UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended 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


For
The Quarterly Period Ended February 29, 2008





INDEX








PagePART  I.    Financial InformationITEM
      1.  Financial StatementsConsolidated Balance Sheets as of February 29, 2008
      (unaudited) and August 31, 2007
            3Consolidated Statements of Operations for the three and six
      month periods ended February 29, 2008 and February 28, 2007
      (unaudited)
            5Consolidated Statement of Changes in Shareholders’ Equity
      for the six month period ended February 29, 2008
      (unaudited)
            6Consolidated Statements of Cash Flows for the six month
      periods ended February 29, 2008 and February 28, 2007
      (unaudited)
            7Notes to the Unaudited Interim Consolidated Financial
      Statements
            9ITEM
      2.  Management's Discussion and Analysis of
      Financial Condition and Results of Operations
            34ITEM
      3.  Quantitative and Qualitative Disclosures
      About Market Risk
            44ITEM
      4. Controls and
      Procedures
            44PART
      II.    Other
      InformationITEM
      1.    Legal
      Proceedings
            45ITEM
      1A. Risk Factors
            45ITEM
      2.    Unregistered Sales of Equity
      Securities and Use of Proceeds
            45ITEM
      3.    Defaults Upon Senior
      Securities
            45ITEM
      4.    Submission of Matters to a
      Vote of Security Holders
            45ITEM
      5.    Other
      Information
            45ITEM
      6.    Exhibits
            45Signatures
            45





2
 Index





PART1 - FINANCIAL INFORMATION


Item1. Financial Statements.





FORTUNEINDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(DOLLARS
IN THOUSANDS)





February
      29,
              2008
              (Unaudited)
            
            
            August 31,
              2007
              (Audited)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





3
 Index





FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS (CONTINUED)


(DOLLARS
IN THOUSANDS)





February
      29, 2008
              (Unaudited)
            
            
            August 31,
              2007
              (Audited)LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESLine
      of credit (Note 9)
            
            $
            15,000
            
            
            $
            15,000Current
      maturities of long-term debt (Note 9)
            
            
            2,213
            
            
            
            2,249Current
      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
            
            
            47,074
            
            
            
            48,117LONG-TERM
      LIABILITIESLong-term
      debt, less current maturities (Note 9)
            
            
            15,339
            
            
            
            16,375Convertible
      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
            
            
            20,998
            
            
            
            25,913Total
      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





4
 Index





FORTUNEINDUSTRIES, 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




5
 Index





FORTUNEINDUSTRIES, 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





6
 Index





FORTUNEINDUSTRIES, 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 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.





7
 Index





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.





8
 Index





FORTUNEINDUSTRIES, 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.





9
 Index





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.





10
 Index





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.





11
 Index





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.





12
 Index





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.





Reclassifications:Certain
amounts in the Consolidated balance Sheets and statement of cash flows have been
reclassified to conform to fiscal 2008 presentation.





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.





13
 Index





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)AssetsCash
            
            $
            57
            
            
            $
            79Marketable
      equity securities
            
            
            -
            
            
            
            923Prepaid
      expenses and other current assets
            
            
            -
            
            
            
            10Property,
      plant and equipment
            
            
            6,097
            
            
            
            6,626Other
      assets
            
            
            2
            
            
            
            3$
            6,156
            
            
            $
            7,641Liabilities
      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
            )
            
            
            236$
            6,156
            
            
            $
            7,641





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.





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.




14
 Index




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





15
 Index





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.





16
 Index





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:





17
 Index








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
            
            
            (24,834
            )
            
            
            (22,679
            )Long-term
      portion of outstanding debt
            
            $
            20,168
            
            
            $
            24,884




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





2008
            
            $
            24,8342009
            
            
            8,6072010
            
            
            3,2332011
            
            
            8,3282012
      and thereafter
            
            
            -$
            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.





18
 Index





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.  The
Company has not changed the long-term classification of its debt obligations to
current liabilities as a result of alternative financing options available in
the event the loan was called by the bank. The Company is currently in
discussions with its bank to obtain a waiver related to these covenant
violations.





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.





19
 Index





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





20
 Index




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.





21
 Index





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.





22
 Index





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 ofcommon
      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





23
 Index





(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 theUnited Kingdom,SingaporeandChinaproviding 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.





24
 Index





(12)
            The Company maintains an
      operating lease agreement that provides for monthly base rent of $5
      throughJanuary 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.





25
 Index





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 inRichmond,INfrom 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 inProvo,Utahwhich 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’sJHDrewsubsidiary maintains an
      operating lease agreement for rental of three buildings located inIndiana,TennesseeandMissouriwith 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.





26
 Index





(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 andFebruary 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.





27
 Index





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





28
 Index





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.





29
 Index




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





30
 Index








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.





31
 Index




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





32
 Index








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





33
 Index





Item2.  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.





34
 Index





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.





35
 Index





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
            )





36
 Index





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


·
            Reduced 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 andunseasonably 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:





37
 Index





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
              %


38
 Index





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.





39
 Index





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.





40
 Index





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.





41
 Index





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 ($6.404) million at February 29, 2008 compared with $0.3
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.





42
 Index





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
            
            
            $
            24,834
            
            
            $
            8,607
            
            
            $
            11,561
            
            
            $
            -Operating
      lease (1)
            
            
            15,898
            
            
            
            1,506
            
            
            
            4,429
            
            
            
            3,534
            
            
            
            6,429Total
            
            $
            60,900
            
            
            $
            26,340
            
            
            $
            13,036
            
            
            $
            15,095
            
            
            $
            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.





43
 Index





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.





Item3.  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.





Item4.  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.





44
 Index





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.





PARTII--OTHER
INFORMATION.





Item1. 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.





Item1A. 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.





Item2. Unregistered Sales of Equity Securities and Use of
Proceeds.





None





Item3. Defaults Upon Senior Securities.





None




Item4. Submission of Matters to a Vote of Security
Holders.





None





Item5. Other Information.





None





Item6. 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








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:  April
      14, 2008
            By:
      /s/ John F. FisbeckJohn F. Fisbeck,Chief
      Executive OfficerDate:  April
      14, 2008
            By:
      /s/ Garth A. AllredGarth
      A Allred,Chief
      Financial Officer






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