<PAGE>

                United States Securities and Exchange Commission
                             Washington, D.C. 20549
                                   Form 10QSB

  (Mark One)

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

                   For the quarterly period ended May 31, 2005

[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

            For the transition period from __________ to ___________

Commission file number                  0-19049

                      Fortune Diversified Industries, Inc.
         ---------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

          Indiana                                      20-2803889
-------------------------------               ---------------------------------
(State or other jurisdiction of               (IRS Employer Identification No.)
incorporation or organization)

                6402 Corporate Drive, Indianapolis, Indiana 46278
                -------------------------------------------------
                    (Address of principal executive offices)

                                 (317) 532-1374
                 ----------------------------------------------
                (Issuer's telephone number, including area code)

              ----------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  On July 13, 2005, there were
10,549,094 shares of the Company's Common Stock outstanding.

Transitional Small Business Disclosure Format (Check one):  Yes [ ] No [X]

<PAGE>

                      FORTUNE DIVERSIFIED INDUSTRIES, INC.
                                   FORM 10-QSB
                   For The Quarterly Period Ended May 31, 2005

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                     Page(s)
                                                                                                     -------
<S>                                                                                                  <C>
PART  I.    Financial Information

   ITEM 1.  Financial Statements

                Consolidated Balance Sheets as of May 31, 2005
                (unaudited) and August 31, 2004                                                          1

                Consolidated Statements of Operations for the Nine Months
                Ended May 31, 2005 (unaudited )and May 31, 2004 (unaudited)                              2

                Consolidated Statements of Operations for the Three Months
                Ended May 31, 2005 (unaudited) and May 31, 2004 (unaudited)                              3

                Consolidated Statements of Stockholders' Equity as of
                May 31, 2005 (unaudited) and August 31, 2004                                             4

                Consolidated Statements of Cash Flows for the Nine Months
                Ended May 31, 2005 (unaudited) and May 31, 2004 (unaudited)                              5

                Notes to Unaudited Interim Consolidated Financial Statements                             6

   ITEM 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                                                         24

   ITEM 3.  Controls and Procedures                                                                     32

PART II.    Other Information

   ITEM 1.  Legal Proceedings                                                                           32

   ITEM 2.  Changes in Securities and Use of Proceeds                                                   32

   ITEM 3.  Defaults upon Senior Securities                                                             33

   ITEM 4.  Submission of Matters to a Vote of Security Holders                                         33

   ITEM 5.  Other Information                                                                           33

   ITEM 6.  Exhibits and Reports on Form 8-K                                                            33

            Signatures                                                                                  34
</TABLE>

<PAGE>

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements.

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                     ASSETS
                                                                                   UNAUDITED          AUDITED
                                                                                     MAY 31,         AUGUST 31,
                                                                                      2005              2004
<S>                                                                                <C>               <C>
CURRENT ASSETS
     Cash and equivalents                                                            $  3,925         $  3,527
     Restricted savings account                                                         1,234              210
     Available for sale investments                                                     2,118            1,959
     Accounts receivable, net                                                          18,904           15,894
     Costs and estimated earnings in excess of billings
        on uncompleted contracts                                                        2,165            1,879
     Inventory, net                                                                     9,589            9,746
     Deferred tax asset                                                                 1,070            1,014
     Prepaid expenses and other current assets                                          1,593              815
                                                                                     --------         --------
         Total Current Assets                                                          40,598           35,044
                                                                                     --------         --------

OTHER ASSETS
     Property, plant & equipment, net                                                   4,560            4,038
     Goodwill                                                                          12,068           10,192
     Other intangible assets, net                                                       5,539            2,111
     Other long term assets                                                               452              184
                                                                                     --------         --------
         Total Other Assets                                                            22,619           16,525
                                                                                     --------         --------

         TOTAL ASSETS                                                                $ 63,217         $ 51,569
                                                                                     ========         ========

                                         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Lines of credit                                                                 $ 13,918         $  7,948
     Current maturities of long-term debt                                               2,616            1,999
     Current maturities of long-term debt - related party                                  34               47
     Accounts payable                                                                   7,405            4,670
     Due to related party                                                                   -               29
     Health and workers' compensation reserves                                          4,817            3,750
     Accrued expenses                                                                   5,969            5,414
     Billings in excess of costs and estimated earnings on
        uncompleted contracts                                                           1,695            1,912
     Other current liabilities                                                            105              101
                                                                                     --------         --------
         Total Current Liabilities                                                     36,559           25,870
                                                                                     --------         --------

