Loss) Per Common Share

                    

                    $

                    (0.25

                    )

                    

                    $

                    (0.73

                    )

                    

                    $

                    (0.25

                    )

                    

                    $

                    (0.66

                    )Basic weighted average number of common shares outstanding

                    

                    

                    11,391,823

                    

                    

                    

                    10,628,219

                    

                    

                    

                    11,391,823

                    

                    

                    

                    10,576,185Diluted Income (Loss) Per Common Share:

                    

                    $

                    (0.22

                    )

                    

                    $

                    (0.63

                    )

                    

                    $

                    (0.22

                    )

                    

                    $

                    (0.57

                    )Diluted weighted average number of common shares outstanding

                    

                    

                    12,658,637

                    

                    

                    

                    12,281,760

                    

                    

                    

                    12,714,263

                    

                    

                    

                    12,240,371





At February 29, 2008, diluted shares represent 866,942 shares obtainable through the Laurus convertible term note and 272,727 shares obtainable through the Laurus Warrant, 13,636 shares obtainable through the CB Capital Warrant, and 5,000 shares obtainable through warrants issued as stock compensation.  The remainder of diluted shares is obtainable through acquisition agreements and employee stock
            compensation plans.





NOTE 16- OPERATING LEASE COMMITMENTS




Property Lease Commitments





Segment

                    

                    Location(s)

                    

                    DescriptionCorporate and various Wireless Infrastructure & Electronics Integration subsidiaries

                    

                    Indianapolis, IN (1)

                    

                    Corporate offices, various subsidiary offices and warehouse facilitiesWireless Infrastructure

                    

                    Cleveland, OH, Kansas City, MO, and Alpharetta, GA, (2); Ft. Wayne, IN (3)

                    

                    Offices, warehouse facilitiesBusiness Solutions

                    

                    Richmond, IN (4); Indianapolis, IN (5); Brentwood, TN (6); Provo, UT (10); Tucson, AZ (12); Loveland, CO (11)

                    

                    OfficesTransportation Infrastructure

                    

                    Indianapolis, IN, Sedalia, MO, Knoxville, TN (7)

                    

                    Offices, equipment yard, warehouse, storageUltraviolet Technologies

                    

                    Crawfordsville, IN (8); United Kingdom, Singapore, Shenzhen, China and GuangDong, China (9)

                    

                    Offices, warehouse and manufacturing facilities





24





(1)

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





(2)

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





(3)

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





(4)

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





(5)

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





(6)

                    The Company maintains an operating lease agreement that provides for monthly base rent of $10 through January 31, 2009. In addition to an escalating base monthly rent, the agreement requires the Company to pay any increase in operating costs, real estate taxes, or utilities over the base year.





(7)

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





(8)

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





(9)

                    The Company maintains various operating leases in the United Kingdom, Singapore and China
                            providing for monthly base rent of approximately $9 with various expirations through 2015, which may be adjusted annually to fair market value or to increases defined in the agreement. The agreement includes a one-year renewal option and the lessee pays most expenses related to the building including repairs and maintenance, insurance, and property taxes.





(10)

                    The Company maintains an operating lease agreement that provides for monthly base rent of $25 through January 31, 2011 and is increased 5% annually.  The lessee pays most expenses related to repairs, maintenance, property taxes, and insurance.  The lessor is required to carry minimal amounts of insurance.  The lease
                            is with a limited liability company in which an employee is a member.





(11)

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





25





(12)

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





Rent expense under these agreements amounted to $1,324 and $654 for the six and three months ending February 29, 2008, respectively.





Equipment





The Company leases a fleet of trucks and trailers, support vehicles and specialty construction equipment.  As of February 29, 2008, the Company had approximately 300 units of rolling-stock fleet. Lease expense under these agreements amounted to approximately $66 for the six months ending February 29, 2008 and leases expire in various years through 2009. Most operating leases provide for a
            one-year term per vehicle with an option to purchase or continue leasing on a month-to-month basis.





Future minimum commitments under these agreements at February 29, 2008 are approximately as follows:





Facilities

                    

                    

                    Vehicles and

                        Equipment2008

                    

                    $

                    1,243

                    

                    

                    $

                    2632009

                    

                    

                    2,305

                    

                    

                    

                    242010

                    

                    

                    2,100

                    

                    

                    

                    -2011

                    

                    

                    1,871

                    

                    

                    

                    -2012

                    

                    

                    1,663

                    

                    

                    

                    -2013 and thereafter

                    

                    

                    6,429

                    

                    

                    

                    -$

                    15,611

                    

                    

                    $

                    287








NOTE 17 - RELATED PARTY TRANSACTIONS





The following is a summary of related party amounts included in the consolidated financial statements at February 29, 2008 and February 28, 2007, respectively:





February 29,

                        2008

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Assets:Note receivable from subsidiary employee

                    

                    $

                    300

                    

                    

                    $

                    300Liabilities:Long-term line of credit

                    

                    

                    (1,000

                    )

                    

                    

                    (1,000

                    )Installment notes payable

                    

                    

                    (16

                    )

                    

                    

                    (30

                    )Net assets (liabilities)

                    

                    $

                    (716

                    )

                    

                    $

                    (730

                    )





The note receivable represents a loan with a subsidiary employee in connection with the acquisition of the subsidiary.  The loan is secured by restricted stock and expires June 30, 2008.





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





The long-term line of credit represents a loan from the Company’s major shareholder and matures on December 1, 2010.  See Note 9 for further details.





The installment notes payable represents loans for equipment and vehicle purchases by the Company’s majority shareholder.  The loans are secured by the respective assets acquired and expire no later than September 30, 2008.  Interest expense is immaterial.  See Note 9 for further details.





26





The following is a summary of related party amounts included in the consolidated statements of operations for the six months ending February 29, 2008 and February 28, 2007, respectively:





February 29,

                        2008

                        (Unaudited)

                    

                    

                    February 28,

                        2007

                        (Unaudited)Revenues:Electronics Integration (1)

                    

                    $

                    -

                    

                    

                    $

                    3Total

                    

                    

                    -

                    

                    

                    

                    3Expenses:Wireless Infrastructure (2) (3) (4)

                    

                    

                    136

                    

                    

                    

                    113Business Solutions (5)

                    

                    

                    173

                    

                    

                    

                    24Transportation Infrastructure (6)

                    

                    

                    150

                    

                    

                    

                    94Ultraviolet Technologies (7)

                    

                    

                    42

                    

                    

                    

                    42Electronics Integration (2)

                    

                    

                    57

                    

                    

                    

                    120Holding Company (8) (9)

                    

                    

                    508

                    

                    

                    

                    65Total

                    

                    

                    1,066

                    

                    

                    

                    458





(1)

                    During the six months ending February 28, 2007, the Company’s TTC subsidiary performed $3 worth of services for businesses owned by the Company’s two majority shareholders.


(2)

                    The Company maintains an operating lease agreement for the rental of a building with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders.  A majority of the Company’s subsidiaries maintain offices and or warehouse space in the facility.
                            The lease agreement includes a ten-year term with one option to extend the lease term for a one-year period. The agreement provides for a monthly base rent of $30 per month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs.  Rent and related expenses of $77 and $80 were recognized for the six months ended February 29, 2008 and February 28,
                            2007, respectively.


(3)

                    The Company maintains a debt obligation to its majority shareholder for the purchase of vehicles and equipment. The loans are secured by the assets and pay interest at 6%.  Interest expense of $1 and $9 was recognized for the six months ending February 29, 2008 and February 28, 2007, respectively.


(4)

                    The Company’s Fortune Wireless subsidiary maintained an operating lease agreement for rental of a building with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders. The operating lease agreement provided for monthly base rent of $4 through April
                            30, 2011, adjusted annually to fair market value. The building was sold during November 2007.  Rent and related expenses of $12 and $24 was recognized for the six months ending February 29, 2008 and February 28, 2007, respectively.


(5)

                    The Company’s PSM subsidiary holds a lease for an office building in Richmond, IN from a former Chief Operating Officer of the Company. The lease is for a period of five years and
                            expires in May 2008. The agreement provides for base rent of $4 per month with nominal annual increases.  Rent and related expense of $24 was recognized for the six months ending February 29, 2008 and February 28, 2007, respectively.  The Company’s ESG subsidiary entered into a lease agreement for an office building in Provo,
                            Utah which is leased from a limited liability company in which an employee is a member of the limited liability company.  The lease is due to expire January 31, 2011.  Rent and related expense of $149 and $0 was recognized for the six months ending February 29, 2008 and February 28, 2007, respectively.


(6)

                    The Company’s JH Drew subsidiary maintains an operating lease agreement for rental of three buildings located in Indiana,
                            Tennessee and Missouri with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders. The lease agreement includes a five-year term with one option to extend the lease term
                            for a one-year period and provides for base rent of $25 per month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs.  Rent and related expenses of $150 and $94 were recognized for the six months ending February 29, 2008 and February 28, 2007, respectively.


(7)

                    The Company’s Nor-Cote subsidiary maintains an operating lease agreement for rental of a building with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two major shareholders.  The agreement provides for monthly base rent of $7 and expires in August 2009. The
                            base rent shall be adjusted annually to fair market value. The agreement also includes one renewal option, which allows the Company to extend the lease term for an additional year.  Rent and related expenses of $42 were recognized for the six months ending February 29, 2008 and February 28, 2007, respectively.





27





(8)

                    The Company maintains an operating lease agreement for the rental of a building with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders.  The lease agreement includes a ten-year term with one option to extend the lease term for a one-year
                            period. The agreement provides for a monthly base rent of $79 per month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs.  Rent and related expenses of $471 and $65 were recognized for the six months ending February 29, 2008 and February 28, 2007, respectively.


(9)

                    As described in Note 14, the Company entered into various unsecured line of credit agreements with its major shareholder. Interest expense booked on these agreements amounted to $37 and $0 for the six months ending February 29, 2008 and February 28, 2007, respectively.





