UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





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





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


SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended November 30, 2007





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


SECURITIES EXCHANGE ACT OF 1934





Commission file number: 0-19049





FORTUNE INDUSTRIES, INC.


(Exact name of Registrant as specified in its charter)





INDIANA

                    20-2803889(State or other jurisdiction of

                    (IRS Employerincorporation or organization)

                    Identification Number)





6402 Corporate Drive

                    46278Indianapolis, IN

                    (Zip Code)(Address of principal executive offices)





(317) 532-1374


(Registrant’s telephone number, including area code)





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


Yes x No o


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



Large accelerated filer o                                 Accelerated filer o



Non-accelerated filer o                                 Smaller reporting
        companyx(Do not check if a smaller reporting company)



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


Yes o No x





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


1










Explanatory Note

The purpose of Amendment No. 1 to the Company’s Quarterly Report for the quarter ended November 30, 2007 is to reclassify long term debt from our credit facility loan to current debt as a result of covenant violations, reclassify our temporary equity component related to the ESG acquisition to liabilities, and disclose put options related to our ESG acquisition.

For convenience, this amended Quarterly Report on Form 10-Q/A sets forth the original filing in its entirety, as amended where necessary to reflect the restatement. The following sections were revised to reflect this restatement:

| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| | • | Part I, Item 1. Consolidated Balance Sheets, Consolidated Statements of Cash Flows, and Notes to the Consolidated Financial Statements, and
| |   |                                                                                                                                            
| | • | Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations                                      

The financial statements and other disclosures in the amended Quarterly Report on Form 10-Q/A do not reflect any events that have occurred after the Quarterly Report on Form 10-Q was initially filed on January 14, 2008. The following table sets forth the effects of the restatement on previously reported consolidated financial statements as of, and for the three months ended, November 30, 2007:

|                                                                  |  |                                            |        |          |   |        | 
|----------------------------------------------------------------- |  | ------------------------------------------ | ------ | -------- | - | ------ | 
|                                                                  |  | November 30, 2007                          |       
|                                                                  |  |                                            |       
|                                                                  |  | As Previously
                    Reported |        | Restated |  
|                                                                  |  |                                            |        |          |  
|Consolidated Balance Sheet Data:                                  |  |                                            |        |          |   |        | 
|Short-term debt and current maturities of long-term debt (Note 9) |  | $                                          | 1,682  |          | $ | 17,769 | 
|                                                                  |  |                                            |        |          |   |        | 
|Total Current Liabilities                                         |  | $                                          | 43,356 |          | $ | 59,443 | 
|                                                                  |  |                                            |        |          |   |        | 
|Long-Term Debt, less current maturities (Note 9)                  |  | $                                          | 16,299 |          | $ | 212    | 
|                                                                  |  |                                            |        |          |   |        | 
|Other long-term liabilities                                       |  | $                                          | 215    |          | $ | 1,029  | 
|                                                                  |  |                                            |        |          |   |        | 
|Total Long-Term Liabilities                                       |  | $                                          | 25,158 |          | $ | 9,885  | 
|                                                                  |  |                                            |        |          |   |        | 
|Temporary Equity (Note 13)                                        |  | $                                          | 814    |          | $ | -      | 
|                                                                  |  |                                            |        |          |   |        | 

2





FORTUNE INDUSTRIES, INC.


FORM 10-Q/A


For The Quarterly Period Ended November 30, 2007





INDEX








PagePART  I.    Financial InformationITEM 1.  Financial StatementsConsolidated Balance Sheets as of November 30, 2007 (unaudited, restated) and August 31, 2007 (restated)

                    4Consolidated Statements of Operations for the three month periods ended November 30, 2007 and 2006 (unaudited)

                    6Consolidated Statement of Changes in Shareholders’ Equity for the three month period ended November 30, 2007 (unaudited)

                    7Consolidated Statements of Cash Flows for the three month periods ended November 30, 2007 and 2006 (unaudited, restated)

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

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

                    33ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

                    42ITEM 4.  Controls and Procedures

                    42PART II.    Other InformationITEM 1.    Legal Proceedings

                    43ITEM 1A. Risk Factors

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

                    43ITEM 3.    Defaults Upon Senior Securities

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

                    43ITEM 5.    Other Information

                    43ITEM 6.    Exhibits

                    43Signatures

                    44




3





PART 1 - FINANCIAL INFORMATION


Item 1. Financial Statements.





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(DOLLARS IN THOUSANDS)





November 30,

                        2007

                        (Unaudited,
                            Restated)

                    

                    

                    August 31,

                        2007

                        (Audited,
                            Restated)ASSETSCURRENT ASSETSCash and equivalents

                    

                    $

                    5,893

                    

                    

                    $

                    9,830Restricted cash (Note 1)

                    

                    

                    5,205

                    

                    

                    

                    5,091Accounts receivable, net (Note 4)

                    

                    

                    20,355

                    

                    

                    

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

                    

                    

                    3,332

                    

                    

                    

                    1,279Inventory, net (Note 6)

                    

                    

                    6,016

                    

                    

                    

                    6,656Deferred tax asset (Note 11)

                    

                    

                    1,535

                    

                    

                    

                    1,535Prepaid expenses and other current assets

                    

                    

                    2,147

                    

                    

                    

                    2,840Total Current Assets

                    

                    

                    44,483

                    

                    

                    

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

                    

                    

                    11,740

                    

                    

                    

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

                    

                    

                    770

                    

                    

                    

                    770Goodwill (Note 8)

                    

                    

                    18,461

                    

                    

                    

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

                    

                    

                    7,142

                    

                    

                    

                    7,450Other long-term assets

                    

                    

                    1,107

                    

                    

                    

                    1,048Total Other Assets

                    

                    

                    39,220

                    

                    

                    

                    39,967TOTAL ASSETS

                    

                    $

                    83,703

                    

                    

                    $

                    88,355





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements





4





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS (CONTINUED)


(DOLLARS IN THOUSANDS)





November 30,

                        2007

                        (Unaudited,
                            Restated)

                    

                    

                    August 31,

                        2007

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

                    

                    $

                    14,695

                    

                    

                    $

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

                    

                    

                    17,769

                    

                    

                    

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

                    

                    

                    2,045

                    

                    

                    

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

                    

                    

                    2,200

                    

                    

                    

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

                    

                    

                    365

                    

                    

                    

                    503Accounts payable

                    

                    

                    5,701

                    

                    

                    

                    9,168Health and workers' compensation reserves

                    

                    

                    4,911

                    

                    

                    

                    5,128Accrued expenses

                    

                    

                    9,568

                    

                    

                    

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

                    

                    

                    1,757

                    

                    

                    

                    1,178Other current liabilities

                    

                    

                    432

                    

                    

                    

                    725Total Current Liabilities

                    

                    

                    59,443

                    

                    

                    

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

                    

                    

                    212

                    

                    

                    

                    208Convertible term note (Note 9)

                    

                    

                    3,405

                    

                    

                    

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

                    

                    

                    1,000

                    

                    

                    

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

                    

                    

                    4,239

                    

                    

                    

                    4,559Other long-term liabilities

                    

                    

                    1,029

                    

                    

                    

                    1,029Total Long-Term Liabilities

                    

                    

                    9,885

                    

                    

                    

                    9,746Total Liabilities

                    

                    

                    69,328

                    

                    

                    

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

                    

                    

                    351

                    

                    

                    

                    236SHAREHOLDERS' EQUITY (NOTE 13)Common stock, $0.10 par value; 150,000,000 authorized; 11,391,823 issued and outstanding at November 30, 2007 and August 31, 2007, respectively

                    

                    

                    1,117

                    

                    

                    

                    1,117Preferred stock, $0.10 par value; 1,000,000 authorized; 66,180 issued and outstanding at November 30, 2007 and August 31, 2007, respectively

                    

                    

                    6,618

                    

                    

                    

                    6,618Additional paid-in capital and warrants outstanding

                    

                    

                    19,317

                    

                    

                    

                    19,317Accumulated deficit

                    

                    

                    (12,290

                    )

                    

                    

                    (12,300

                    )Accumulated other comprehensive income

                    

                    

                    300

                    

                    

                    

                    26015,062

                    

                    

                    

                    15,012Less:  Treasury stock, 384,500 shares of common stock outstanding at November 30, 2007 and August 31, 2007, respectively

                    

                    

                    (1,038

                    )

                    

                    

                    (923

                    )Total Shareholders' Equity

                    

                    

                    14,024

                    

                    

                    

                    14,089TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

                    

                    $

                    83,703

                    

                    

                    $

                    88,355





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements





5





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


(UNAUDITED)





Three Month Period EndedNovember 30,

                        2007

                    

                    

                    November 30,

                        2006REVENUESService revenues

                    

                    $

                    22,455

                    

                    

                    $

                    15,002Product revenues

                    

                    

                    21,302

                    

                    

                    

                    25,682TOTAL REVENUES

                    

                    

                    43,757

                    

                    

                    

                    40,684COST OF REVENUESService cost of revenues

                    

                    

                    17,315

                    

                    

                    

                    11,235Product cost of revenues

                    

                    

                    17,532

                    

                    

                    

                    20,675TOTAL COST OF REVENUES

                    

                    

                    34,847

                    

                    

                    

                    31,910GROSS PROFIT

                    

                    

                    8,910

                    

                    

                    

                    8,774OPERATING EXPENSESSelling, general and administrative expenses

                    

                    

                    6,965

                    

                    

                    

                    6,431Depreciation and amortization

                    

                    

                    691

                    

                    

                    

                    718Total Operating Expenses

                    

                    

                    7,656

                    

                    

                    

                    7,149OPERATING INCOME

                    