LONG-TERM LIABILITIES

     Line of credit - related party                                                  $  6,618         $  6,268
     Long-term debt - related party, less current maturities                               69              106
     Long-term debt, less current maturities                                            5,329            6,254
     Other long-term liabilities                                                          253              253
                                                                                     --------         --------
         Total Long-term Liabilities                                                   12,269           12,881
                                                                                     --------         --------

         Total Liabilities                                                             48,828           38,751
                                                                                     --------         --------

STOCKHOLDERS' EQUITY
     Common stock                                                                       1,033            1,008
     Additional paid-in capital and warrants outstanding                               16,910           15,893
     Accumulated deficit                                                               (3,632)          (4,089)
     Accumulated other comprehensive income                                                78                6
                                                                                     --------         --------
         Total Stockholders' Equity                                                    14,389           12,818
                                                                                     --------         --------

         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $ 63,217         $ 51,569
                                                                                     ========         ========
</TABLE>

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

                                        1

<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         NINE MONTHS ENDED
                                                                      MAY 31,          MAY 31,
                                                                       2005             2004
<S>                                                                  <C>              <C>
NET REVENUES BUSINESS SOLUTIONS SEGMENT (GROSS
         BILLINGS OF $124,911,000 LESS WORKSITE
         EMPLOYEE PAYROLL COST OF $106,323,000)                      $ 18,588         $ 13,108
NET REVENUES WIRELESS INFRASTRUCTURE SERVICES                           8,713            6,184
NET REVENUE WIRELESS INFRASTRUCTURE PRODUCTS                           33,771            4,278
NET REVENUES MANUFACTURING AND DISTRIBUTION SEGMENT                    16,029           16,701
                                                                     --------         --------

TOTAL NET REVENUES                                                     77,101           40,271
                                                                     --------         --------

COST OF REVENUES BUSINESS SOLUTIONS SEGMENT                            14,382           10,586
COST OF REVENUES WIRELESS INFRASTRUCTURE SERVICES                       5,691            4,791
COST OF REVENUES WIRELESS INFRASTRUCTURE PRODUCTS                      30,306            3,464
COST OF REVENUES MANUFACTURING AND DISTRIBUTION SEGMENT                11,492           11,468
                                                                     --------         --------

TOTAL COST OF REVENUES                                                 61,871           30,309
                                                                     --------         --------

GROSS PROFIT                                                           15,230            9,962

OPERATING EXPENSES
     Selling, general and administrative expenses                      12,812            7,696
     Depreciation and amortization                                      1,203              681
                                                                     --------         --------
         Total Operating Expenses                                      14,015            8,377
                                                                     --------         --------

OPERATING INCOME                                                        1,215            1,585
                                                                     --------         --------

OTHER INCOME (EXPENSE)
     Interest income                                                       29               68
     Interest expense                                                    (972)            (330)
     Gain (loss) on investments in marketable securities, net             (42)              29
     Exchange rate gain                                                    50                -
     Other income (expense)                                               177              (45)
                                                                     --------         --------
         Total Other Income (Expense)                                    (758)            (278)
                                                                     --------         --------

NET INCOME BEFORE PROVISION
  FOR INCOME TAXES                                                        457            1,307

PROVISION FOR INCOME TAXES                                                  -              (25)
                                                                     --------         --------

NET INCOME                                                           $    457         $  1,282
                                                                     --------         --------

BASIC INCOME PER SHARE                                               $    .04         $    .13
                                                                     --------         --------

DILUTED INCOME PER SHARE                                             $    .04         $    .13
                                                                     --------         --------
</TABLE>

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

                                        2
<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                                MAY 31,          MAY 31,
                                                                 2005             2004
<S>                                                            <C>              <C>
NET REVENUES BUSINESS SOLUTION SEGMENT (GROSS
        BILLINGS OF $51,868,000 LESS WORKSITE
        EMPLOYEE PAYROLL COST OF $43,578,000)                  $  8,290         $  4,988
NET REVENUE WIRELESS INFRASTRUCTURE SERVICES                      3,690            1,687
NET REVENUE WIRELESS INFRASTRUCTURE PRODUCTS                     14,259            4,278
NET REVENUE MANUFACTURING AND DISTRIBUTION SEGMENT                5,665            6,302
                                                               --------         --------

TOTAL NET REVENUES                                               31,904           17,255
                                                               --------         --------