Other Related Party Transactions





The Company’s majority shareholders have entered into various put/call option agreements (“option agreements”) with the Company’s common stock over the last five years.  Option agreements with these shareholders are included in the acquisitions of CSM and ESG.  The put/ call options range in price from $1 to $10.33 per common share.  During the six
            months ending February 29, 2008, the majority shareholders did not acquire any shares of the Company’s common stock related to option agreements with shareholders.





Guaranties





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




NOTE 18- SIGNIFICANT ESTIMATES





Significant estimates have been made by management with respect to the realizability of the Company’s deferred tax assets. Actual results could differ from these estimates making it reasonably possible that a change in these estimates could occur in the near term. The net increase in the valuation allowance for deferred income tax assets was $986 and $2,169 at February 29, 2008 and February 28,
            2007, respectively.  The valuation allowance relates primarily to net operating loss carry forwards, tax credit carry forwards, and net deductible temporary differences. The Company evaluates a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS No. 109, including the number of years the Company’s operating loss and tax credits can be carried forward, the existence of taxable temporary differences, the
            Company’s earnings history and the Company’s near-term earnings expectations. At February 29, 2008, management believes it is more likely than not that the majority of net deferred income tax assets will not be realized.





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





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





Certain portions of the Company’s business (including, the Wireless Infrastructure and Transportation Infrastructure Segments) recognize revenues using the percentage-of-completion method of accounting.  This accounting method results in the Company recognizing contract revenues and earnings ratably over the contract term in proportion to its incurrence of contract cost.  The
            earnings or losses recognized on individual contracts are based on estimates of contract revenues, costs and profitability that require considerable judgment. If in any period the Company significantly increases its estimate of the total costs to complete a given project, the Company may recognize very little or no additional revenues with respect to that project.  If the total contract cost estimates indicate that there is a loss, such loss is recognized in the period
            such determination is made.  To the extent that the Company’s cost estimates fluctuate over time or differ from actual costs, its operating results may be materially affected.  As a result, the Company’s gross profit in future periods may be significantly reduced or eliminated.





28





NOTE 19- CONCENTRATION OF CREDIT RISK




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




NOTE 20- COMMITMENTS AND CONTINGENCIES





Litigation





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





Restricted Cash





Certain states and vendors require us to post letters of credit to ensure payment of taxes or payments to the Company’s vendors under health insurance and workers compensation contracts and to guarantee performance under the Company’s contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts
            to the holder of the letter of credit if the holder demonstrates that the Company has failed to perform specified actions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, the Company may also have to record a charge to earnings for the reimbursement. The Company does not believe that it is likely that any claims will be made under a letter of credit in the foreseeable
            future.  As of February 29, 2008, the Company had approximately $5.6 million in restricted cash primarily to secure obligations under its PEO contracts in the Business Solutions segment.





Payment and Performance Bonds





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





NOTE 21 - SEGMENT INFORMATION





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





The segments are organized as follows:





Segment & Entity

                    

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

                    

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

                    

                    Provider turnkey development services for the deployment of wireless networksTransportation InfrastructureJames H. Drew Corp. and subsidiaries

                    

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

                    

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

                    

                    Distributor and installer of home and commercial electronicsVariable Interest EntityFisbeck - Fortune Development, LLC

                    

                    Land, buildings and building improvements that are utilized solely by the Company





29





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





Business

                        Solutions (1)

                    

                    

                    Wireless

                        Infrastructure

                    

                    

                    Transportation

                        Infrastructure

                    

                    

                    Ultraviolet

                        Technologies

                    

                    

                    Electronics

                        Integration

                    

                    

                    Operating

                        Total3-Months Ended February 29, 2008Revenue

                    

                    $

                    22,258

                    

                    

                    $

                    4,253

                    

                    

                    $

                    10,047

                    

                    

                    $

                    2,811

                    

                    

                    $

                    2,556

                    

                    

                    $

                    41,925Cost of revenue

                    

                    

                    18,588

                    

                    

                    

                    3,558

                    

                    

                    

                    9,228

                    

                    

                    

                    1,621

                    

                    

                    

                    2,404

                    

                    

                    

                    35,399Gross profit

                    

                    

                    3,670

                    

                    

                    

                    695

                    

                    

                    

                    819

                    

                    

                    

                    1,190

                    

                    

                    

                    152

                    

                    

                    

                    6,,526Operating expensesSelling, general and administrative

                    

                    

                    3,290

                    

                    

                    

                    1,112

                    

                    

                    

                    1,024

                    

                    

                    

                    1,185

                    

                    

                    

                    476

                    

                    

                    

                    7,087Depreciation and amortization

                    

                    

                    354

                    

                    

                    

                    41

                    

                    

                    

                    5

                    

                    

                    

                    83

                    

                    

                    

                    11

                    

                    

                    

                    494Total operating expenses

                    

                    

                    3,644

                    

                    

                    

                    1,153

                    

                    

                    

                    1,029

                    

                    

                    

                    1,268

                    

                    

                    

                    487

                    

                    

                    

                    7,581Segment operating income (loss)

                    

                    $

                    26

                    

                    

                    $

                    (458

                    )

                    

                    $

                    (210

                    )

                    

                    $

                    (78

                    )

                    

                    $

                    (335

                    )

                    

                    $

                    (1,055

                    )






Holding

                        Company

                    

                    

                    Consolidated

                        VIE

                    

                    

                    VIE

                        Elimination

                    

                    

                    Segment

                        Totals3-months ended February 29, 2008Revenue

                    

                    $

                    -

                    

                    

                    $

                    421

                    

                    

                    $

                    (420

                    )

                    

                    $

                    41,926Cost of revenue

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    35,399Gross profit

                    

                    

                    -

                    

                    

                    

                    421

                    

                    

                    

                    (420

                    )

                    

                    

                    6,527Operating expensesSelling, general and administrative

                    

                    

                    748

                    

                    

                    

                    -

                    

                    

                    

                    (420

                    )

                    

                    

                    7,415Depreciation and amortization

                    

                    

                    185

                    

                    

                    

                    48

                    

                    

                    

                    -

                    

                    

                    

                    727Total operating expenses

                    

                    

                    933

                    

                    

                    

                    48

                    

                    

                    

                    (420

                    )

                    

                    

                    8,142Segment operating income (loss)

                    

                    $

                    (933

                    )

                    

                    $

                    373

                    

                    

                    $

                    -

                    

                    

                    $

                    (1,615

                    )





(1) Gross billings of $161,416 less worksite employee payroll costs of $139,158.





30




Business

                        Solutions (1)

                    

                    

                    Wireless

                        Infrastructure

                    

                    

                    Transportation

                        Infrastructure

                    

                    

                    Ultraviolet

                        Technologies

                    

                    

                    Electronics

                        Integration

                    

                    

                    Operating

                        Total3-Months Ended February 28, 2007Revenue

                    

                    $

                    13,462

                    

                    

                    $

                    4,694

                    

                    

                    $

                    7,885

                    

                    

                    $

                    2,913

                    

                    

                    $

                    3,284

                    

                    

                    $

                    32,238Cost of revenue

                    

                    

                    11,197

                    

                    

                    

                    4,717

                    

                    

                    

                    6,689

                    

                    

                    

                    1,838

                    

                    

                    

                    3,269

                    

                    

                    

                    27,710Gross profit

                    

                    

                    2,265

                    

                    

                    

                    (23

                    )

                    

                    

                    1,196

                    

                    

                    

                    1,075

                    

                    

                    

                    15

                    

                    

                    

                    4,528Operating expensesSelling, general and administrative

                    

                    

                    1,808

                    

                    

                    

                    2,323

                    

                    

                    

                    733

                    

                    

                    

                    1,066

                    

                    

                    

                    731

                    

                    

                    

                    6,661Depreciation and amortization

                    

                    

                    175

                    

                    

                    

                    183

                    

                    

                    

                    145

                    

                    

                    

                    108

                    

                    

                    

                    57

                    

                    

                    

                    668Impairment

                    

                    

                    -

                    

                    

                    

                    1,815

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    212

                    

                    

                    

                    2,027Total operating expenses

                    

                    

                    1,983

                    

                    

                    

                    4,321

                    

                    

                    

                    878

                    

                    

                    

                    1,174

                    

                    

                    

                    1,000

                    

                    

                    

                    9,356Segment operating income (loss)

                    

                    $

                    282

                    

                    

                    $

                    (4,344

                    )

                    

                    $

                    318

                    

                    

                    $

                    (99

                    )

                    

                    $

                    (985

                    )

                    

                    $

                    (4,828

                    )








Holding

                        Company

                    

                    

                    Consolidated

                        VIE

                    

                    

                    VIE

                        Elimination

                    

                    

                    Segment

                        Totals3-Months Ended February 28, 2007Revenue

                    

                    $

                    -

                    

                    

                    $

                    358

                    

                    

                    $

                    (357

                    )

                    

                    $

                    32,239Cost of revenue

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    27,710Gross profit

                    

                    

                    -

                    

                    

                    

                    358

                    

                    

                    

                    (357

                    )

                    

                    

                    4,529Operating expensesSelling, general and administrative

                    

                    

                    1,335

                    

                    

                    

                    43

                    

                    

                    

                    (357

                    )

                    

                    

                    7,682Depreciation and amortization

                    

                    

                    367

                    

                    

                    

                    49

                    

                    

                    

                    -

                    

                    

                    

                    1,084Impairment

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    2,027Total operating expenses

                    

                    

                    1,702

                    

                    

                    

                    92

                    

                    

                    

                    (357

                    )

                    

                    

                    10,793Segment operating income (loss)

                    

                    $

                    (1,702

                    )

                    

                    $

                    266

                    

                    

                    $

                    -

                    

                    

                    $

                    (6,264

                    )





(1) Gross billings of $106,493 less worksite employee payroll costs of $93,031.





(2) Beginning in fiscal year 2008, the Company began allocating selling, general, and administrative expenses to the segments. The effect of this change in period ending February 28, 2007 would be $586 of unallocated selling, general and administrative expenses.