                    

                    1,254

                    

                    

                    

                    1,625OTHER INCOME (EXPENSE)Interest income

                    

                    

                    79

                    

                    

                    

                    91Interest expense

                    

                    

                    (923

                    )

                    

                    

                    (847

                    )Loss on disposal of assets

                    

                    

                    (46

                    )

                    

                    

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

                    

                    

                    -

                    

                    

                    

                    17Exchange rate gain (loss)

                    

                    

                    19

                    

                    

                    

                    (1

                    )Other income

                    

                    

                    5

                    

                    

                    

                    22Total Other Expense

                    

                    

                    (866

                    )

                    

                    

                    (718

                    )INCOME BEFORE MINORITY INTEREST IN VARIABLE INTEREST ENTITY

                    

                    

                    388

                    

                    

                    

                    907Minority Interest in Variable Interest Entity (Note 2)

                    

                    

                    195

                    

                    

                    

                    40INCOME BEFORE PROVISION FOR INCOME TAXES

                    

                    

                    193

                    

                    

                    

                    867Provision for income taxes (Note 11)

                    

                    

                    59

                    

                    

                    

                    17NET INCOME

                    

                    

                    134

                    

                    

                    

                    850Preferred stock dividends

                    

                    

                    124

                    

                    

                    

                    124NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

                    

                    $

                    10

                    

                    

                    $

                    726BASIC INCOME PER COMMON SHARE

                    

                    $

                    0.00

                    

                    

                    $

                    0.07Basic weighted average shares outstanding

                    

                    

                    11,391,823

                    

                    

                    

                    10,524,722DILUTED INCOME PER COMMON SHARE

                    

                    $

                    0.00

                    

                    

                    $

                    0.06Diluted weighted average shares outstanding

                    

                    

                    12,768,981

                    

                    

                    

                    12,242,284





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements





6





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Common

                        Stock

                    

                    

                    Treasury

                        Stock

                    

                    

                    Preferred

                        Stock

                    

                    

                    Additional

                        Paid-in Capital

                        and Warrants

                        Outstanding

                    

                    

                    Accumulated

                        Deficit

                    

                    

                    Accumulated

                        Other

                        Comprehensive

                        Income

                    

                    

                    Total

                        Shareholders'

                        Equity

                    

                    

                    Comprehensive

                        IncomeBALANCE AT AUGUST 31, 2007

                    

                    $

                    1,117

                    

                    

                    $

                    (923

                    )

                    

                    $

                    6,618

                    

                    

                    $

                    19,317

                    

                    

                    $

                    (12,300

                    )

                    

                    $

                    260

                    

                    

                    $

                    14,089Net income

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    134

                    

                    

                    

                    -

                    

                    

                    

                    134

                    

                    

                    

                    134Preferred Stock Dividends

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    (124

                    )

                    

                    

                    -

                    

                    

                    

                    (124

                    )

                    

                    

                    -Foreign currency translation adjustments, net of tax

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    40

                    

                    

                    

                    40

                    

                    

                    

                    40Unrealized gains on investments, net of tax

                    

                    

                    -

                    

                    

                    

                    (115

                    )

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    (115

                    )

                    

                    

                    (115

                    )Reclassification adjustments for realized gains & losses included in net income, net of tax

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -Total comprehensive income

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    $

                    59BALANCE AT NOVEMBER 30, 2007

                    

                    $

                    1,117

                    

                    

                    $

                    (1,038

                    )

                    

                    $

                    6,618

                    

                    

                    $

                    19,317

                    

                    

                    $

                    (12,290

                    )

                    

                    $

                    300

                    

                    

                    $

                    14,024





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements





7





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Three Month Period EndedNovember 30,

                        2007
                            (Restated)

                    

                    

                    November 30,

                        2006CASH FLOWS FROM OPERATING ACTIVITIESNet Income

                    

                    $

                    134

                    

                    

                    $

                    850Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization

                    

                    

                    897

                    

                    

                    

                    718Provision for losses on accounts receivable

                    

                    

                    (216

                    )

                    

                    

                    (21

                    )Gain on sale of investments

                    

                    

                    -

                    

                    

                    

                    (17

                    )Loss on disposal of assets

                    

                    

                    46

                    

                    

                    

                    -Minority interest in variable interest entity income

                    

                    

                    195

                    

                    

                    

                    40Changes in certain operating assets and liabilities:Restricted cash

                    

                    

                    (114

                    )

                    

                    

                    -Accounts receivable

                    

                    

                    1,018

                    

                    

                    

                    (433

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

                    

                    

                    (2,053

                    )

                    

                    

                    240Inventory, net

                    

                    

                    640

                    

                    

                    

                    182Prepaid assets and other current assets

                    

                    

                    693

                    

                    

                    

                    400Other long-term assets

                    

                    

                    (48

                    )

                    

                    

                    67Accounts payable

                    

                    

                    (3,467

                    )

                    

                    

                    (3,244

                    )Health and workers' compensation reserves

                    

                    

                    (217

                    )

                    

                    

                    338Accrued expenses and other current liabilities

                    

                    

                    36

                    

                    

                    

                    284Billings in excess of costs and estimated earnings on uncompleted contracts

                    

                    

                    579

                    

                    

                    

                    715Net Cash Provided by (Used in) Operating Activities

                    

                    

                    (1,877

                    )

                    

                    

                    119CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures

                    

                    

                    (465

                    )

                    

                    

                    (330

                    )Variable interest entity proceeds from sale of assets

                    

                    

                    430

                    

                    

                    

                    -Purchases of marketable securities

                    

                    

                    -

                    

                    

                    

                    11Net Cash Used in Investing Activities

                    

                    

                    (35

                    )

                    

                    

                    (319

                    )CASH FLOWS FROM FINANCING ACTIVITIESNet borrowings (payments) under line of credit

                    

                    

                    (305

                    )

                    

                    

                    4,395Payments on short and long-term debt

                    

                    

                    (643

                    )

                    

                    

                    (366

                    )Variable interest entity payments on long-term debt

                    

                    

                    (458

                    )

                    

                    

                    (102

                    )Debt issuance costs

                    

                    

                    (113

                    )

                    

                    

                    -Payments from convertible debentures

                    

                    

                    (227

                    )

                    

                    

                    (227

                    )Dividends on preferred stock

                    

                    

                    (124

                    )

                    

                    

                    (124

                    )Proceeds from variable interest entity member contributions

                    

                    

                    70

                    

                    

                    

                    85Distributions to variable interest entity members

                    

                    

                    (265

                    )

                    

                    

                    -Net Cash Provided by (Used in) Financing Activities

                    

                    

                    (2,065

                    )

                    

                    

                    3,661Effect of exchange rate changes on cash

                    

                    

                    40

                    

                    

                    

                    11NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS

                    

                    

                    (3,937

                    )

                    

                    

                    3,472CASH AND EQUIVALENTSBeginning of Period

                    

                    

                    9,830

                    

                    

                    

                    3,632End of Period

                    

                    $

                    5,893

                    

                    

                    $

                    7,104





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.





8





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Three Month Period EndedNovember 30,

                        2007
                            (Restated)

                    

                    

                    November 30,

                        2006SUPPLEMENTAL DISCLOSURESInterest paid

                    

                    $

                    917

                    

                    

                    $

                    561Income taxes paid

                    

                    $

                    27

                    

                    

                    $

                    9Unrealized net gain on marketable equity securities

                    

                    $

                    -

                    

                    

                    $

                    24Non-cash investing and financing activities:Issuance of preferred stock for debt extinguishment

                    

                    $

                    -

                    

                    

                    $

                    6,618Issuance of warrants in connection with loan refinancing

                    

                    

                    -

                    

                    

                    

                    266$

                    -

                    

                    

                    $

                    6,884Consolidation of Variable Interest Entity (Note 2)Cash

                    

                    $

                    20

                    

                    

                    $

                    23Prepaid expenses and other current assets

                    

                    

                    -

                    

                    

                    

                    5Property, plant and equipment

                    

                    

                    6,144

                    

                    

                    

                    6,773Other long-term assets

                    

                    

                    2

                    

                    

                    

                    5Total Assets

                    

                    $

                    6,166

                    

                    

                    $

                    6,806Line of credit

                    

                    $

                    2,200

                    

                    

                    $

                    2,200Current maturities of long-term debt

                    

                    

                    365

                    

                    

                    

                    503Accrued expenses

                    

                    

                    49

                    

                    

                    

                    43Other current liabilities

                    

                    

                    -

                    

                    

                    

                    -Long-term debt

                    

                    

                    4,239

                    

                    

                    

                    4,937Minority interest

                    

                    

                    351

                    

                    

                    

                    738Less: Treasury Stock

                    

                    

                    (1,038

                    )

                    

                    

                    (1,615

                    )Total Liabilities and Minority Interest

                    

                    $

                    6,166

                    

                    

                    $

                    6,806





See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.





9





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED,


EXCEPT PER SHARE DATA)


(UNAUDITED)





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





General





Basis of Presentation: The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2007 Annual Report on Form 10-K filed by Fortune Industries, Inc. (which, together with its subsidiaries unless the context requires otherwise, shall be referred to
            herein as the “Company”).  The accompanying unaudited consolidated financial statements have been prepared by the Company without audit. These unaudited financial statements contain, in the opinion of management, all adjustments (consisting of normal accruals and other recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented in conformity with accounting
            principles generally accepted in the United States. The operating results for the three-month period ended November 30, 2007 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, and Singapore, which have been eliminated in consolidation at the Nor-Cote subsidiary level. All significant inter-company accounts and transactions of the Company have been eliminated.