COST OF REVENUES BUSINESS SOLUTIONS SEGMENT                       6,398            4,049
COST OF REVENUES WIRELESS INFRASTRUCTURE SERVICES                 2,296            1,185
COST OF REVENUES WIRELESS INFRASTRUCTURE PRODUCTS                12,605            3,464
COST OF REVENUES MANUFACTURING AND DISTRIBUTION SEGMENT           3,974            4,502
                                                               --------         --------

TOTAL COST OF REVENUES                                           25,273           13,200
                                                               --------         --------

GROSS PROFIT                                                      6,631            4,055

OPERATING EXPENSES
     Selling, general and administrative expenses                 4,814            3,037
     Depreciation and amortization                                  472              235
                                                               --------         --------
        Total Operating Expenses                                  5,286            3,272
                                                               --------         --------

OPERATING INCOME                                                  1,345              783
                                                               --------         --------

OTHER INCOME (EXPENSE)
     Interest income                                                 11               38
     Interest expense                                              (383)            (141)
     Exchange rate gain                                              (9)               -
     Other income                                                    50              (16)
                                                               --------         --------
        Total Other Income (Expense)                               (331)            (119)
                                                               --------         --------

NET INCOME BEFORE PROVISION
  FOR INCOME TAXES                                                1,014              664

PROVISION FOR INCOME TAXES                                           64              (25)
                                                               --------         --------

NET INCOME                                                     $  1,078         $    639
                                                               ========         ========

BASIC INCOME PER SHARE                                         $    .10         $    .06
                                                               ========         ========

DILUTED INCOME PER SHARE                                       $    .10         $    .06
                                                               ========         ========
</TABLE>

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

                                3
<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                   ADDITIONAL
                                                 PAID-IN CAPITAL  COST OF ACCUMULATED ACCUMULATED OTHER     TOTAL    COMPREHENSIVE
                                          COMMON  AND WARRANTS   TREASURY   EARNINGS    COMPREHENSIVE   STOCKHOLDERS    INCOME
                                          STOCK   OUTSTANDING      STOCK   (DEFICIT)       INCOME          EQUITY       (LOSS)
<S>                                      <C>     <C>             <C>      <C>         <C>               <C>          <C>
BALANCE AT AUGUST 31, 2004               $ 1,008     $ 15,893     $ -       $ (4,089)       $  6           $ 12,818     $ 2,523
                                         =======     ========     ===       ========        ====           ========     =======
Issuance of 223,450 shares of common
  stock for acquisitions                      23        1,017       -              -           -              1,040           -
Conversion of stock options                    2            -       -              -           -                  2           -
Net income                                     -            -       -            457           -                457         457
Translation adjustments, net of tax            -            -       -              -           5                  5           5
Net unrealized investments gains, net
 of tax                                        -            -       -              -          67                 67          67
                                         -------     --------     ---       --------        ----           --------     -------
BALANCE AT MAY 31, 2005                  $ 1,033     $ 16,910     $ -       $ (3,632)       $ 78           $ 14,389     $ 3,052
                                         =======     ========     ===       ========        ====           ========     =======
</TABLE>

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

                                        4
<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                      Nine Months Ended
                                                                                   MAY 31,          MAY 31,
                                                                                    2005             2004
                                                                                  --------         --------
<S>                                                                               <C>              <C>
OPERATING ACTIVITIES
     Net Income                                                                   $    457         $  1,282
     Adjustments to reconcile net income to net cash
      provided (used) by operating activities:
        Depreciation and amortization                                                1,203              681
        Gain on sale of investments                                                     40              (29)
        Loss on disposal of fixed assets                                                 5
        (Increase) decrease in certain operating assets:
           Restricted cash                                                            (737)
           Accounts receivable                                                      (2,338)          (3,616)
           Costs and estimated earnings in excess of billings on
              uncompleted contracts                                                   (286)             167
           Inventory                                                                   263           (1,165)
           Recoverable income taxes                                                      -              142
           Other current assets                                                        170              (56)
           Other long term assets                                                       27             (178)
        Increase (decrease) in certain operating liabilities:
           Accounts payable                                                          1,419              551
           Accrued expenses and other current liabilities                           (2,748)            (203)
           Billings in excess of costs and estimated earnings on
              uncompleted contracts                                                   (217)             807
                                                                                  --------         --------
              Net Cash Used by Operating Activities                                 (2,742)          (1,617)
                                                                                  --------         --------

INVESTING ACTIVITIES
     Capital Expenditures                                                           (1,164)            (659)
     Purchases of available for sale securities                                       (132)          (2,044)
     Proceeds from sale of available for sale securities                                 -              689
     Proceeds from sale of certificates of deposits                                      -               19
     Acquisition of productive assets and businesses, net of cash received          (1,371)          (8,644)
                                                                                  --------         --------
              Net Cash Used by Investing Activities                                 (2,667)         (10,639)
                                                                                  --------         --------