Business

                        Solutions (1)

                    

                    

                    Wireless

                        Infrastructure

                    

                    

                    Transportation

                        Infrastructure

                    

                    

                    Ultraviolet

                        Technologies

                    

                    

                    Electronics

                        Integration

                    

                    

                    Operating

                        Total6-Months Ended February 29, 2008Revenue

                    

                    $

                    42,627

                    

                    

                    $

                    9,780

                    

                    

                    $

                    21,627

                    

                    

                    $

                    6,077

                    

                    

                    $

                    5,569

                    

                    

                    $

                    85,680Cost of revenue

                    

                    

                    34,843

                    

                    

                    

                    7,399

                    

                    

                    

                    19,486

                    

                    

                    

                    3,503

                    

                    

                    

                    5,015

                    

                    

                    

                    70,246Gross profit

                    

                    

                    7,784

                    

                    

                    

                    2,381

                    

                    

                    

                    2,141

                    

                    

                    

                    2,574

                    

                    

                    

                    554

                    

                    

                    

                    15,434Operating expensesSelling, general and administrative

                    

                    

                    6,659

                    

                    

                    

                    2,192

                    

                    

                    

                    1,839

                    

                    

                    

                    2,486

                    

                    

                    

                    901

                    

                    

                    

                    14,077Depreciation and amortization

                    

                    

                    707

                    

                    

                    

                    82

                    

                    

                    

                    9

                    

                    

                    

                    153

                    

                    

                    

                    25

                    

                    

                    

                    976Total operating expenses

                    

                    

                    7,366

                    

                    

                    

                    2,274

                    

                    

                    

                    1,848

                    

                    

                    

                    2,639

                    

                    

                    

                    926

                    

                    

                    

                    15,053Segment operating income (loss)

                    

                    $

                    418

                    

                    

                    $

                    107

                    

                    

                    $

                    293

                    

                    

                    $

                    (65

                    )

                    

                    $

                    (372

                    )

                    

                    $

                    381





31








Holding

                        Company

                    

                    

                    Consolidated

                        VIE

                    

                    

                    VIE

                        Elimination

                    

                    

                    Segment

                        Totals6-months ended February 29, 2008Revenue

                    

                    $

                    -

                    

                    

                    $

                    854

                    

                    

                    $

                    (851

                    )

                    

                    $

                    85,683Cost of revenue

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    70,246Gross profit

                    

                    

                    -

                    

                    

                    

                    854

                    

                    

                    

                    (851

                    )

                    

                    

                    15,437Operating expensesSelling, general and administrative

                    

                    

                    1,137

                    

                    

                    

                    17

                    

                    

                    

                    (851

                    )

                    

                    

                    14,380Depreciation and amortization

                    

                    

                    345

                    

                    

                    

                    97

                    

                    

                    

                    -

                    

                    

                    

                    1,418Total operating expenses

                    

                    

                    1,482

                    

                    

                    

                    114

                    

                    

                    

                    (851

                    )

                    

                    

                    15,798Segment operating income (loss)

                    

                    $

                    (1,482

                    )

                    

                    $

                    740

                    

                    

                    $

                    -

                    

                    

                    $

                    (361

                    )





(1) Gross billings of $316,530 less worksite employee payroll costs of $273,903.





Business

                        Solutions (1)

                    

                    

                    Wireless

                        Infrastructure

                    

                    

                    Transportation

                        Infrastructure

                    

                    

                    Ultraviolet

                        Technologies

                    

                    

                    Electronics

                        Integration

                    

                    

                    Operating

                        Total6-Months Ended February 28, 2007Revenue

                    

                    $

                    25,092

                    

                    

                    $

                    13,690

                    

                    

                    $

                    20,632

                    

                    

                    $

                    5,962

                    

                    

                    $

                    7,541

                    

                    

                    $

                    72,917Cost of revenue

                    

                    

                    20,378

                    

                    

                    

                    11,249

                    

                    

                    

                    17,932

                    

                    

                    

                    3,561

                    

                    

                    

                    6,500

                    

                    

                    

                    59,620Gross profit

                    

                    

                    4,714

                    

                    

                    

                    2,441

                    

                    

                    

                    2,700

                    

                    

                    

                    2,401

                    

                    

                    

                    1,041

                    

                    

                    

                    13,297Operating expensesSelling, general and administrative

                    

                    

                    3,377

                    

                    

                    

                    4,125

                    

                    

                    

                    1,506

                    

                    

                    

                    2,200

                    

                    

                    

                    1,397

                    

                    

                    

                    12,605Depreciation and amortization

                    

                    

                    317

                    

                    

                    

                    298

                    

                    

                    

                    283

                    

                    

                    

                    217

                    

                    

                    

                    80

                    

                    

                    

                    1,195Impairment

                    

                    

                    -

                    

                    

                    

                    1,815

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    212

                    

                    

                    

                    2,027Total operating expenses

                    

                    

                    3,694

                    

                    

                    

                    6,238

                    

                    

                    

                    1,789

                    

                    

                    

                    2,417

                    

                    

                    

                    1,689

                    

                    

                    

                    15,827Segment operating income (loss)

                    

                    $

                    1,020

                    

                    

                    $

                    (3,797

                    )

                    

                    $

                    911

                    

                    

                    $

                    (16

                    )

                    

                    $

                    (648

                    )

                    

                    $

                    (2,530

                    )








Holding

                        Company

                    

                    

                    Consolidated

                        VIE

                    

                    

                    VIE

                        Elimination

                    

                    

                    Segment

                        Totals6-Months Ended February 28, 2007Revenue

                    

                    $

                    -

                    

                    

                    $

                    584

                    

                    

                    $

                    (578

                    )

                    

                    $

                    72,923Cost of revenue

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    59,620Gross profit

                    

                    

                    -

                    

                    

                    

                    584

                    

                    

                    

                    (578

                    )

                    

                    

                    13,303Operating expensesSelling, general and administrative

                    

                    

                    2,043

                    

                    

                    

                    43

                    

                    

                    

                    (578

                    )

                    

                    

                    14,113Depreciation and amortization

                    

                    

                    509

                    

                    

                    

                    98

                    

                    

                    

                    -

                    

                    

                    

                    1,802Impairment

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    2,027Total operating expenses

                    

                    

                    2,552

                    

                    

                    

                    141

                    

                    

                    

                    (578

                    )

                    

                    

                    17,942Segment operating income (loss)

                    

                    $

                    (2,552

                    )

                    

                    $

                    443

                    

                    

                    $

                    -

                    

                    

                    $

                    (4,639

                    )





(1) Gross billings of $189,410 less worksite employee payroll costs of $164,318.





(2) Beginning in fiscal year 2008, the Company began allocating selling, general, and administrative expenses to the segments. The effect of this change in period ending February 28, 2007 would be $1,258 of unallocated selling, general and administrative expenses.





32




Business

                        Solutions

                    

                    

                    Wireless

                        Infrastructure

                    

                    

                    Transportation

                        Infrastructure

                    

                    

                    Ultraviolet

                        Technologies

                    

                    

                    Electronics

                        Integration

                    

                    

                    Operating

                        TotalAs of February 29, 2008 (unaudited)Current AssetsCash and equivalents

                    

                    $

                    3,868

                    

                    

                    $

                    (41

                    )

                    

                    $

                    142

                    

                    

                    $

                    548

                    

                    

                    $

                    (283

                    )

                    

                    $

                    4,234Restricted cash

                    

                    

                    5,611

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    5,611Accounts receivable, net

                    

                    

                    3,828

                    

                    

                    

                    5,912

                    

                    

                    

                    5,419

                    

                    

                    

                    1,961

                    

                    

                    

                    1,548

                    

                    

                    

                    18,668Costs and estimated earnings in excess of billings on uncompleted contracts

                    

                    

                    -

                    

                    

                    

                    472

                    

                    

                    

                    4,683

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    5,155Inventory, net

                    

                    

                    13

                    

                    

                    

                    78

                    

                    

                    

                    2,045

                    

                    

                    

                    1,755

                    

                    

                    

                    1,064

                    

                    

                    

                    4,955Deferred tax asset

                    

                    

                    922

                    

                    

                    

                    -

                    

                    

                    

                    613

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,535Prepaid expenses and other current assets

                    

                    

                    383

                    

                    

                    

                    573

                    

                    

                    

                    332

                    

                    

                    

                    192

                    

                    

                    

                    49

                    

                    

                    

                    1,529Total Current Assets

                    

                    

                    14,625

                    

                    

                    

                    6,994

                    

                    

                    

                    13234

                    

                    

                    

                    4,456

                    

                    

                    

                    2,378

                    

                    

                    

                    41,687Other AssetsProperty, plant & equipment, net

                    

                    

                    755

                    

                    

                    

                    676

                    

                    

                    

                    1,621

                    

                    

                    

                    2,000

                    

                    

                    

                    134

                    

                    

                    

                    5,186Accounts receivable - long term

                    

                    

                    -

                    

                    

                    

                    7

                    

                    

                    

                    1,057

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,064Goodwill

                    

                    

                    12,338

                    

                    

                    

                    -

                    

                    

                    

                    152

                    

                    

                    

                    4,695

                    

                    

                    

                    1,276

                    

                    

                    

                    18,461Other intangible assets, net

                    

                    

                    6,316

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    518

                    

                    

                    

                    -

                    

                    

                    

                    6,834Other long term assets

                    

                    

                    11

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    76

                    

                    

                    

                    6

                    

                    

                    

                    93Total Other Assets

                    

                    

                    19,420

                    

                    

                    

                    683

                    

                    

                    

                    2,830

                    

                    

                    

                    7,289

                    

                    

                    

                    1,416

                    

                    

                    

                    31,638Total Assets

                    

                    $

                    34,045

                    

                    

                    $

                    7677

                    

                    

                    $

                    16,064

                    

                    

                    $

                    11,745

                    

                    

                    $

                    3, 794

                    

                    

                    $

                    73,325




Holding

                        Company

                    

                    

                    Consolidated

                        VIE

                    

                    