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





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





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





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





10





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





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





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





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





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





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





11





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





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





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





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





Restricted Cash: Restricted cash includes certificates of deposits and letters of credit issued as collateral under its health and accident benefit program, its workers compensation program, and certain general insurance coverage related to the Company’s Business Solutions segment. At November 30, 2007, the Company had $5,205 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, $3,119 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 November 30, 2007. For the three-month period ended November 30, 2006 there was $17 of realized gains from the sale of marketable securities.





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





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





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





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





12





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





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





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





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





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





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





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





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





Research and Development Costs: Research and development costs are expensed as incurred and totaled $115 and $127 for the three month periods ended November 30, 2007 and 2006, 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 $151 and $80 for the three months ended November 30, 2007 and 2006, respectively.





13





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





Debt and equity issuances may have features, which allow the holder to convert at beneficial conversion terms, which are then measured using similar valuation techniques and amortized to interest expense in the case of debt or recorded as dividends in the case of preferred stock instruments.  No issuances have beneficial conversion terms during of the three months ended November 30, 2007 and
            2006.





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





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





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





New Accounting Pronouncements





In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.  SAB 108 was effective during our three-month period ending November 30,
            2007.  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 November 30, 2007.





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 believes that this new pronouncement will have an immaterial impact on the Company’s financial statements in future periods.





NOTE 2 – VARIABLE INTEREST ENTITY





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





14





The Company leases a total of five facilities from a consolidated variable interest entity, a related-party referenced earlier whose primary purpose is to own and lease these properties to the Company. As of  November 30, 2007, 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 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 November 30, 2007 and August 31, 2007 consisted of the following:





November 30,

                        2007

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)AssetsCash

                    

                    $

                    20

                    

                    

                    $

                    79Prepaid expenses and other current assets

                    

                    

                    -

                    

                    

                    

                    10Property, plant and equipment

                    

                    

                    6,144

                    

                    

                    

                    6,626Other assets

                    

                    

                    2

                    

                    

                    

                    3$

                    6,166

                    

                    

                    $

                    6,718Liabilities and Members EquityAccounts payable

                    

                    $

                    7

                    

                    

                    $

                    -Line of credit

                    

                    

                    2,200

                    

                    

                    

                    2,200Current maturities of long-term debt

                    

                    

                    365

                    

                    

                    

                    503Accrued expenses

                    

                    

                    42

                    

                    

                    

                    143Long-term debt, net of current maturities

                    

                    

                    4,239

                    

                    

                    

                    4,5596,853

                    

                    

                    

                    7,405Members equity

                    

                    

                    351

                    

                    

                    

                    236Less: Treasury Stock

                    

                    

                    (1,038

                    )

                    

                    

                    (923

                    )$

                    6,166

                    

                    

                    $

                    6,718





For the three month period ended November 30, 2007, the consolidation of the VIE included income of $195 comprised of $433 in rental income, offset by a $126 charge to interest expense, a $49 charge to depreciation expense, a $47 loss on disposal of property, plant, and equipment, and $16 in administrative and other miscellaneous expenses.  For the three month period ended November 30, 2006, the
            consolidation of the VIE included income of $40 comprised of $226 in rental income, offset by a $137 charge to interest expense, a $48 charge to depreciation expense, and $1 in administrative and other miscellaneous expenses.





NOTE 3 - ACQUISITIONS AND PRO FORMA RESULTS





Acquisitions





During the three month period ended November 30, 2007, the Company had no acquisitions.


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

|                   |  |                  |       |         |   |       |                      |  |         |           | 
|------------------ |  | ---------------- | ----- | ------- | - | ----- | -------------------- |  | ------- | --------- | 
|                   |  | (3)EBITDA Target |       |         |   |      
|                   |  |                  |       |         |   |      
|                   |  | Minimum          |       | Maximum |   |       | Total Shares         | 
|                   |  |                  |       |         |   |       |                      |  |        
|                   |  |                  |       |         |   |       |                      |  |         |          
|Year 1 - 3/1/2008* |  | $                | 1,600 |         | $ | 1,800 |                      |  | 120,000 |          
|Year 2 - 3/1/2009* |  | $                | 1,600 |         | $ | 2,000 |                      |  | 120,000 |          
|Year 3 - 3/1/2010* |  | $                | 1,600 |         | $ | 2,400 |                      |  | 120,000 |          
|                   |  |                  |       |         |   |       |                      |  |         |           | 
|                   |  |                  |       |         |   |       |                      |  |         | 360,000   | 
|                   |  |                  |       |         |   |       | closing share price* |  |         | 4.20      | 
|                   |  |                  |       |         |   |       |                      |  | $       | 1,512,000 | 

(3) Earn-out of 360,000 shares vests ratably over 3 years based on annual EBITDA

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

Pro Forma Results





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





15








Three Month Period EndedNovember 30,

                        2007

                        (Unaudited)

                    

                    

                    November 30,

                        2006

                        (Unaudited)Net revenue

                    

                    $

                    43,757

                    

                    

                    $

                    47,979Operating income

                    

                    $

                    1,254

                    

                    

                    $

                    1,767Net income available to common shareholders

                    

                    $

                    10

                    

                    

                    $

                    888Basic income per common share

                    

                    $

                    0.00

                    

                    

                    $

                    0.08Diluted income per common share

                    

                    $

                    0.00

                    

                    

                    $

                    0.07








NOTE 4 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE





Accounts receivable and contracts receivable are summarized as follows:





November 30,

                        2007

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Accounts receivable

                    

                    $

                    14,431

                    

                    

                    $

                    17,572Contracts receivableProgress billing

                    

                    

                    5,915

                    

                    

                    

                    4,576Retainages

                    

                    

                    1,023

                    

                    

                    

                    23921,369

                    

                    

                    

                    22,387Less allowance for doubtful accounts and sales returns

                    

                    

                    (1,014

                    )

                    

                    

                    (1,230

                    )$

                    20,355

                    

                    

                    $

                    21,157Long-term accounts receivable

                    

                    $

                    770

                    

                    

                    $

                    770





NOTE 5 – CONTRACTS IN PROGRESS





Information related to contracts in progress is summarized as follows:





November 30,

                        2007

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Costs incurred on uncompleted contracts

                    

                    $

                    16,405

                    

                    

                    $

                    10,999Estimated earnings recognized to date on uncompleted contracts

                    

                    

                    4,237

                    

                    

                    

                    2,51120,642

                    

                    

                    

                    13,510Less billings on uncompleted contracts

                    

                    

                    (19,067

                    )

                    

                    

                    (13,409

                    )$

                    1,575

                    

                    

                    $

                    101




16





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





November 30,

                        2007

                        (Unaudited)

                    

                    

                    August 31,

                        2007

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

                    

                    $

                    3,332

                    

                    

                    $

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

                    

                    

                    1,757

                    

                    

                    

                    1,178$

                    1,575

                    

                    

                    $

                    101




NOTE 6 – INVENTORY




Inventories are summarized as follows:




November 30,

                        2007

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Raw materials

                    

                    $

                    765

                    

                    

                    $

                    691Work-in-process

                    

                    

                    48

                    

                    

                    

                    29Finished goods

                    

                    

                    5,584

                    

                    

                    

                    6,3176,397

                    

                    

                    

                    7,037Less inventory reserve

                    

                    

                    (381

                    )

                    

                    

                    (381

                    )$

                    6,016

                    

                    

                    $

                    6,656




17





NOTE 7 - PROPERTY, PLANT AND EQUIPMENT





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





November 30,

                        2007

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Land and building

                    

                    $

                    8,970

                    

                    

                    $

                    9,440Machinery and equipment

                    

                    

                    7,024

                    

                    

                    

                    6,926Research equipment

                    

                    

                    368

                    

                    

                    

                    270Office equipment

                    

                    

                    5,753

                    

                    

                    

                    5,616Vehicles

                    

                    

                    3,367

                    

                    

                    

                    3,299Leasehold improvements

                    

                    

                    373

                    

                    

                    

                    34225,855

                    

                    

                    

                    25,893Less accumulated depreciation

                    

                    

                    (14,115

                    )

                    

                    

                    (13,655

                    )$

                    11,740

                    

                    

                    $

                    12,238





The provision for depreciation amounted to $487, of which $206 is included in cost of revenues, and $556, of which $134 is included in cost of revenues, for the three-month periods ended November 30, 2007 and 2006, respectively.  Losses on disposal of assets totaling $46 was recorded for the three-month period ended November 30, 2007 related to various building, office equipment, and vehicle
            disposals.  There were no gains or losses on disposal of assets for the three-month period ended November 30, 2006.  A total of $6,144 net of $682 of accumulated depreciation and $6,773 net of $497 of accumulated depreciation is included in the property, plant and equipment at November 30, 2007 and 2006, 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 month period ended November 30, 2007.





The total amount of goodwill that is deductible for tax purposes is $9,476 and $1,969 at November 30, 2007 and 2006, respectively.





18





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





November 30, 2007

                        (Unaudited)Gross

                        Carrying

                        Amount

                    

                    

                    Accumulated

                        Amortization

                    

                    

                    Net Book

                        Value

                    

                    

                    Weighted
                            Average

                        Amortization

                        Period
                            (in years)Customer relationships

                    

                    $

                    6,294

                    

                    

                    $

                    1,351

                    

                    

                    $

                    4,943

                    

                    

                    

                    10Non-compete

                    

                    

                    200

                    

                    

                    

                    63

                    

                    

                    

                    137

                    

                    

                    

                    5Non-compete

                    

                    

                    930

                    

                    

                    

                    140

                    

                    

                    

                    790

                    

                    

                    

                    5Non-compete

                    

                    

                    1,485

                    

                    

                    

                    803

                    

                    

                    

                    682

                    

                    

                    

                    5Total

                    

                    

                    8,909

                    

                    

                    

                    2,357

                    

                    

                    

                    6,552Tradename (not subject to amortization)

                    

                    

                    590

                    

                    

                    

                    -

                    

                    

                    

                    590Total

                    

                    $

                    9,499

                    

                    

                    $

                    2,357

                    

                    

                    $

                    7,142





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 $410 and $162 for the three month periods ended November 30, 2007 and 2006, respectively, which includes $102 and $3 of amortization related to loan origination fees, respectively.





Amortization expense on intangible assets currently owned by the Company at November 30, 2007 for each of the next five fiscal years is as follows:





2008

                    

                    $

                    9242009

                    

                    

                    1,1582010

                    

                    

                    1,0832011

                    

                    

                    9862012

                    

                    

                    8182013 and thereafter

                    

                    

                    2,173Total

                    

                    $

                    7,142




19





NOTE 9 - DEBT ARRANGEMENTS





The Company’s debt liabilities consisted of the following:





November 30,

                        2007

                        (Unaudited,
                            Restated)

                    

                    

                    August 31,

                        2007

                        (Audited,
                            Restated)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 major shareholder, the Company’s Chairman of the Board.

                    

                    $

                    14,695

                    

                    

                    $

                    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 major shareholder.

                    

                    

                    17,587

                    

                    

                    

                    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.

                    

                    

                    278

                    

                    

                    

                    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.

                    

                    

                    5,450

                    

                    

                    

                    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.

                    

                    

                    23

                    

                    

                    

                    30Variable Interest EntityRevolving line of credit promissory note due February 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.

                    

                    

                    4,604

                    

                    

                    

                    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.

                        

                        

                        93

                        

                        

                        

                        112Total debt obligation

                        

                        

                        45,930

                        

                        

                        

                        47,563Less current maturities

                        

                        

                        (37,074

                        )

                        

                        

                        (38,846

                        )Long-term portion of outstanding debt

                        

                        $

                        8,856

                        

                        

                        $

                        8,717


20




Fiscal year principal payments due on long-term debt outstanding (including convertible term note) at November 30, 2007 are approximately as follows:





2008

                    

                    $

                    37,0742009

                    

                    

                    7,3142010

                    

                    

                    5392011

                    

                    

                    1,0032012

                    

                    

                    -2013 and thereafter

                    

                    

                    -$

                    45,930





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 creditand the term loan aresecured by assets of the Company and are secured 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 $14,695at
            November 30, 2007.  The Company had $305availability under the line of credit at November 30, 2007.





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.





Under terms of the Agreement, the bank may call the loan if the Company is in violation of any restrictive covenants. At November 30, 2007 and August 31, 2007, the Company was in breach of (a) the Minimum Shareholders’ Equity covenant requirement of $15,000 and (b) the Maximum Funded Debt/Total Capitalization Ratio covenant requirements. Under terms
            of the Agreement, the bank may call the loan if the Company is in violation of any restrictive covenants. In the absence of waivers from the bank and in accordance with FAS 78, the Company reclassified the related notes payable as current debt. This reclassification totaled $16,087 and $16,167 as of November 30 and August 31, 2007, respectively.





21





Convertible Term Note





On November 21, 2005, the Company issued a convertible term note (the “Note”) payable to an unrelated party, LaurusMaster 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 November 30, 2007, the Company has postponed all 12 months of principal payments.  These deferred principal amounts shall be due and payable, at the Company’s option, on any subsequent payment date or on the maturity date of the Note.





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




•

                    a failure to make payments under the Note when due;





•

                    a material breach of the transaction documents by the Company;





•

                    bankruptcy related events;





•

                    a change of control transaction without prior approval; and





•

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





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





22





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 990,909shares 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 November 30, 2007.




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.





23





NOTE 11 - INCOME TAXES





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:





November 30,

                        2007

                        (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:





November 30,

                        2007

                        (Unaudited)

                    

                    

                    August 31,

                        2007

                        (Audited)Current:Federal

                    

                    $

                    206

                    

                    

                    $

                    (1,652

                    )State

                    

                    

                    33

                    

                    

                    

                    (273

                    )239

                    

                    

                    

                    (1,925

                    )Deferred:Federal

                    

                    

                    (1

                    )

                    

                    

                    (96

                    )State

                    

                    

                    2

                    

                    

                    

                    (15

                    )1

                    

                    

                    

                    (111

                    )2Change in valuation allowance

                    

                    

                    (181

                    )

                    

                    

                    2,193Net income tax (benefit)

                    

                    $

                    59

                    

                    

                    $

                    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:





November 30,

                        2007

                        (Unaudited)

                    

                    

                    August 31,

                        2007

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

                    

                    $

                    551

                    

                    

                    $

                    637Accrued liabilities and other

                    

                    

                    1,492

                    

                    

                    

                    1,494Noncurrent:Amortization of covenants

                    

                    

                    332

                    

                    

                    

                    270Depreciation

                    

                    

                    (221

                    )

                    

                    

                    (246

                    )Net operating losses and other carryforwards

                    

                    

                    3,504

                    

                    

                    

                    3,6845,658

                    

                    

                    

                    5,839Valuation allowance

                    

                    

                    (4,123

                    )

                    

                    

                    (4,304

                    )$

                    1,535

                    

                    

                    $

                    1,535




24





SFAS 109 requires a valuation allowance to reduce the deferred tax assets reported if, at November 30, 2007, 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 $4,123 valuation allowance at November 30, 2007 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 $181.  At November 30, 2007, 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.




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 November 30, 2007, norestricted share units were issued under this plan.





Warrants





At November 30, 2007, 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 November 30, 2007 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 November 30, 2007.




Preferred Stock





The following are the details of the Company's non-voting preferred stock as of November 30, 2007 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 $124were paid for the three months ended
            November 30, 2007 and 2006, respectively.





25





Treasury Stock





The Company’s related party consolidated variable interest entity described in Note 2 holds 384,500 shares of the Company’s common stock at
            November 30, 2007.  The Company’s securities valued at $1,038 as of November 30, 2007 are required to be recorded as treasury stock for purposes of the consolidation.





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

                    

                    

                    40

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    40Balance at November30, 2007

                    

                    $

                    299

                    

                    

                    $

                    (41

                    )

                    

                    $

                    42

                    

                    

                    $

                    300





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).





26





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 EndedNovember 30,

                        2007

                        (Unaudited)

                    

                    

                    November 30,

                        2006

                        (Unaudited)Net Income Available to Common Shareholders

                    

                    $

                    10

                    

                    

                    $

                    726Basic Income Per Common Share

                    

                    $

                    0.00

                    

                    

                    $

                    0.07Basic weighted average number of common shares outstanding

                    

                    

                    11,391,823

                    

                    

                    

                    10,524,722Diluted Income Per Common Share:

                    

                    $

                    0.00

                    

                    

                    $

                    0.06Diluted weighted average number of common shares outstanding

                    

                    

                    12,768,981

                    

                    

                    

                    12,242,284





At November 30, 2007, diluted shares represent 990,909 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.







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, Alpharetta, GA,  Pensacola, FL, and Richmond, VA metropolitan areas (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





(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 major 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.





27





(2)

                    The Company maintains various operating lease agreements that provide for monthly base rents between $1 and $7that expire between January 31, 2008 and April 30, 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 $10through 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 major 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 major shareholders.  The operating lease agreement provides for monthly base rent of $7 through August 31, 2009, adjusted annually to fair market value. The Agreement also
                            includes one renewal option.





(9)

                    The Company maintains various operating leases in the United Kingdom, Singapore and China providing for monthly base rent of approximately $10 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.





(12)

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





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





28




Equipment





The Company leases a fleet of trucks and trailers, support vehicles and specialty construction equipment.  As of November 30, 2007, the Company had approximately 300 units of rolling-stock fleet. Lease expense under these
            agreements amounted to approximately $70 for the three months ending November 30, 2007 and leases expire in various years through 2010. 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 November 30, 2007 are approximately as follows:





Facilities

                    

                    

                    Vehicles and

                        Equipment2008

                    

                    $

                    1,616

                    

                    

                    $

                    4812009

                    

                    

                    1,955

                    

                    

                    

                    422010

                    

                    

                    1,778

                    

                    

                    

                    102011

                    

                    

                    1,736

                    

                    

                    

                    12012

                    

                    

                    1,664

                    

                    

                    

                    -2013 and thereafter

                    

                    

                    6,433

                    

                    

                    

                    -$

                    15,182

                    

                    

                    $

                    534








NOTE 17 - RELATED PARTY TRANSACTIONS





The following is a summary of related party amounts included in the consolidated financial statements at November 30, 2007 and 2006, respectively:





November 30,

                        2007

                        (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

                    

                    

                    (23

                    )

                    

                    

                    (30

                    )Net assets (liabilities)

                    

                    $

                    (723

                    )

                    

                    $

                    (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 March 31, 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 December1, 2010.  See Note 9for 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 August 31, 2008.  Interest expense is
            immaterial.  See Note 9 for further details.