                    Segment

                        TotalsAs of February 29, 2008 (continued, unaudited)Current AssetsCash and equivalents

                    

                    $

                    50

                    

                    

                    $

                    57

                    

                    

                    $

                    4,341Restricted cash

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    5,611Accounts receivable, net

                    

                    

                    (1,098

                    )

                    

                    

                    -

                    

                    

                    

                    17,570Costs and estimated earnings in excess of billings on uncompleted contracts

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    5,155Inventory, net

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    4,955Deferred tax asset

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,535Prepaid expenses and other current assets

                    

                    

                    75

                    

                    

                    

                    (101

                    )

                    

                    

                    1,503Total Current Assets

                    

                    

                    (973

                    )

                    

                    

                    (44

                    )

                    

                    

                    40,670Other AssetsProperty, plant & equipment, net

                    

                    

                    507

                    

                    

                    

                    6,097

                    

                    

                    

                    11,790Accounts receivable - long term

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,064Goodwill

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    18,461Other intangible assets, net

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    6,834Other long term assets

                    

                    

                    711

                    

                    

                    

                    2

                    

                    

                    

                    806Total Other Assets

                    

                    

                    1,218

                    

                    

                    

                    6,099

                    

                    

                    

                    38,955Total Assets

                    

                    $

                    245

                    

                    

                    $

                    6,055

                    

                    

                    $

                    79,625





33








Business

                        Solutions

                    

                    

                    Wireless

                        Infrastructure

                    

                    

                    Transportation

                        Infrastructure

                    

                    

                    Ultraviolet

                        Technologies

                    

                    

                    Electronics

                        Integration

                    

                    

                    Operating

                        TotalAs of August 31, 2007 (audited)Current AssetsCash and equivalents

                    

                    $

                    9,104

                    

                    

                    $

                    (134

                    )

                    

                    $

                    498

                    

                    

                    $

                    519

                    

                    

                    $

                    (77

                    )

                    

                    $

                    9,910Restricted cash

                    

                    

                    5,091

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    5,091Accounts receivable, net

                    

                    

                    3,330

                    

                    

                    

                    5,193

                    

                    

                    

                    9,913

                    

                    

                    

                    1,856

                    

                    

                    

                    1,614

                    

                    

                    

                    21,906Costs and estimated earnings in excess of billings on uncompleted contracts

                    

                    

                    -

                    

                    

                    

                    560

                    

                    

                    

                    719

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,279Inventory, net

                    

                    

                    9

                    

                    

                    

                    78

                    

                    

                    

                    3,339

                    

                    

                    

                    1,759

                    

                    

                    

                    1,471

                    

                    

                    

                    6,656Deferred tax asset

                    

                    

                    922

                    

                    

                    

                    -

                    

                    

                    

                    613

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,535Prepaid expenses and other current assets

                    

                    

                    731

                    

                    

                    

                    713

                    

                    

                    

                    399

                    

                    

                    

                    232

                    

                    

                    

                    238

                    

                    

                    

                    2,313Total Current Assets

                    

                    

                    19,187

                    

                    

                    

                    6,410

                    

                    

                    

                    15,481

                    

                    

                    

                    4,366

                    

                    

                    

                    3,246

                    

                    

                    

                    48,690Other AssetsProperty, plant & equipment, net

                    

                    

                    636

                    

                    

                    

                    790

                    

                    

                    

                    1,614

                    

                    

                    

                    1,869

                    

                    

                    

                    139

                    

                    

                    

                    5,048Accounts receivable - long term

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    770

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    770Goodwill

                    

                    

                    12,338

                    

                    

                    

                    -

                    

                    

                    

                    152

                    

                    

                    

                    4,695

                    

                    

                    

                    1,276

                    

                    

                    

                    18,461Other intangible assets, net

                    

                    

                    6,888

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    562

                    

                    

                    

                    -

                    

                    

                    

                    7,450Other long term assets

                    

                    

                    38

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    15

                    

                    

                    

                    4

                    

                    

                    

                    57Total Other Assets

                    

                    

                    19,900

                    

                    

                    

                    790

                    

                    

                    

                    2,536

                    

                    

                    

                    7,141

                    

                    

                    

                    1,419

                    

                    

                    

                    31,786Total Assets

                    

                    $

                    39,087

                    

                    

                    $

                    7,200

                    

                    

                    $

                    18,017

                    

                    

                    $

                    11,507

                    

                    

                    $

                    4,665

                    

                    

                    $

                    80,476




Holding

                        Company

                    

                    

                    Consolidated

                        VIE

                    

                    

                    Segment

                        TotalsAs of August 31, 2007 (continued, audited)Current AssetsCash and equivalents

                    

                    $

                    (159

                    )

                    

                    $

                    79

                    

                    

                    $

                    9,830Restricted cash

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    5,091Accounts receivable, net

                    

                    

                    (749

                    )

                    

                    

                    -

                    

                    

                    

                    21,157Costs and estimated earnings in excess of billings on uncompleted contracts

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,279Inventory, net

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    6,656Deferred tax asset

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,535Prepaid expenses and other current assets

                    

                    

                    517

                    

                    

                    

                    10

                    

                    

                    

                    2,840Total Current Assets

                    

                    

                    (391

                    )

                    

                    

                    89

                    

                    

                    

                    48,388Other AssetsProperty, plant & equipment, net

                    

                    

                    564

                    

                    

                    

                    6,626

                    

                    

                    

                    12,238Accounts receivable - long term

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    770Goodwill

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    18,461Other intangible assets, net

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    7,450Other long term assets

                    

                    

                    988

                    

                    

                    

                    3

                    

                    

                    

                    1,048Total Other Assets

                    

                    

                    1,552

                    

                    

                    

                    6,629

                    

                    

                    

                    39,967Total Assets

                    

                    $

                    1,161

                    

                    

                    $

                    6,718

                    

                    

                    $

                    88,355





34





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, 2007.  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





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





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





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





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





Business Solutions Segment





The Business Solutions segment provides full-service human resource services through PEO relationships.  Business Solutions services are performed by Professional Staff Management, Inc. and its affiliated entities (“PSM”), CSM, Inc. and its affiliated entities (“CSM”), Employer Solutions Group, Inc. and its affiliated entities (“ESG”).  PSM was
            acquired in October 2003, CSM was acquired in April 2005, and ESG was acquired effective as of March 1, 2007.   As of January 1, 2008, PEM is included in the operation of ESG. Our PEOs provide services typically managed by a company’s internal human resources and accounting departments, including payroll and tax processing and management, worker’s compensation and risk
            management, benefits administration, unemployment administration, human resource compliance services, 401k and retirement plan administration and employee assessments.  Clients represent a wide variety of industries including healthcare, professional services, manufacturing logistics, telemarketing and blue-collar services. Combined, these organizations provide co-employment services to approximately 17,200 employees in 44 states.





Wireless Infrastructure Segment





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





35





Site Acquisition





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





Engineering, Architecture and Design





Engineering, architecture and design services are performed for the wireless, telecommunications, real estate development, municipal, and petroleum industries. The telecommunications industry includes cellular, personal communication services (PCS), specialized mobile radio (SMR), enhanced specialized mobile radio (ESMR), microwave systems, fixed wireless, broadband and fiber optics technologies for
            carriers, tower consolidators and utilities.  Services also include structural analysis and design of improvements to telecommunications towers, the structural design and analysis of buildings, commercial and residential land development projects, including re-zoning of properties.





Construction/Technical Services





Construction services are performed for the telecommunications industry, primarily consisting of developing and upgrading wireless networks for wireless carriers. Services include: program and construction management; electrical, foundation, and tower installations; and antennae and line installations.  Technical services are performed for wireless equipment manufacturers and service
            providers including switch and radio base station engineering.  Services include site, survey, delivery, installation and integration for the implementation of end user equipment offered by a wide range of wireless equipment manufacturers.





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





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





Transportation Infrastructure Segment





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





Ultraviolet Technologies Segment





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





36





Electronics Integration Segment





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





Kingston and Commercial Solutions are distributors for prominent national companies in the electronic, sound, security, and video markets. Customers include businesses in the hospitality, healthcare, education, transportation and retail industries.  Product offerings include the latest technology in HDTV displays, including LCD’s and plasma televisions, sound systems, electronic locking
            devices, wire, cable and fiber optics, and intercom systems.  The Electronics Integration segment also includes mobile audio products for the RV and marine industry as well as telecommunications products for commercial and residential applications.   Kingston was acquired in July 2002.  Commercial Solutions began operations in December 2003.





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





CRITICAL ACCOUNTING POLICIES





The Company’s accounting policies, which are in compliance with accounting principles generally accepted in the United States, require application of methodologies, estimates and judgments that have a significant impact on the results reported in the Company’s financial statements.  Those policies that, in the belief of management, are critical and require the use of complex judgment in
            their application, are disclosed in the Company’s Form 10-K for the year ended August 31, 2007.  Since August 31, 2007, there have been no material changes to the Company’s critical accounting policies.