29





The following is a summary of related party amounts included in the consolidated statements of operations for the three months ending
            November 30, 2007 and 2006, respectively:





November 30,

                        2007

                        (Unaudited)

                    

                    

                    November 30,

                        2006

                        (Unaudited)Revenues:Electronics Integration (1)

                    

                    $

                    -

                    

                    

                    $

                    3Total

                    

                    

                    -

                    

                    

                    

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

                    

                    

                    223

                    

                    

                    

                    244Business Solutions (5)

                    

                    

                    87

                    

                    

                    

                    12Transportation Infrastructure (6)

                    

                    

                    117

                    

                    

                    

                    86Ultraviolet Technologies (7)

                    

                    

                    21

                    

                    

                    

                    21Electronics Integration (2)

                    

                    

                    45

                    

                    

                    

                    128Holding Company (8) (9)

                    

                    

                    245

                    

                    

                    

                    55Total

                    

                    

                    738

                    

                    

                    

                    546





(1)

                    During the three months ending November 30, 2006,,the Company’s TTCsubsidiary 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 $108per 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 $255
                            and $359were recognized for the three months ended November 30, 2007and 2006, 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 was recognized for the three
                            months ending November 30, 2007and 2006, respectively.


(4)

                    The Company’s Fortune Wireless 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 majority shareholders. The operating lease agreement provides for monthly base rent of $4 through April 30,
                            2011, adjusted annually to fair market value. The agreement also includes a one-year renewal option. Rent andrelated expenses of $12wasrecognized for the three months ending November 30, 2007 and 2006, respectively.


(5)

                    The Company’s PSM subsidiary holds a lease for an office building in Richmond, IN from a former Chief Operating Officer of the Company. The lease is for a period of five years and expires in May 2008. The agreement provides for base
                            rent of $4 per month with nominal annual increases.  Rent and related expense of $12 was recognized for the three months ending November30, 2007and 2006, respectively.  The Company’s ESG subsidiary entered into a lease agreement for an office building in Provo, Utah which is
                            leased from a limited liability company in which an employee is a member of the limited liability company.  The lease is due to expire January 31, 2011.  Rent and related expense of $75 and $0 was recognized for the three months ending November 30, 2007and 2006, respectively.


(6)

                    The Company’s JH Drew subsidiary maintains an operating lease agreement for rental of three buildings located in Indiana, Tennessee and Missouri with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority
                            shareholders. The lease agreement includes a five-year term with one option to extend the lease term for a one-year period and provides for base rent of $25per 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 $117and $86were recognized for the
                            three months ending November 30, 2007and 2006, 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 $21were recognized for the three months ending November 30, 2007 and 2006, respectively.





30





(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 $63 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 $227 and $43were recognized for the three months ending November 30, 2007and
                            2006, 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 $18 and $12 for the
                            three months ending November30, 2007and 2006, 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 Nor-Cote, PSM, CSM, and PEM. The put/ call options range in price from $1 to $10.33 per common share.  During the three months ending November 30, 2007, 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
            decrease in the valuation allowance for deferred income tax assets was $181and $61 at November 30, 2007and 2006, respectively. The valuation allowance relates primarily to net
            operating loss carry forwards, tax credit carry forwards, and net deductible temporary differences. The Company evaluates a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS No. 109, including the number of years the Company’s operating loss and tax credits can be carried forward, the existence of taxable temporary differences, the Company’s earnings history and the Company’s near-term earnings
            expectations. At November 30, 2007, management believes it is more likely than not that the majority of net deferred income tax assets will not be realized.





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





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





Certain portions of the Company’s business (including, but not limited to the Wireless Infrastructure and Transportation Infrastructure Segments) recognize revenues using the percentage-of-completion method of accounting.  This accounting method results
            in the Company recognizing contract revenues and earnings ratably over the contract term in proportion to its incurrence of contract cost.  The earnings or losses recognized on individual contracts are based on estimates of contract revenues, costs and profitability that require considerable judgment. If in any period the Company significantly increases its estimate of the total costs to complete a given project, the Company may recognize very little or no additional
            revenues with respect to that project.  If the total contract cost estimates indicate that there is a loss, such loss is recognized in the period such determination is made.  To the extent that the Company’s cost estimates fluctuate over time or differ from actual costs, its operating results may be materially affected.  As a result, the Company’s gross profit in future periods may be significantly reduced or eliminated.





31




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 November 30, 2007, the Company had approximately $5.2million 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.





32





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; Precision Employee Management, LLC

                    

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

                    

                    Provider turnkey development services for the deployment of wireless networksTransportation InfrastructureJamesH. 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 EntityFortune Fisbeck Development, LLC

                    

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





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 November 30, 2007Revenue

                    

                    $

                    20,369

                    

                    

                    $

                    5,527

                    

                    

                    $

                    11,580

                    

                    

                    $

                    3,266

                    

                    

                    $

                    3,013

                    

                    

                    $

                    43,755Cost of revenue

                    

                    

                    16,255

                    

                    

                    

                    3,841

                    

                    

                    

                    10,258

                    

                    

                    

                    1,882

                    

                    

                    

                    2,611

                    

                    

                    

                    34,847Gross profit

                    

                    

                    4,114

                    

                    

                    

                    1,686

                    

                    

                    

                    1,322

                    

                    

                    

                    1,384

                    

                    

                    

                    402

                    

                    

                    

                    8,908Operating expensesSelling, general and administrative

                    

                    

                    3,386

                    

                    

                    

                    1,080

                    

                    

                    

                    815

                    

                    

                    

                    1,301

                    

                    

                    

                    425

                    

                    

                    

                    7,007Depreciation and amortization

                    

                    

                    353

                    

                    

                    

                    41

                    

                    

                    

                    4

                    

                    

                    

                    70

                    

                    

                    

                    14

                    

                    

                    

                    482Impairment

                    

                    

                    -

                    

                    

                    

                    

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    

                    

                    

                    

                    -Total operating expenses

                    

                    

                    3,739

                    

                    

                    

                    1,121

                    

                    

                    

                    819

                    

                    

                    

                    1,371

                    

                    

                    

                    439

                    

                    

                    

                    7,489Segment operating income (loss)

                    

                    $

                    375

                    

                    

                    $

                    565

                    

                    

                    $

                    503

                    

                    

                    $

                    13

                    

                    

                    $

                    (37

                    )

                    

                    $

                    1,419




33




Holding

                        Company

                    

                    

                    Consolidated

                        VIE

                    

                    

                    VIE

                        Elimination

                    

                    

                    Segment

                        Totals3-months ended November 30, 2007Revenue

                    

                    $

                    -

                    

                    

                    $

                    433

                    

                    

                    $

                    (431

                    )

                    

                    $

                    43,757Cost of revenue

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    34,847Gross profit

                    

                    

                    -

                    

                    

                    

                    433

                    

                    

                    

                    (431

                    )

                    

                    

                    8,910Operating expensesSelling, general and administrative

                    

                    

                    372

                    

                    

                    

                    17

                    

                    

                    

                    (431

                    )

                    

                    

                    6,965Depreciation and amortization

                    

                    

                    160

                    

                    

                    

                    49

                    

                    

                    

                    -

                    

                    

                    

                    691Impairment

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -Total operating expenses

                    

                    

                    532

                    

                    

                    

                    66

                    

                    

                    

                    (431

                    )

                    

                    

                    7,656Segment operating income (loss)

                    

                    $

                    (532

                    )

                    

                    $

                    367

                    

                    

                    $

                    -

                    

                    

                    $

                    1,254





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





Business

                        Solutions (1)

                    

                    

                    Wireless

                        Infrastructure

                    

                    

                    Transportation

                        Infrastructure

                    

                    

                    Ultraviolet

                        Technologies

                    

                    

                    Electronics

                        Integration

                    

                    

                    Operating

                        Total3-Months Ended November 30, 2006Revenue

                    

                    $

                    11,630

                    

                    

                    $

                    8,996

                    

                    

                    $

                    12,747

                    

                    

                    $

                    3,049

                    

                    

                    $

                    4,257

                    

                    

                    $

                    40,679Cost of revenue

                    

                    

                    9,181

                    

                    

                    

                    6,532

                    

                    

                    

                    11,243

                    

                    

                    

                    1,723

                    

                    

                    

                    3,231

                    

                    

                    

                    31,910Gross profit

                    

                    

                    2,449

                    

                    

                    

                    2,464

                    

                    

                    

                    1,504

                    

                    

                    

                    1,326

                    

                    

                    

                    1,026

                    

                    

                    

                    8,769Operating expensesSelling, general and administrative

                    

                    

                    1,569

                    

                    

                    

                    1,802

                    

                    

                    

                    773

                    

                    

                    

                    1,134

                    

                    

                    

                    666

                    

                    

                    

                    5,944Depreciation and amortization

                    

                    

                    142

                    

                    

                    

                    115

                    

                    

                    

                    138

                    

                    

                    

                    109

                    

                    

                    

                    23

                    

                    

                    

                    527Total operating expenses

                    

                    

                    1,711

                    

                    

                    

                    1,917

                    

                    

                    

                    911

                    

                    

                    

                    1,243

                    

                    

                    

                    689

                    

                    

                    

                    6,471Segment operating income (loss)

                    

                    $

                    738

                    

                    

                    $

                    547

                    

                    

                    $

                    593

                    

                    

                    $

                    83

                    

                    

                    $

                    337

                    

                    

                    $

                    2,298








Holding

                        Company

                    

                    

                    Consolidated

                        VIE

                    

                    

                    VIE

                        Elimination

                    

                    

                    Segment

                        Totals3-Months Ended November 30, 2006Revenue

                    

                    $

                    -

                    

                    

                    $

                    226

                    

                    

                    $

                    (221

                    )

                    

                    $

                    40,684Cost of revenue

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    31,910Gross profit

                    

                    

                    -

                    

                    

                    

                    226

                    

                    

                    

                    (221

                    )

                    

                    

                    8,774Operating expensesSelling, general and administrative

                    

                    

                    708

                    

                    

                    

                    -

                    

                    

                    

                    (221

                    )

                    

                    

                    6,431Depreciation and amortization

                    

                    

                    142

                    

                    

                    

                    49

                    

                    

                    

                    -

                    

                    

                    

                    718Total operating expenses

                    

                    

                    850

                    

                    

                    

                    49

                    

                    

                    

                    (221

                    )

                    

                    

                    7,149Segment operating income (loss)

                    

                    $

                    (850

                    )

                    

                    $

                    177

                    

                    

                    $

                    -

                    

                    

                    $

                    1,625





(1) Gross billings of $82,916 less worksite employee payroll costs of $71,286.


(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 November 30, 2006 would be $674 of unallocated selling, general and administrative expenses.





34




Business

                        Solutions

                    

                    

                    Wireless

                        Infrastructure

                    

                    

                    Transportation

                        Infrastructure

                    

                    

                    Ultraviolet

                        Technologies

                    

                    

                    Electronics

                        Integration

                    

                    

                    Operating

                        TotalAs of November 30, 2007 (unaudited)Current AssetsCash and equivalents

                    

                    $

                    6,262

                    

                    

                    $

                    (1,236

                    )

                    

                    $

                    383

                    

                    

                    $

                    430

                    

                    

                    $

                    (83

                    )

                    

                    $

                    5,756Restricted cash

                    

                    

                    5,205

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    5,205Marketable equity securities

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -Accounts receivable, net

                    

                    

                    2,776

                    

                    

                    

                    6,996

                    

                    

                    

                    8,346

                    

                    

                    

                    1,874

                    

                    

                    

                    1,635

                    

                    

                    

                    21,627Costs and estimated earnings in excess of billings on uncompleted contracts

                    

                    

                    -

                    

                    

                    

                    1,396

                    

                    

                    

                    1,936

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    3,332Inventory, net

                    

                    

                    7

                    

                    

                    

                    78

                    

                    

                    

                    3,124

                    

                    

                    

                    1,825

                    

                    

                    

                    982

                    

                    

                    

                    6,016Deferred tax asset

                    

                    

                    922

                    

                    

                    

                    -

                    

                    

                    

                    613

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,535Prepaid expenses and other current assets

                    

                    

                    629

                    

                    

                    

                    715

                    

                    

                    

                    413

                    

                    

                    

                    215

                    

                    

                    

                    127

                    

                    

                    

                    2,099Total Current Assets

                    

                    

                    15,801

                    

                    

                    

                    7,949

                    

                    

                    

                    14,815

                    

                    

                    

                    4,344

                    

                    

                    

                    2,661

                    

                    

                    

                    45,570Other AssetsProperty, plant & equipment, net

                    

                    

                    633

                    

                    

                    

                    729

                    

                    

                    

                    1,605

                    

                    

                    

                    1,961

                    

                    

                    

                    144

                    

                    

                    

                    5,072Accounts receivable - long term

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,038

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,038Goodwill

                    

                    

                    12,338

                    

                    

                    

                    -

                    

                    

                    

                    152

                    

                    

                    

                    4,695

                    

                    

                    

                    1,276

                    

                    

                    

                    18,461Other intangible assets, net

                    

                    

                    6,602

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    540

                    

                    

                    

                    -

                    

                    

                    

                    7,142Other long term assets

                    

                    

                    13

                    

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    91

                    

                    

                    

                    2

                    

                    

                    

                    106Total Other Assets

                    

                    

                    19,586

                    

                    

                    

                    729

                    

                    

                    

                    2,527

                    

                    

                    

                    7,287

                    

                    

                    

                    1,422

                    

                    

                    

                    31,551Total Assets

                    

                    $

                    35,387

                    

                    

                    $

                    8,678

                    

                    

                    $

                    17,342

                    

                    

                    $

                    11,631

                    

                    

                    $

                    4,083

                    

                    

                    $

                    77,121




Holding

                        Company

                    

                    

                    Consolidated

                        VIE

                    

                    

                    Segment

                        TotalsAs of November 30, 2007 (continued, unaudited)Current AssetsCash and equivalents

                    

                    $

                    117

                    

                    

                    $

                    20

                    

                    

                    $

                    5,893Restricted cash

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    5,205Marketable equity securities

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    -Accounts receivable, net

                    

                    

                    (1,272

                    )

                    

                    

                    -

                    

                    

                    

                    20,355Costs and estimated earnings in excess of billings on uncompleted contracts

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    3,332Inventory, net

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    6,016Deferred tax asset

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    1,535Prepaid expenses and other current assets

                    

                    

                    39

                    

                    

                    

                    (7

                    )

                    

                    

                    2,147Total Current Assets

                    

                    

                    (1,116

                    )

                    

                    

                    13

                    

                    

                    

                    44,483Other AssetsProperty, plant & equipment, net

                    

                    

                    524

                    

                    

                    

                    6,144

                    

                    

                    

                    11,740Accounts receivable - long term

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    770Goodwill

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    18,461Other intangible assets, net

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    7,142Other long term assets

                    

                    

                    999

                    

                    

                    

                    2

                    

                    

                    

                    1,107Total Other Assets

                    

                    

                    1,523

                    

                    

                    

                    6,146

                    

                    

                    

                    39,220Total Assets

                    

                    $

                    425

                    

                    

                    $

                    6,159

                    

                    

                    $

                    83,703




35




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




36





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





Statements contained in this document, as well as some statements by the Company in periodic press releases and oral statements of Company officials during presentations about the Company constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of
            1995 (the “Act”).  Forward-looking statements include statements that are predictive in nature, depend on or refer to future events or conditions, which include words such as “expect,” “estimate,” “anticipate,” “predict,” “believe” and similar expressions. These statements are based on the current intent, belief or expectation of the Company with respect to, among other things, trends affecting the
            Company’s financial condition or results of operations.  These statements are not guaranties of future performance and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.





Actual events and results involve risks and uncertainties and may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors.  Factors that might cause or contribute to such differences, include, but are not limited to, the risks and uncertainties that
            are discussed under the heading “Risk Factors” disclosed within Form 10-K for the year ended August 31, 2007.  Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission.





OVERVIEW





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





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





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





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





Business Solutions Segment





The Business Solutions segment provides full-service human resource services through PEO relationships.  Business Solutions services are performed by Professional Staff Management, Inc. and its affiliated entities (“PSM”), CSM, Inc. and its affiliated entities (“CSM”), Employer Solutions Group,
            Inc.. and its affiliated entities (“ESG”) and Precision Employee Management, LLC (“Precision”) and its affiliated entities.  PSM was acquired in October 2003, CSM was acquired in April 2005, Precision was acquired in February 2007 and ESG was acquired effective as of March 1, 2007.  Our PEOs provide services typically managed by a company’s internal human resources and accounting departments, including payroll and tax processing and
            management, worker’s compensation and risk management, benefits administration, unemployment administration, human resource compliance services, 401k and retirement plan administration and employee assessments.  Clients represent a wide variety of industries from healthcare, professional services, manufacturing logistics, telemarketing to 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.





37





Site Acquisition





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





Engineering, Architecture and Design





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





Construction/Technical Services





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





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





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





Transportation Infrastructure Segment





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





Ultraviolet Technologies Segment





38





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.





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 on 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 MONTH PERIODS ENDED NOVEMBER 30, 2007 AND NOVEMBER 30, 2006





Executive Overview of Financial Results





Results of operations for the three-month period ended November 30, 2007 and 2006 are as follows:





Revenue for the

                        3-months ended November 30,

                    

                    

                    Operating income for the

                        3-months ended November 30,2007

                    

                    

                    2006

                    

                    

                    2007

                    

                    

                    2006(Dollars in thousands)Business Solutions

                    

                    $

                    20,369

                    

                    

                    $

                    11,630

                    

                    

                    $

                    375

                    

                    

                    $

                    738Wireless Infrastructure

                    

                    

                    5,527

                    

                    

                    

                    8,996

                    

                    

                    

                    565

                    

                    

                    

                    547Transportation Infrastructure

                    

                    

                    11,580

                    

                    

                    

                    12,747

                    

                    

                    

                    503

                    

                    

                    

                    593Ultraviolet Technologies

                    

                    

                    3,266

                    

                    

                    

                    3,049

                    

                    

                    

                    13

                    

                    

                    

                    83Electronics Integration

                    

                    

                    3,013

                    

                    

                    

                    4,257

                    

                    

                    

                    (37

                    )

                    

                    

                    337Holding Company

                    

                    

                    -

                    

                    

                    

                    -

                    

                    

                    

                    (532

                    )

                    

                    

                    (850

                    )Variable Interest Entity

                    

                    

                    433

                    

                    

                    

                    226

                    

                    

                    

                    367

                    

                    

                    

                    177Variable Interest Entity Elimination

                    

                    

                    (431

                    )

                    

                    

                    (221

                    )

                    

                    

                    -

                    

                    

                    

                    -Segment Totals

                    

                    $

                    43,757

                    

                    

                    $

                    40,684

                    

                    

                    $

                    1,254

                    

                    

                    $

                    1,625Net Income Available to Common Shareholders

                    

                    

                    

                    

                    

                    

                    

                    

                    

                    $

                    10

                    

                    

                    $

                    726




39





Net income available to common stock shareholders was $.01 million or ($0.00) per diluted share on revenue of $43.757 million for the three month period ended November 30, 2007 compared with net income available to common stock shareholders of $0.726 million or $0.06 per diluted share on revenue of $40.684 million for the three
            month period ended November 30, 2006.  This represents an 8% increase in revenue and a 99% percent decrease in net income.