RESULTS OF OPERATIONS:  COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007





Executive Overview of Financial Results





Results of operations for the three month period ended February 29, 2008 and February 28, 2007 are as follows:





Revenue for the

                        3-months ended February 29 and February 28,

                    

                    

                    Operating income for the

                        3-months ended February 29 and February 28,2008

                    

                    

                    2007

                    

                    

                    2008

                    

                    

                    2007(Dollars in thousands)Business Solutions

                    

                    $

                    22,258

                    

                    

                    $

                    13,462

                    

                    

                    $

                    26

                    

                    

                    $

                    282Wireless Infrastructure

                    

                    

                    4,253

                    

                    

                    

                    4,694

                    

                    

                    

                    (458

                    )

                    

                    

                    (4,344

                    )Transportation Infrastructure

                    

                    

                    10,047

                    

                    

                    

                    7,885

                    

                    

                    

                    (210

                    )

                    

                    

                    318Ultraviolet Technologies

                    

                    

                    2,811

                    

                    

                    

                    2,913

                    

                    

                    

                    (78

                    )

                    

                    

                    (99

                    )Electronics Integration

                    

                    

                    2,556

                    

                    

                    

                    3,284

                    

                    

                    

                    (335

                    )

                    

                    

                    (985

                    )Holding Company

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    (933

                    )

                    

                    

                    (1,702

                    )Variable Interest Entity

                    

                    

                    421

                    

                    

                    

                    358

                    

                    

                    

                    373

                    

                    

                    

                    266Variable Interest Entity Elimination

                    

                    

                    (420

                    )

                    

                    

                    (357

                    )

                    

                    

                    -

                    

                    

                    

                    -Segment Totals

                    

                    $

                    41,926

                    

                    

                    $

                    32,239

                    

                    

                    $

                    (1,615

                    )

                    

                    $

                    (6,264

                    )Net Loss Available to Common Shareholders

                    

                    

                    

                    

                    

                    

                    

                    

                    

                    $

                    (2,839

                    )

                    

                    $

                    (7,755

                    )





37





Results of operations for the six month period ended February 29, 2008 and February 28, 2007 are as follows:





Revenue for the

                        6-months ended February 29 and February 28,

                    

                    

                    Operating income for the

                        6-months ended February 29 and February 28,2008

                    

                    

                    2007

                    

                    

                    2008

                    

                    

                    2007(Dollars in thousands)Business Solutions

                    

                    $

                    42,627

                    

                    

                    $

                    25,092

                    

                    

                    $

                    418

                    

                    

                    $

                    1,020Wireless Infrastructure

                    

                    

                    9, 780

                    

                    

                    

                    13,690

                    

                    

                    

                    107

                    

                    

                    

                    (3,797

                    )Transportation Infrastructure

                    

                    

                    21,627

                    

                    

                    

                    20,632

                    

                    

                    

                    293

                    

                    

                    

                    911Ultraviolet Technologies

                    

                    

                    6,077

                    

                    

                    

                    5,962

                    

                    

                    

                    (65

                    )

                    

                    

                    (16

                    )Electronics Integration

                    

                    

                    5,569

                    

                    

                    

                    7,541

                    

                    

                    

                    (372

                    )

                    

                    

                    (648

                    )Holding Company

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    (1,482

                    )

                    

                    

                    (2,552

                    )Variable Interest Entity

                    

                    

                    854

                    

                    

                    

                    584

                    

                    

                    

                    740

                    

                    

                    

                    443Variable Interest Entity Elimination

                    

                    

                    (851

                    )

                    

                    

                    (578

                    )

                    

                    

                    -

                    

                    

                    

                    -Segment Totals

                    

                    $

                    85,683

                    

                    

                    $

                    72,923

                    

                    

                    $

                    (361

                    )

                    

                    $

                    (4,639

                    )Net Loss Available to Common Shareholders

                    

                    

                    

                    

                    

                    

                    

                    

                    

                    $

                    (2,829

                    )

                    

                    $

                    (7,029

                    )





Net loss available to common stock shareholders was ($2.839) million or ($0.25) per diluted share on revenue of $41.926 million for the three month period ended February 29, 2008 compared with net loss available to common stock shareholders of ($7.755) million or ($0.63) per diluted share on revenue of $32.239 million for the three month period ended February 28, 2007.  This represents a 30%
            increase in revenue and a 63% percent decrease in net loss available to common stock shareholders.





Net loss available to common stock shareholders was ($2.829) million or ($0.25) per diluted share on revenue of $85.683 million for the six month period ended February 29, 2008 compared with net loss available to common stock shareholders of ($7.029) million or ($0.57) per diluted share on revenue of $72.923 million for the six month period ended February 28, 2007.  This represents an 18% increase
            in revenue and a 60% percent decrease in net loss available to common stock shareholders.





The following factors primarily contributed to the increase in revenue for the three and six month periods ended February 29, 2008 and February 28, 2007:





·

                    Organic growth and the acquisition of ESG on March 1, 2007 within the Business Solutions segment and an increase in revenue in Transportation Infrastructure; offset by


·

                    R educed volumes of work associated with the Wireless Infrastructure operational changes enacted in the three month period ended February 28, 2007, and a decrease in Electronics Integration revenue due primarily to a lower volume of sales of television products.





The following factors primarily contributed to the decrease in net loss available to common stock shareholders for the three and six month periods ended February 29, 2008 and February 28, 2007:





·

                    Operational changes and a non-recurring impairment charge in the Wireless Infrastructure segment during the three month period ended February 28, 2007, and operational changes and aging inventory sales in the Electronics Integration segment, offset by


·

                    Higher workers compensation claims in the Business Solutions segment and unseasonably wet weather conditions in January and February, which caused reduced labor billing in the Transportation Infrastructure segment.





Results by segment are described in further detail as follows:





38





Business Solutions





Business Solutions segment operating results for three and six month period ended February 29, 2008 and February 28, 2007 are as follows:


Three Month Period Ended

                            

                            

                            Six Month Period EndedFebruary 29, 2008

                            

                            

                            February 28, 2007

                            

                            

                            February 29, 2008

                            

                            

                            February 28, 2007(Dollars in thousands)

                            

                            

                            (Dollars in thousands)Revenues

                            

                            $

                            22,258

                            

                            

                            

                            100

                            %

                            

                            $

                            13,462

                            

                            

                            

                            100

                            %

                            

                            $

                            42,627

                            

                            

                            

                            100

                            %

                            

                            $

                            25,092

                            

                            

                            

                            100

                            %Cost of revenues

                            

                            

                            18,588

                            

                            

                            

                            83.5

                            %

                            

                            

                            11,197

                            

                            

                            

                            83.2

                            %

                            

                            

                            34,843

                            

                            

                            

                            81.7

                            %

                            

                            

                            20,378

                            

                            

                            

                            81.2

                            %Gross profit

                            

                            

                            3,670

                            

                            

                            

                            16.5

                            %

                            

                            

                            2,265

                            

                            

                            

                            16.8

                            %

                            

                            

                            7,784

                            

                            

                            

                            18.3

                            %

                            

                            

                            4,714

                            

                            

                            

                            18.8

                            %Operating expensesSelling, general and administrative

                            

                            

                            3,290

                            

                            

                            

                            14.8

                            %

                            

                            

                            1,808

                            

                            

                            

                            13.4

                            %

                            

                            

                            6,659

                            

                            

                            

                            15.6

                            %

                            

                            

                            3,377

                            

                            

                            

                            13.5

                            %Depreciation and amortization

                            

                            

                            354

                            

                            

                            

                            1.6

                            %

                            

                            

                            175

                            

                            

                            

                            1.3

                            %

                            

                            

                            707

                            

                            

                            

                            1.7

                            %

                            

                            

                            317

                            

                            

                            

                            1.3

                            %Total operating expenses

                            

                            

                            3,644

                            

                            

                            

                            16.4

                            %

                            

                            

                            1,983

                            

                            

                            

                            14.7

                            %

                            

                            

                            7,366

                            

                            

                            

                            17.3

                            %

                            

                            

                            3,694

                            

                            

                            

                            14.7

                            %Segment operating income

                            

                            $

                            26

                            

                            

                            

                            0.1

                            %

                            

                            $

                            282

                            

                            

                            

                            2.1

                            %

                            

                            $

                            418

                            

                            

                            

                            1.0

                            %

                            

                            $

                            1,020

                            

                            

                            

                            4.1

                            %




Revenue





Revenue for the three month period ended February 29, 2008 was $22.258 million, compared to $13.462 million for the three month period ended February 28, 2007, an increase of $8.796 million or 65%.  Revenue for the six month period ended February 29, 2008 was $42.627 million, compared to $25.092 million for the six month period ended February 28, 2007, an increase of $17.535 million or
            70%.  Revenue increased primarily due to organic growth and the acquisitions of ESG and Precision.  As such, administrative fees, workers compensation premiums, employee benefit premiums and income taxes collected have increased.





Gross Profit





Gross profit for the three month period ended February 29, 2008 was $3.670 million, representing 17% of revenue, compared to $2.265 million, representing 17% of revenue for the three month period ended February 28, 2007, an increase of $1.405 million or 62%.  Gross profit for the six month period ended February 29, 2008 was $7.784 million, representing 18% of revenue, compared to $4.714 million,
            representing 19% of revenue for the six month period ended February 28, 2007, an increase of $3.070 million or 65%.  Gross profit increased due to the acquisitions of ESG and Precision.  Gross profit as a percentage of revenue decreased slightly mainly as a result of one workers compensation claim expensed in February 2008.  The Company’s self-funded liability within certain of these programs is limited to $180 in health insurance and $250 or $750
            in workers compensation insurance.





Operating Income





Operating income for the three month period, ended February 29, 2008 was $0.026 million, compared to $0.282 million for the three month period ended February 28, 2007, a decrease of $0.256 million or 91%.  Operating income for the six month period, ended February 29, 2008 was $0.418 million, compared to $1.020 million for the six month period ended February 28, 2007, a decrease of $0.602 million
            or 59%.  Operating income decreased due to the decrease in gross profits discussed above.  Operating expenses increased due to the acquisitions of ESG and Precision.