The following factors primarily contributed to the increase in revenue for the three-month period ended November 30, 2007:





·

                    Organic growth and the acquisitions of Precision on February 1, 2007 and ESG on March 1, 2007 within the Business Solutions segment; offset by


·

                    The completion of several long-term contracts within the Transportation Infrastructure segment, reduced volumes of work associated with the Wireless Infrastructure operational changes enacted at 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 income available to common stock shareholders for the three-month period ended November 30, 2007:





·

                    Decrease in gross profit in the Business Solutions segment due to higher claims expense in the Company’s health and workers compensation insurance programs;


·

                    Reduced volume of work within the Transportation Infrastructure segment;


·

                    Reduced volume of sales within the Electronics Integration segment; and


·

                    Increased interest expense due primarily to increased borrowings related to financing of the Precision and ESG acquisitions.





Results by segment are described in further detail as follows:





Business Solutions





Business Solutions segment operating results for three-month period ended November 30, 2007 and 2006 are as follows:





Three Month Period EndedNovember 30, 2007

                    

                    

                    November 30, 2006(Dollars in thousands)Revenues

                    

                    $

                    20,369

                    

                    

                    

                    100

                    %

                    

                    $

                    11,630

                    

                    

                    

                    100

                    %Cost of revenues

                    

                    

                    16,255

                    

                    

                    

                    79.8

                    %

                    

                    

                    9,181

                    

                    

                    

                    78.9

                    %Gross profit

                    

                    

                    4,114

                    

                    

                    

                    20.2

                    %

                    

                    

                    2,449

                    

                    

                    

                    21.1

                    %Operating expensesSelling, general and administrative

                    

                    

                    3,356

                    

                    

                    

                    15.3

                    %

                    

                    

                    1,569

                    

                    

                    

                    13.5

                    %Depreciation and amortization

                    

                    

                    353

                    

                    

                    

                    1.7

                    %

                    

                    

                    142

                    

                    

                    

                    1.2

                    %Total operating expenses

                    

                    

                    3,739

                    

                    

                    

                    17.0

                    %

                    

                    

                    1,711

                    

                    

                    

                    14.7

                    %Segment operating income

                    

                    $

                    375

                    

                    

                    

                    3.2

                    %

                    

                    $

                    738

                    

                    

                    

                    6.3

                    %





Revenue





Revenue for the three-month period ended November 30, 2007 was $20.369 million, compared to $11.630 million for the three-month period ended November 30, 2006, an increase of $8.739 million or 75.1%.  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 November 30, 2007 was $4.114 million, representing 20% of revenue, compared to $2.449 million, representing 21% of revenue for the three month period ended November 30, 2006, an increase of $1.665 million or 68%.  Gross profit increased due to the acquisitions of ESG and
            Precision.  Gross profit as a percentage of revenue decreased as a result of higher workers compensation claims.  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.





40





Operating Income





Operating income for the three-month period, ended November 30, 2007 was $0.375 million, compared to $0.738 million for the three-month period ended November 30, 2006, a decrease of $0.363 million or 49%.  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-month period ended November 30, 2007 and 2006 are as follows:





Three Month Period EndedNovember 30, 2007

                    

                    

                    November 30, 2006(Dollars in thousands)Revenue

                    

                    $

                    5,527

                    

                    

                    

                    100

                    %

                    

                    $

                    8,996

                    

                    

                    

                    100

                    %Cost of revenue

                    

                    

                    3,841

                    

                    

                    

                    69.5

                    %

                    

                    

                    6,532

                    

                    

                    

                    72.6

                    %Gross profit

                    

                    

                    1,686

                    

                    

                    

                    30.5

                    %

                    

                    

                    2,464

                    

                    

                    

                    27.4

                    %Operating expensesSelling, general and administrative

                    

                    

                    1,080

                    

                    

                    

                    16.3

                    %

                    

                    

                    1,802

                    

                    

                    

                    20.0

                    %Depreciation and amortization

                    

                    

                    41

                    

                    

                    

                    0.7

                    %

                    

                    

                    115

                    

                    

                    

                    1.3

                    %Total operating expenses

                    

                    

                    1,121

                    

                    

                    

                    17.1

                    %

                    

                    

                    1,914

                    

                    

                    

                    21.3

                    %Segment operating income

                    

                    $

                    565

                    

                    

                    

                    13.4

                    %

                    

                    $

                    547

                    

                    

                    

                    6.1

                    %





Revenue





Revenue for the three-month period ended November 30, 2007 was $5.527 million compared to $8.996 million for the three-month period ended November 30, 2006, a decrease of $3.469 million or 38.6%.  The decrease in revenues is primarily due mainly to the decline and/or suspension of capital budgets for some of our major
            clients, the acquisitions and mergers in the industry and our decision to downsize our operations.




Gross Profit





Gross profit for the three-month period ended November 30, 2007 was $1.686 million, representing 31% of revenue, compared to $2.464 million representing 27% of revenue for the three month period ended November 30, 2006, a decrease of $0.778 million or 32%.  Gross profit for the three-month period ended November 30, 2007
            decreased as a result of decreased revenue.  Gross profit as a percentage of revenue increased for the three-month period ended November 30, 2007 as a result of aligning the asset and labor base in line with market conditions, thereby reducing the cost of revenue relative to overall revenue.





Operating Income





Operating income for the three-month period, ended November 30, 2007 was $0.565 million, compared to $0.547 million for the three-month period ended November 30, 2006, an increase of $0.018 million or 3%. Operating income increased for the three-month period ended November 30, 2007 resulting from initiated management team changes,
            aligning asset and labor base in line with market conditions, and evaluating and adjusting ongoing customer contract negotiations and purchasing procedures.





41





Transportation Infrastructure





Transportation Infrastructure segment operating results for the three month period ended November 30, 2007 and 2006 are as follows:





Three Month Period EndedNovember 30, 2007

                    

                    

                    November 30, 2006(Dollars in thousands)Revenue

                    

                    $

                    11,580

                    

                    

                    

                    100

                    %

                    

                    $

                    12,747

                    

                    

                    

                    100

                    %Cost of revenue

                    

                    

                    10,258

                    

                    

                    

                    88.6

                    %

                    

                    

                    11,243

                    

                    

                    

                    88.2

                    %Gross profit

                    

                    

                    1,322

                    

                    

                    

                    11.4

                    %

                    

                    

                    1,504

                    

                    

                    

                    11.8

                    %Operating expensesSelling, general and administrative

                    

                    

                    815

                    

                    

                    

                    6.5

                    %

                    

                    

                    773

                    

                    

                    

                    6.1

                    %Depreciation and amortization

                    

                    

                    4

                    

                    

                    

                    0.1

                    %

                    

                    

                    138

                    

                    

                    

                    1.1

                    %Total operating expenses

                    

                    

                    819

                    

                    

                    

                    6.6

                    %

                    

                    

                    911

                    

                    

                    

                    7.1

                    %Segment operating income

                    

                    $

                    503

                    

                    

                    

                    4.8

                    %

                    

                    $

                    593

                    

                    

                    

                    4.7

                    %





Revenue





Revenue for the three-month period ended November 30, 2007 was $11.580 million compared to $12.747 million for the three-month period ended November 30, 2006, a decrease of $1.167 million or 9%. Revenue decreased primarily due to the completion of several long-term contracts within the Transportation Infrastructure
            segment.





Gross Profit





Gross profit for the three-month period ended November 30, 2007 was $1.322 million, representing 11% of revenue, compared to $1.504 million representing 12% of revenue for the three month period ended November 30, 2006, a decrease of $0.182 million or 12%. Gross profit decreased primarily due to the revenue decrease discussed
            above.  Gross profit as a percentage of revenue did not change significantly.





Operating Income





Operating income for the three-month period ended November 30, 2007 was $0.503 million, compared to $0.593 million for the three-month period ended November 30, 2006, a decrease of $0.090 million or 15%. Operating income decreased slightly due  to the gross profit decrease discussed above.





Ultraviolet Technologies





Ultraviolet Technologies segment operating results for the three-month period ended November 30, 2007 and 2006 are as follows:





Three Month Period EndedNovember 30, 2007

                    

                    

                    November 30, 2006(Dollars in thousands)Revenue

                    

                    $

                    3,266

                    

                    

                    

                    100

                    %

                    

                    $

                    3,049

                    

                    

                    

                    100

                    %Cost of revenue

                    

                    

                    1,882

                    

                    

                    

                    57.6

                    %

                    

                    

                    1,723

                    

                    

                    

                    56.5

                    %Gross profit

                    

                    

                    1,384

                    

                    

                    

                    42.4

                    %

                    

                    

                    1,326

                    

                    

                    

                    43.5

                    %Operating expensesSelling, general and administrative

                    

                    

                    1,301

                    

                    

                    

                    38.7

                    %

                    

                    

                    1,134

                    

                    

                    

                    37.2

                    %Depreciation and amortization

                    

                    

                    70

                    

                    

                    

                    2.1

                    %

                    

                    

                    109

                    

                    

                    

                    3.6

                    %Total operating expenses

                    

                    

                    1,371

                    

                    

                    

                    40.8

                    %

                    

                    

                    1,243

                    

                    

                    

                    40.8

                    %Segment operating income

                    

                    $

                    13

                    

                    

                    

                    1.6

                    %

                    

                    $

                    83

                    

                    

                    

                    2.7

                    %




42





Revenue





Revenue for the three-month period ended November 30, 2007 were $3.266 million compared to $3.049 million for the three-month period ended November 30, 2006, an increase of $0.217 million or 7.1%. Revenue increased primarily due to increased domestic sales of CD/DVD inks and toll manufactured products, as well as increased sales of
            nameplate inks in Asia, offset by a decrease in POP/Decal inks.