Wireless Infrastructure





Wireless Infrastructure segment operating results for the three and six month periods ended February 29, 2008 and February 28, 2007 are as follows:





Three Month Period Ended

                        

                        

                        Six Month Period EndedFebruary 29, 2008

                        

                        

                        February 28, 2007

                        

                        

                        February 29, 2008

                        

                        

                        February 28, 2007(Dollars in thousands)

                        

                        

                        (Dollars in thousands)Revenues

                        

                        $

                        4,253

                        

                        

                        

                        100

                        %

                        

                        $

                        4,694

                        

                        

                        

                        100

                        %

                        

                        $

                        9,780

                        

                        

                        

                        100

                        %

                        

                        $

                        13,690

                        

                        

                        

                        100

                        %Cost of revenues

                        

                        

                        3,558

                        

                        

                        

                        83.7

                        %

                        

                        

                        4,717

                        

                        

                        

                        100.5

                        %

                        

                        

                        7,399

                        

                        

                        

                        75.7

                        %

                        

                        

                        11,249

                        

                        

                        

                        82.2

                        %Gross profit (loss)

                        

                        

                        695

                        

                        

                        

                        16.3

                        %

                        

                        

                        (23

                        )

                        

                        

                        -0.5

                        %

                        

                        

                        2,381

                        

                        

                        

                        24.3

                        %

                        

                        

                        2,441

                        

                        

                        

                        17.8

                        %Operating expensesSelling, general and administrative

                        

                        

                        1,112

                        

                        

                        

                        26.1

                        %

                        

                        

                        2,323

                        

                        

                        

                        49.5

                        %

                        

                        

                        2,192

                        

                        

                        

                        22.4

                        %

                        

                        

                        4,125

                        

                        

                        

                        30.1

                        %Depreciation and amortization

                        

                        

                        41

                        

                        

                        

                        1.0

                        %

                        

                        

                        183

                        

                        

                        

                        3.9

                        %

                        

                        

                        82

                        

                        

                        

                        0.8

                        %

                        

                        

                        298

                        

                        

                        

                        2.2

                        %Impairment

                        

                        

                        -

                        

                        

                        

                        0.0

                        %

                        

                        

                        1,815

                        

                        

                        

                        38.7

                        %

                        

                        

                        -

                        

                        

                        

                        0.0

                        %

                        

                        

                        1,815

                        

                        

                        

                        13.3

                        %Total operating expenses

                        

                        

                        1,153

                        

                        

                        

                        27.1

                        %

                        

                        

                        4,321

                        

                        

                        

                        92.1

                        %

                        

                        

                        2,274

                        

                        

                        

                        23.3

                        %

                        

                        

                        6,238

                        

                        

                        

                        45.6

                        %Segment operating loss

                        

                        $

                        (458

                        )

                        

                        

                        -10.8

                        %

                        

                        $

                        (4,344

                        )

                        

                        

                        -92.5

                        %

                        

                        $

                        107

                        

                        

                        

                        1.1

                        %

                        

                        $

                        (3,797

                        )

                        

                        

                        -27.7

                        %


39





Revenue





Revenue for the three month period ended February 29, 2008 was $4.253 million compared to $4.694 million for the three month period ended February 28, 2007, a decrease of $0.441 million or 9%.  The decrease in revenues is primarily due to the decline and/or suspension of capital budgets by some of our major clients, the consolidation in the industry and our decision to downsize our
            operations.




Revenue for the six month period ended February 29, 2008 was $9.780 million compared to $13.690 million for the six month period ended February 28, 2007, a decrease of $3.910 million or 29%.  The decrease in revenues is primarily due to the decline and/or suspension of capital budgets for some of our major clients, the consolidation in the industry and our decision to downsize our
            operations.





Gross Profit





Gross profit for the three month period ended February 29, 2008 was $0.695 million, representing 16% of revenue, compared to ($0.023) million representing (0.5)% of revenue for the three month period ended February 28, 2007, an increase of $0.718 million or 3122%.  Gross profit for the six month period ended February 29, 2008 was $2.381 million, representing 24% of revenue, compared to $2.441
            million representing 18% of revenue for the six month period ended February 28, 2007, a decrease in gross profit of $0.060 million or 3%.  Gross profit increased for the three month period ended February 29, 2008 as a result of better aligning the asset and labor base with market conditions, thereby reducing the cost of revenue relative to overall revenue.





Operating Income





The operating loss for the three month period, ended February 29, 2008 was ($0.458) million, compared to operating loss of ($4.344) million for the three month period ended February 28, 2007, an decrease in operating loss of $3.886 million or 90%. Operating income for the six month period, ended February 29, 2008 was $0.107 million, compared to operating loss of ($3.797) million for the six month period
            ended February 28, 2007, an increase in operating income of $3.904 million or 103%. Operating income increased for the three month period ended February 29, 2008 as a result of initiated management team changes, better aligning asset and labor base with market conditions, and evaluating and adjusting ongoing customer contract negotiations and purchasing procedures.  Additionally, the increase is partially due to a non-recurring impairment charge during the three month
            period ended February 28, 2007.





Transportation Infrastructure





Transportation Infrastructure segment operating results for the three and six month periods ended February 29, 2008 and February 28, 2007 are as follows:




Three Month Period Ended

                        

                        

                        Six Month Period EndedFebruary 29, 2008

                        

                        

                        February 28, 2007

                        

                        

                        February 29, 2008

                        

                        

                        February 28, 2007(Dollars in thousands)

                        

                        

                        (Dollars in thousands)Revenues

                        

                        $

                        10,047

                        

                        

                        

                        100

                        %

                        

                        $

                        7,885

                        

                        

                        

                        100

                        %

                        

                        $

                        21,627

                        

                        

                        

                        100

                        %

                        

                        $

                        20,632

                        

                        

                        

                        100

                        %Cost of revenues

                        

                        

                        9,228

                        

                        

                        

                        91.8

                        %

                        

                        

                        6,689

                        

                        

                        

                        84.8

                        %

                        

                        

                        19,486

                        

                        

                        

                        90.1

                        %

                        

                        

                        17,932

                        

                        

                        

                        86.9

                        %Gross profit

                        

                        

                        819

                        

                        

                        

                        8.2

                        %

                        

                        

                        1,196

                        

                        

                        

                        15.2

                        %

                        

                        

                        2,141

                        

                        

                        

                        9.9

                        %

                        

                        

                        2,700

                        

                        

                        

                        13.1

                        %Operating expensesSelling, general and administrative

                        

                        

                        1,024

                        

                        

                        

                        10.2

                        %

                        

                        

                        733

                        

                        

                        

                        9.3

                        %

                        

                        

                        1,839

                        

                        

                        

                        8.5

                        %

                        

                        

                        1,506

                        

                        

                        

                        7.3

                        %Depreciation and amortization

                        

                        

                        5

                        

                        

                        

                        0.0

                        %

                        

                        

                        145

                        

                        

                        

                        1.8

                        %

                        

                        

                        9

                        

                        

                        

                        0.0

                        %

                        

                        

                        283

                        

                        

                        

                        1.4

                        %Total operating expenses

                        

                        

                        1,029

                        

                        

                        

                        10.2

                        %

                        

                        

                        878

                        

                        

                        

                        11.1

                        %

                        

                        

                        1,848

                        

                        

                        

                        8.5

                        %

                        

                        

                        1,789

                        

                        

                        

                        8.7

                        %Segment operating income (loss)

                        

                        $

                        (210

                        )

                        

                        

                        -2.1

                        %

                        

                        $

                        318

                        

                        

                        

                        4.0

                        %

                        

                        $

                        293

                        

                        

                        

                        1.4

                        %

                        

                        $

                        911

                        

                        

                        

                        4.4

                        %





Revenue





Revenue for the three month period ended February 29, 2008 was $10.047 million compared to $7.885 million for the three month period ended February 28, 2007, an increase of $2.162 million or 27%. Revenue for the six month period ended February 29, 2008 was $21.627 million compared to $20.632 million for the six month period ended February 28, 2007, an increase of $.995 million or 5%. Revenue increased
            primarily due to the company beginning work on new Specialty Projects during the three month Period ended February 29, 2008.




Gross Profit





Gross profit for the three month period ended February 29, 2008 was $0.819 million, representing 8% of revenue, compared to $1.196 million representing 15% of revenue for the three month period ended February 28, 2007, a decrease of $0.377 million or 32%. Gross profit for the six month period ended February 29, 2008 was $2.141 million, representing 10% of revenue, compared to $2.700 million representing 13%
            of revenue for the six month period ended February 28, 2007, a decrease of $0.559 million or 21%. Gross profit decreased primarily due to an increase in material costs at a lower profit margin at early stages in the jobs within the electric group.





40





Operating Income





Operating loss for the three month period ended February 29, 2008 was $0.210 million, compared to operating income of $0.318 million for the three month period ended February 28, 2007, a decrease in operating income of $0.528 million or 166%. Operating income for the six month period ended February 29, 2008 was $0.293 million, compared to $0.911 million for the six month period ended February 28, 2007, a
            decrease of $0.618 million or 68%. Operating income decreased due to unseasonably wet weather conditions in January and February, which caused reduced labor billing despite the substantial increase in backlog.





Ultraviolet Technologies





Ultraviolet Technologies segment operating results for the three and six month periods ended February 29, 2008 and February 28, 2007 are as follows:




Three Month Period Ended

                        

                        

                        Six Month Period EndedFebruary 29, 2008

                        

                        

                        February 28, 2007

                        

                        

                        February 29, 2008

                        

                        

                        February 28, 2007(Dollars in thousands)

                        

                        

                        (Dollars in thousands)Revenues

                        

                        $

                        2,811

                        

                        

                        

                        100

                        %

                        

                        $

                        2,913

                        

                        

                        

                        100

                        %

                        

                        $

                        6,077

                        

                        

                        

                        100

                        %

                        

                        $

                        5,962

                        

                        

                        

                        100

                        %Cost of revenues

                        

                        

                        1,621

                        

                        

                        

                        57.7

                        %

                        

                        

                        1,838

                        

                        

                        

                        63.1

                        %

                        

                        

                        3,503

                        

                        

                        

                        57.6

                        %

                        

                        

                        3,561

                        

                        

                        

                        59.7

                        %Gross profit (loss)

                        

                        

                        1,190

                        

                        

                        

                        42.3

                        %

                        

                        

                        1,075

                        

                        

                        

                        36.9

                        %

                        

                        

                        2,574

                        

                        

                        

                        42.4

                        %

                        

                        

                        2,401

                        

                        

                        

                        40.3

                        %Operating expensesSelling, general and administrative

                        

                        

                        1,185

                        

                        

                        

                        42.2

                        %

                        

                        

                        1,066

                        

                        

                        

                        36.6

                        %

                        

                        

                        2,486

                        

                        

                        

                        40.9

                        %

                        

                        

                        2,200

                        

                        

                        

                        36.9

                        %Depreciation and amortization

                        

                        

                        83

                        

                        

                        

                        3.0

                        %

                        

                        

                        108

                        

                        

                        

                        3.7

                        %

                        

                        

                        153

                        

                        

                        

                        2.5

                        %

                        

                        

                        217

                        

                        

                        

                        3.6

                        %Total operating expenses

                        

                        

                        1,268

                        

                        

                        

                        45.1

                        %

                        

                        

                        1,174

                        

                        

                        

                        40.3

                        %

                        

                        

                        2,639

                        

                        

                        

                        43.4

                        %

                        

                        

                        2,417

                        

                        

                        

                        40.5

                        %Segment operating income (loss)

                        

                        $

                        (78

                        )

                        

                        

                        -2.8

                        %

                        

                        $

                        (99

                        )

                        

                        

                        -3.4

                        %

                        

                        $

                        (65

                        )

                        

                        

                        -1.1

                        %

                        

                        $

                        (16

                        )

                        

                        

                        -0.3

                        %




Revenue





Revenue for the three month period ended February 29, 2008 was $2.811 million compared to $2.913 million for the three month period ended February 28, 2007, a decrease of $0.102 million or 4%. Revenue for the six month period ended February 29, 2008 was $6.077 million compared to $5.962 million for the six month period ended February 28, 2007, an increase of $0.115 million or 2%.
            Revenue decreased for the three month Period ended February 29, 2008 as a result of a decline in sales of conductive inks in the UK, a decline in sales of CD inks in South Africa, and a decrease in NamePlate ink Sales in Asia.




Gross Profit





Gross profit for the three month period ended February 29, 2008 was $1.190 million representing 42% of revenue, compared to $1.075 million representing 37% of revenue for the three month period ended February 28, 2007, an increase of $0.115 or 11%.  Gross profit for the six month period ended February 29, 2008 was $2.574 million representing 42% of revenue, compared to $2.401 million representing
            40% of revenue for the six month period ended February 28, 2007, an increase of $0.173 or 7%.  Gross profit did not change significantly for the three month period ended February 29, 2008.





Operating Income





Operating loss for the three month period ended February 29, 2008 was ($0.078) million, compared to operating loss of ($0.099) million for the three month period ended February 28, 2007, an increase in operating income of $0.021 million or 21%. Operating loss for the six month period ended February 29, 2008 was ( $0.065) million, compared to operating loss of ($0.016) million for the six month period ended
            February 28, 2007, a decrease in operating income of $0.049 million or 306%. Operating income increased for the three month period ended February 29, 2008 primarily due to lower sales returns and allowances as a result of new testing equipment and product improvements, lower freight costs due to lower volume of shipments overseas, lower scrap, closure of an office in Atlanta, and favorable exchange rate differences, offset by lower margin due to slightly lower sales, and higher
            medical expenses in the self-funded healthcare plan, higher SG&A expenses due to an expansion in research and development and testing facilities.





41





Electronics Integration





Electronics Integration segment operating results for the three and six month periods ended February 29, 2008 and February 28, 2007 are as follows:




Three Month Period Ended

                        

                        

                        Six Month Period EndedFebruary 29, 2008

                        

                        

                        February 28, 2007

                        

                        

                        February 29, 2008

                        

                        

                        February 28, 2007(Dollars in thousands)

                        

                        

                        (Dollars in thousands)Revenues

                        

                        $

                        2,556

                        

                        

                        

                        100

                        %

                        

                        $

                        3,284

                        

                        

                        

                        100

                        %

                        

                        $

                        5,569

                        

                        

                        

                        100

                        %

                        

                        $

                        7,541

                        

                        

                        

                        100

                        %Cost of revenues

                        

                        

                        2,404

                        

                        

                        

                        94.1

                        %

                        

                        

                        3,269

                        

                        

                        

                        99.5

                        %

                        

                        

                        5,015

                        

                        

                        

                        90.1

                        %

                        

                        

                        6,500

                        

                        

                        

                        86.2

                        %Gross profit

                        

                        

                        152

                        

                        

                        

                        5.9

                        %

                        

                        

                        15

                        

                        

                        

                        0.5

                        %

                        

                        

                        554

                        

                        

                        

                        9.9

                        %

                        

                        

                        1,041

                        

                        

                        

                        13.8

                        %Operating expensesSelling, general and administrative

                        

                        

                        476

                        

                        

                        

                        18.6

                        %

                        

                        

                        731

                        

                        

                        

                        22.3

                        %

                        

                        

                        901

                        

                        

                        

                        16.2

                        %

                        

                        

                        1,397

                        

                        

                        

                        18.5

                        %Depreciation and amortization

                        

                        

                        11

                        

                        

                        

                        0.4

                        %

                        

                        

                        57

                        

                        

                        

                        1.7

                        %

                        

                        

                        25

                        

                        

                        

                        0.4

                        %

                        

                        

                        80

                        

                        

                        

                        1.1

                        %Impairment

                        

                        

                        -

                        

                        

                        

                        0.0

                        %

                        

                        

                        212

                        

                        

                        

                        6.5

                        %

                        

                        

                        -

                        

                        

                        

                        0.0

                        %

                        

                        

                        212

                        

                        

                        

                        2.8

                        %Total operating expenses

                        

                        

                        487

                        

                        

                        

                        19.1

                        %

                        

                        

                        1,000

                        

                        

                        

                        30.5

                        %

                        

                        

                        926

                        

                        

                        

                        16.6

                        %

                        

                        

                        1,689

                        

                        

                        

                        22.4

                        %Segment operating loss

                        

                        $

                        (335

                        )

                        

                        

                        -13.1

                        %

                        

                        $

                        (985

                        )

                        

                        

                        -30.0

                        %

                        

                        $

                        (372

                        )

                        

                        

                        -6.7

                        %

                        

                        $

                        (648

                        )

                        

                        

                        -8.6

                        %





Revenue





Revenue for the three month period ended February 29, 2008 was $2.556 million compared to $3.284 million for the three month period ended February 28, 2007, a decrease of $0.728 million or 22%. Revenue for the six month period ended February 29, 2008 was $5.569 million compared to $7.541 million for the six month period ended February 28, 2007, a decrease of $1.972 million or 26%. Revenue decreased for the
            three month period ended February 29, 2008 primarily due to a lower volume of sales of television products as a result of the completion of one of Kingston’s large contracts, as well as a shortage of healthcare sets due to manufacturing issues within the period.





Gross Profit





Gross profit for the three month period ended February 29, 2008 was $0.152 million representing 6% of revenue, compared to $0.015 million representing 0.5% of revenue for the three month period ended February 28, 2007, an increase of $0.137 million or 913%.  Gross profit for the six month period ended February 29, 2008 was $0.554 million representing 10% of revenue, compared to $1.041 million
            representing 14% of revenue for the three month period ended February 28, 2007, a decrease of $0.487 million or 47%.  Gross profit increased for the three month period ended February 29, 2008 due to a non-recurring inventory adjustment that took place in the three month period ended February 28, 2007.





Operating Income





Operating loss for the three month period ended February 29, 2008 was ($0.335) million, compared to ($0.985) million for the three month period ended February 28, 2007, a decrease in operating loss of $0.650 million or 66%. Operating loss for the six month period ended February 29, 2008 was ($0.372) million, compared to an operating loss of ($0.648) million for the six month period ended February 28, 2007,
            a decrease in operating loss of $0.276 million or 43%. The increase in operating income was due to rightsizing staffing, decreased expenses, and selling a large amount of aging inventory, as well as a decrease in depreciation due to a non-recurring expense in the three month period ended February 28, 2007.





Holding Company





Operating Expense





The Holding Company does not have any income producing operating assets. As such, the operating loss was equal to operating expenses. Operating expenses consist primarily of employee compensation and benefits, legal, accounting and consulting fees. Operating expenses for the three month period ended February 29, 2008 were $.933 million, compared to $1.702 million for the three month period ended February
            28, 2007, a decrease in operating expense of $0.769 million or 45%. Operating expenses for the six month period ended February 29, 2008 were $1.482 million, compared to $2.552 million for the six month period ended February 28, 2007, a decrease of $1.070 million or 42%, mainly due to allocating selling general and administrative expenses beginning September 1, 2007 to the segments, resulting in a decrease of $0.765 million and $0.583 million for the three and six month periods
            ended February 29, 2008 from the Holding company.




Interest Expense





Interest expense was $0.701 million for the three month period ended February 29, 2008, compared to $0.808 million for the three month period ended February 28, 2007, a decrease of $0.107 million or 13%. Interest expense was $1.496 million for the six month period ended February 29, 2008, compared to $1.655 million for the six month period ended February 28, 2007, a decrease of $0.159 million or 10%. The
            decrease was primarily due to decreasing interest rates on the variable interest rate notes.





42





Income Taxes





The Company recorded a 100% valuation allowance on additions to deferred tax assets due to uncertainty regarding future profitability of the Company based on the last year’s loss. In addition, management is required to estimate taxable income for future years by taxing jurisdictions and to consider this when making its judgment to determine whether or not to record a valuation allowance for part
            or all of a deferred tax asset. A one percent change in the Company's overall statutory tax rate for 2008 would not have a material effect in the carrying value of the net deferred tax assets or liabilities.





Variable Interest Entity





The Company leases a total of five facilities from a consolidated variable interest entity, whose primary purpose is to own and lease these properties to the Company. The VIE had ownership of 384,500 shares of the Company’s stock and is wholly owned by the Company’s Chairman of the Board of Directors and the Chief Executive Officer.  During the period ending February 29, 2008, the
            VIE distributed the 384,500 shares to the members of the VIE.  The VIE does not have any other significant assets. For the three month period ended February 29, 2008, the consolidation of the VIE comprised of $0.421 million in rental income, offset by a $0.100 million charge to interest expense, a $0.048 million charge to depreciation expense, and $0.001 million in administrative and other miscellaneous expenses.  For the three month period ended February
            28, 2007, the consolidation of the VIE comprised of $0.358 million in rental income, offset by a $0.142 million charge to interest expense, a $0.049 million charge to depreciation expense, and $0.042 administrative and other miscellaneous expenses.