Gross Profit





Gross profit for the three-month period ended November 30, 2007 was $1.384 million representing 42% of revenue, compared to $1.326 million representing 44% of revenue for the three month period ended November 30, 2006, an increase of $0.058 or 4%.  Gross profit did not change significantly for the three month period ended
            November 30, 2007.





Operating Income





Operating income for the three-month period ended November 30, 2007 was $0.013 million, compared to $0.083 million for the three-month period ended November 30, 2006, a decrease of $0.070 million or 84%. Operating income decreased primarily due to an increase in personnel and related costs.





Electronics Integration





Electronics Integration segment operating results for the three month period ended November 30, 2007 and 2006 are as follows:





Three Month Period EndedNovember 30, 2007

                    

                    

                    November 30, 2006(Dollars in thousands)Revenue

                    

                    $

                    3,013

                    

                    

                    

                    100

                    %

                    

                    $

                    4,257

                    

                    

                    

                    100

                    %Cost of revenue

                    

                    

                    2,611

                    

                    

                    

                    86.7

                    %

                    

                    

                    3,231

                    

                    

                    

                    75.9

                    %Gross profit

                    

                    

                    402

                    

                    

                    

                    13.3

                    %

                    

                    

                    1,026

                    

                    

                    

                    24.1

                    %Operating expensesSelling, general and administrative

                    

                    

                    425

                    

                    

                    

                    12.9

                    %

                    

                    

                    666

                    

                    

                    

                    15.6

                    %Depreciation and amortization

                    

                    

                    14

                    

                    

                    

                    0.1

                    %

                    

                    

                    23

                    

                    

                    

                    0.5

                    %Total operating expenses

                    

                    

                    439

                    

                    

                    

                    13.4

                    %

                    

                    

                    689

                    

                    

                    

                    16.2

                    %Segment operating income (loss)

                    

                    $

                    (37

                    )

                    

                    

                    (0.1

                    %)

                    

                    $

                    337

                    

                    

                    

                    7.9

                    %





Revenue





Revenue for the three-month period ended November 30, 2007 was $3.013 million compared to $4.257 million for the three-month period ended November 30, 2006, a decrease of $1.244 million or 29%. Revenue decreased for the three-month period ended November 30, 2007 primarily due to a lower volume of sales of television products as a
            result of the completion of two large contracts with Kingston.





Gross Profit





Gross profit for the three-month period ended November 30, 2007 was $0.402 million representing 13% of revenue, compared to $1.026 million representing 24% of revenue for the three month period ended November 30, 2006, a decrease of $0.624 million or 61%.  Gross profit decreased primarily due to the sale of obsolete
            inventory at a loss.





43





Operating Income





Operating loss for the three month period ended November 30, 2007 was $0.037 million, compared to operating income of $0.337 million for the three month period ended November 30, 2006, a decrease of $0.374 million or 110%. The decrease in operating income was due to the decreases in revenue and gross profit discussed
            above.





Holding Company





Operating Expense





The Holding Company does not have any income producing operating assets. As such, the operating loss was equal to operating expenses. Operating expenses consist primarily of employee compensation and benefits, legal, accounting and consulting fees. Operating expenses for the three-month period ended November 30, 2007 were $.532
            million, compared to $0.850 million for the three-month period ended November 30, 2006, a decrease of $0.318 million or 37%. Operating expense did not change significantly. Beginning in the three month period ended November 30, 2007 we began allocating, selling general and administrative expenses to the segments resulting in a decrease of $.583 million to the Holding company.




Interest Expense





Interest expense was $0.923 million for the three-month period ended November 30, 2007, compared to $0.847 million for the three-month period ended November 30, 2006, an increase of $0.076 million or 7%. The increase was primarily due to additional borrowing under the Company’s credit facility, interest on the Company’s
            convertible term note, and interest expense related to the VIE.





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 has 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.  The VIE does not have any other significant assets. For the three month period ended November 30, 2007, the consolidation of the VIE comprised of $0.433 million in rental income, offset by a $0.126 million charge to interest expense, a $0.049 million charge to depreciation expense, $0.047 loss on disposal of building, $0.016 million in administrative and other miscellaneous expenses.  For the three month period ended November 30, 2006, the
            consolidation of the VIE comprised of $0.226 million in rental income, offset by a $0.137 million charge to interest expense, a $0.049 million charge to depreciation expense, and insignificant 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 $5.893 million at November 30, 2007 and $9.830 million at August 31, 2007.  At November 30, 2007, we had $0.305 million available on our line of credit with the bank.





We had working capital of ($15) million at November 30, 2007 compared with ($16) million at August 31, 2007. The increase in working capital was primarily due to the increase in costs and estimated earnings in excess of billings on uncompleted contracts and a decrease in accounts payable somewhat offset by a decrease in cash and
            equivalents and a decrease in account receivable.  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 accrues expenses.





44





Total debt at November 30, 2007 was $45.93 million including a $5.450 million convertible term note, $32.676 million in bank debt, $1.000 million in debt to a related party, and $6.804 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 approximately $0.305 million and $0.0 million at November 30, 2007 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 $0.465 million and $0.330 million for the three-month
            period ended November 30, 2007 and 2006, respectively.  Sources of funds for these expenditures have primarily been from additional borrowings from the bank.





As of November 30, 2007, 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.





Cash Flows





Cash flows provided by (used in) operations for the three month period ended November 30, 2007 and 2006 were ($1.877) million and $.119 million, respectively.  This decrease in operating cash flows was due primarily to increased collections of outstanding accounts receivable.





Net cash flow used in investing activities was $0.035 million for the three month period ended November 30, 2007 compared to $0.319 million for the three month period ended November 30, 2006.  The increase was primarily due to the sale of assets by the Variable Interest Entity.





Net cash flow provided by (used in) financing activities was ($2.065) million for the three month period ended November 30, 2007 compared to $3.661 million for the three month period ended November 30, 2006.  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 November 30, 2007:





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

                    

                    $

                    45,930

                    

                    

                    $

                    37,074

                    

                    

                    $

                    7,314

                    

                    

                    $

                    1,542

                    

                    

                    $

                    -Operating lease (1)

                    

                    

                    15,716

                    

                    

                    

                    2,097

                    

                    

                    

                    1,997

                    

                    

                    

                    5,189

                    

                    

                    

                    6,433Total

                    

                    $

                    61,646

                    

                    

                    $

                    39,171

                    

                    

                    $

                    9,311

                    

                    

                    $

                    6,731

                    

                    

                    $

                    6,433





(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





45





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 November 30, 2007, for these options are estimated between $2.4 million and $4.0 million and are expected to be exercised over the next
            six months.





We lease a total of five facilities from aVIE 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 have 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 November 30, 2007, we had approximately $5.2millionin restricted cash primarily to secure obligations under our PEO contracts in the Business Solutions segment.





Payment and Performance Bonds





Within our Wireless Infrastructure and Transportation Infrastructure segments, certain customers, particularly in connection with new construction, require us to post payment or performance bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that we will perform under the terms
            of a contract and that we will pay subcontractors and vendors. If we fail to perform under a contract or fail to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs. Under our continuing indemnity and security agreement with the surety, we have posted letters of credit in the amount of $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 November 30, 2007, an aggregate of approximately $5.0 million in original face amount of bonds issued by the
            surety were outstanding.








Item 3.  Quantitative and Qualitative Disclosures about Market Risk





The Company is exposed to certain market risks arising from adverse changes in interest rates, primarily due to the potential effect of such changes on its variable rate line of credit and convertible term note as described in Note 9 to the consolidated financial statements.  Almost all of the Company’s debt as of
            November 30, 2007 bears interest at variable rates. Based on amounts outstanding at November 30, 2007, if the interest rate on the Company’s variable debt were to increase by 1.0%, annual interest expense would increase by approximately $0.5 million.





Cash and cash equivalents as of November 30, 2007 was $5.893 millionand is primarily insubsidiary operating accounts. A hypothetical 10% adverse change in the average interest
            rate on the Company’s investments would not have had a material effect on net income for the three month period ended November 30, 2007. We do not currently utilize any derivative financial instruments to hedge interest rate risks.





46





We are exposed to foreign currency risks due to both transactions and translations between functional and reporting currencies in our European, Singapore, and Chinese foreign subsidiaries. A hypothetical 10% adverse change in the foreign currency translation would not
            have had a material effect on net income for the three month period ended November 30, 2007. We do not currently utilize any derivative financial instruments to hedge foreign currency risks.








Item 4.  Controls and Procedures





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





Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of November 30, 2007. 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 November 30, 2007 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 November 30, 2007 to ensure that certain disclosure controls and procedures were operating effectively; (ii) greater segregation of duties was needed in
            the accounting functions; and (iii) certain procedures should be documented to ensure that personnel turnover does not result in a failure of those procedures. The Company will continue to evaluate the need for additional staff at the parent and subsidiary levels, but given the size and location of the Company’s subsidiaries the Company believes it will continue to face challenges in attracting and retaining qualified personnel. Additionally, the Company is also in the process
            of evaluating ways in which the impact of personnel turnover on the implementation of disclosure controls and procedures can be reduced. Management continues to evaluate the effectiveness of this segregation and the need for additional enhancements, including, but not limited to, the addition of accounting personnel.








PART II--OTHER INFORMATION.





Item 1. Legal Proceedings.





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





Item 1A. Risk Factors





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





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





None





Item 3. Defaults Upon Senior Securities.





None




47




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





None





Item 5. Other Information.





None





Item 6. Exhibits





The following exhibits are included herein:





31.1

                    Rule 15d-14(a) Certification of CEO


31.2

                    Rule 15d-14(a) Certification of CFO


32.1

                    Section 1350 Certification of CEO


32.2

                    Section 1350 Certification of CFO








SIGNATURES





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





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

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

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


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