For the six month period ended February 29, 2008, the consolidation of the VIE comprised of $0.854 million in rental income, offset by a $0.226 million charge to interest expense, a $0.097 million charge to depreciation expense, $0.047 loss on disposal of building, $0.015 million in administrative and other miscellaneous expenses.  For the six month period ended February 28, 2007, the
            consolidation of the VIE comprised of $0.584 million in rental income, offset by a $0.279 million charge to interest expense, a $0.098 million charge to depreciation expense, and $0.043 administrative and other miscellaneous expenses.





Refer to Note 2 of the accompanying consolidated financial statements for detailed information regarding the variable interest entity.





LIQUIDITY AND CAPITAL RESOURCES





Our principal sources of liquidity include cash and equivalents and proceeds from debt borrowings.  We had cash and equivalents of $4.341 million at February 29, 2008 and $9.830 million at August 31, 2007.  At February 29, 2008, we had no borrowings available on our line of credit with the bank.





We had working capital of ($21.490) million at February 29, 2008 compared with ($15.896) million at August 31, 2007. The decrease in working capital was primarily due to a decrease in cash and equivalents and a decrease in accounts receivable somewhat offset by the increase in costs and estimated earnings in excess of
            billings on uncompleted contracts and a decrease in accounts payable.  Current assets are primarily comprised of cash and equivalents, net accounts receivable, inventories, and costs & estimated earnings in excess of billings on uncompleted contracts. Current liabilities are primarily comprised of the line of credit, accounts payable and accrued expenses.





Total debt at February 29, 2008 was $45.00 million including a $4.768 million convertible term note, $32.552 million in bank debt, $1.000 million in debt to a related party, and $6.681 million in the variable interest entity’s debt.  Total debt at August 31, 2007 was $47.6 million.  Total unused borrowings under the line of credit were $0.0 million at February 29, 2008 and
            August 31, 2007, respectively.  The various debt agreements contain restrictive covenants that limit, among other things, certain mergers and acquisitions, redemptions of common stock, and payment of dividends. In addition, we must meet certain financial ratios.  Total capital expenditures were approximately $0.524 million and $0.5 million for the three month periods ended February 29, 2008 and February 28, 2007, respectively.  Total capital
            expenditures were approximately $0.989 million and $0.8 million for the six month periods ended February 29, 2008 and February 28, 2007, respectively.  Sources of funds for these expenditures have primarily been from additional borrowings from the bank.





As of February 29, 2008, the Company was not in compliance with certain bank debt covenants.  The Company is currently in discussions with its bank to obtain a waiver related to these covenant violations.  The Company has in place secondary financing options in the event a waiver is not obtained.





43





Cash Flows





Cash flows provided by (used in) operations for the six month period ended February 29, 2008 and February 28, 2007 were ($1.519) million and $3.556 million, respectively.  This decrease in operating cash flows was due primarily to increased costs and estimated earning in excess of billings on uncompleted contracts.





Net cash flow used in investing activities was $0.599 million for the six month period ended February 29, 2008 compared to $0.364 million for the six month period ended February 28, 2007.  The decrease was primarily due to the purchase of assets by the subsidiaries.





Net cash flow provided by (used in) financing activities was ($3.399) million for the six month period ended February 29, 2008 compared to $0.455 million for the six month period ended February 28, 2007.  The decrease was primarily the result of less borrowing and more debt repayment.





CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS





The following table summarizes our contractual obligations as of February 29, 2008:





Payments Due ByContractual obligation

                    

                    Total

                    

                    

                    Less than 1

                        year

                    

                    

                    1-2 years

                    

                    

                    3-5 years

                    

                    

                    More than 5

                        years(Dollars in thousands)Debt and capital lease obligations

                    

                    $

                    45,002

                    

                    

                    $

                    39,920

                    

                    

                    $

                    4,006

                    

                    

                    $

                    1,076

                    

                    

                    $

                    -Operating lease (1)

                    

                    

                    15,898

                    

                    

                    

                    1,506

                    

                    

                    

                    4,429

                    

                    

                    

                    3,534

                    

                    

                    

                    6,429Total

                    

                    $

                    60,900

                    

                    

                    $

                    41,426

                    

                    

                    $

                    8,435

                    

                    

                    $

                    4,610

                    

                    

                    $

                    6,429





(1)

                    Operating leases represent the total future minimum lease payments, and are primarily 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





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





Transactions with Related Parties





We have entered into various acquisition agreements over the past three years which contain option agreements or rights between the sellers of the acquired entities and our major shareholder, Mr. Carter Fortune, related to the Company’s stock provided as consideration under the acquisitions.  As more fully described in Note 17, the option agreements provide for put/ call options on
            the Company’s common stock held by the sellers of the acquired companies.   Total estimated cash outlays by the Company’s majority shareholder, subsequent to February 29, 2008, for these options are estimated between $2.4 million and $4.0 million and are expected to be exercised over the next three months.





We lease a total of five facilities from a VIE as described earlier in this filing. The VIE’s primary purpose is to own and lease these properties to the Company. The VIE does not have any other significant assets.  Effective, September 1, 2006, the Company elected to consolidate the VIE through its evaluation of Financial Interpretation No. 46R, Consolidation of Variable Interest Entities
            ("FIN 46R").





Guarantees





A significant portion of our debt and surety bonds are personally guaranteed by the Company’s Chairman of the Board and Chief Executive Officer.  Future changes to these guarantees would affect financing capacity of the Company. The Company’s Chairman of the Board and its Chief Executive Officer are continuing discussions with the Company regarding the charging of a guarantee fee. To
            date, the Chairman of the Board and Chief Executive Officer has not charged a guarantee fee.





Restricted Cash





Certain states and vendors require us to post letters of credit to ensure payment of taxes or payments to our vendors under health insurance and workers compensation contracts and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of
            credit if the holder demonstrates that we have failed to perform specified actions. If this situation were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement. We do not believe that it is likely that any claims will be made under a letter of credit in the foreseeable future.  As of February 29, 2008, we had approximately
            $5.6 million in restricted cash primarily to secure obligations under our PEO contracts in the Business Solutions segment.





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Payment and Performance Bonds





Within our Wireless Infrastructure and Transportation Infrastructure segments, certain customers, particularly in connection with new construction, require us to post payment or performance bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail to
            perform under a contract or fail to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs. Under our continuing indemnity and security agreement with the surety, we have posted letters of credit in the amount of $5.0 million in favor of the surety and, with the consent of our lender under our credit facility; we have granted security interests
            in certain of our assets to collateralize our obligations to the surety. To date, we have not been required to make any reimbursements to the surety for bond-related costs. We believe that it is unlikely that we will have to fund claims under our surety arrangements in the foreseeable future. As of February 29, 2008, an aggregate of approximately $5.0 million in original face amount of bonds issued by the surety were outstanding.





Item 3.  Quantitative and Qualitative Disclosures about Market Risk





The Company is exposed to certain market risks arising from adverse changes in interest rates, primarily due to the potential effect of such changes on its variable rate line of credit and convertible term note as described in Note 9 to the consolidated financial statements.  Almost all of the Company’s debt as of February 29, 2008 bears interest at variable rates. Based on amounts
            outstanding at February 29, 2008, if the interest rate on the Company’s variable debt were to increase by 1.0%, annual interest expense would increase by approximately $0.471million.





Cash and cash equivalents as of February 29, 2008 was $4.341 million and is primarily in subsidiary operating accounts. A hypothetical 10% adverse change in the average interest rate on the Company’s investments would not have had a material effect on net income for the three or six month periods ended February 29, 2008. We do not currently utilize any derivative financial instruments to hedge
            interest rate risks.





We are exposed to foreign currency risks due to both transactions and translations between functional and reporting currencies in our European, Singapore, and Chinese foreign subsidiaries. A hypothetical 10% adverse change in the foreign currency translation would not have had a material effect on net income for the three or six month periods ended February 29, 2008. We do not currently utilize any
            derivative financial instruments to hedge foreign currency risks.





Item 4.  Controls and Procedures





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





Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of February 29, 2008. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, for
            the reasons more fully set forth below, the Company’s disclosure controls and procedures were not effective on February 29, 2008 in providing reasonable assurance that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.





More specifically, the Company’s management has concluded that (i) additional accounting personnel were needed both at the parent company level and at certain subsidiaries at February 29, 2008 to ensure that certain disclosure controls and procedures were operating effectively; (ii) greater segregation of duties was needed in the accounting functions; and (iii) certain procedures should be documented
            to ensure that personnel turnover does not result in a failure of those procedures. The Company will continue to evaluate the need for additional staff at the parent and subsidiary levels, but given the size and location of the Company’s subsidiaries the Company believes it will continue to face challenges in attracting and retaining qualified personnel. Additionally, the Company is also in the process of evaluating ways in which the impact of personnel turnover on the
            implementation of disclosure controls and procedures can be reduced. Management continues to evaluate the effectiveness of this segregation and the need for additional enhancements, including, but not limited to, the addition of accounting personnel.





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During the period covered by this report, there have been no changes to our internal controls that have materially affected or that are reasonably likely to materially affect our internal controls over financial reporting.





PART II--OTHER INFORMATION.





Item 1. Legal Proceedings.





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





Item 1A. Risk Factors





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





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





None





Item 3. Defaults Upon Senior Securities.





None




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





None





Item 5. Other Information.





None





Item 6. Exhibits





The following exhibits are included herein:





31.1

                    Rule 15d-14(a) Certification of CEO


31.2

                    Rule 15d-14(a) Certification of CFO


32.1

                    Section 1350 Certification of CEO


32.2

                    Section 1350 Certification of CFO


46





SIGNATURES





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





Fortune Industries, Inc.(Registrant)Date:  July 3, 2008

                    By: /s/ John F. FisbeckJohn F. Fisbeck,Chief Executive OfficerDate:  July 3, 2008

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






47