FINANCING ACTIVITIES
     Borrowings short term debt - related party                                        800                -
     Payments to related party                                                        (827)            (230)
     Net borrowings under line of credit                                             5,970            7,463
     Borrowings on long-term debt                                                    1,248            4,265
     Payments on long-term debt                                                     (1,718)            (688)
     Borrowings on long-term debt - related party                                      350            4,113
     Payments on long-term debt - related party                                        (21)             (13)
                                                                                  --------         --------
              Net Cash Provided by Financing Activities                              5,802           14,910
                                                                                  --------         --------

              Effect of exchange rate changes on cash                                    5              222

NET INCREASE IN CASH AND EQUIVALENTS                                                   398            2,876

CASH AND EQUIVALENTS
     Beginning of Period                                                             3,527              885
                                                                                  --------         --------

     End of Period                                                                $  3,925         $  3,761
                                                                                  ========         ========

SUPPLEMENTAL DISCLOSURES
     Noncash investing and financing activities:
        Unrealized net gain (loss) on marketable securities                             67             (241)
        Interest paid                                                                  865              320
</TABLE>

See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim
Consolidated Financial Statements.

                                        5
<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

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 2004 annual report on Form 10-KSB filed by
Fortune Diversified Industries, Inc. (together with all its subsidiaries, 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 nine-month period
ended May 31, 2005 are not necessarily indicative of the operating results to be
expected for the full fiscal year.

Nature of Business: The Company is the parent company of Professional Staff
Management, Inc., Professional Staff Management, Inc. II and Pro Staff, Inc.
(collectively "PSM"); CSM, Inc. and subsidiaries (collectively "CSM"); Nor-Cote
International, Inc. (Nor-Cote); Kingston Sales Corporation (Kingston);
Commercial Solutions, Inc. (Commercial Solutions); James H. Drew Corp. (JH
Drew); PDH, Inc. (PDH); Magtech Services, Inc. (Magtech); Cornerstone Wireless
Construction Services, Inc. (Cornerstone Construction); Innovative
Telecommunications Consultants, Inc. (ITC); Telecom Technology Corp. (TTC);
StarQuest Wireless Services, Inc. (StarQuest); Women of Wrestling, Inc. (WOW);
and Murphy Development, Ltd (Murphy).

Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. Nor-Cote
contains foreign subsidiaries from the United Kingdom, Singapore, and Malaysia,
which have been eliminated in consolidation at the Nor-Cote subsidiary level.
All significant intercompany accounts and transactions of the Company have been
eliminated.

Foreign Currency Translation: Assets and liabilities of the foreign subsidiaries
of the Company's wholly owned subsidiary 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 stockholders'
equity.

Comprehensive Income: Comprehensive income 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 entities' owners. For the
Company, comprehensive income 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 has elected to report comprehensive income
in the consolidated statements of stockholders' 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 revenues 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.

                                       6
<PAGE>

Revenue and Cost Recognition: In the Company's Manufacturing and Distribution
segment, revenue from the sale of products is recognized according to the terms
of the sales arrangement, which is generally upon shipment. Commission revenue
is recognized when realizable and earned, which is typically upon receipt of the
commission payment. Revenues are recognized, net of estimated costs of returns,
allowances and sales incentives, 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 the Company does not generally require collateral to secure
accounts receivable.

In its Wireless Infrastructure Segment, PDH, Cornerstone Construction, ITC, and
Magtech enter 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 the Company agrees to do the work for units of work
performed. The Company also performs services on a cost-plus or time and
materials basis. The Company completes most projects within six months. The
Company generally recognizes revenue utilizing output measures, such as when
services are performed, units are delivered or when contract milestones are
reached. Additionally, in the Wireless Infrastructure Segment, JH Drew, a
construction company, 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 costs 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. TTC and StarQuest recognize revenue when product is shipped and
installation is complete.

In its Business Solutions Segment, PSM and CSM, licensed Professional Employer
Organizations (PEO's), bill clients under their Professional Services Agreement,
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. All wages, taxes and insurance coverages are
provided under PSM's and CSM's 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. All calculations or
amounts PSM and CSM owe the government and its employment insurance vendors are
based on the experience levels and activity of PSM and CSM with no consideration
to client detail. There is no direct relationship between what the PSM and CSM
pay versus what is billed to a client. PSM and CSM bill the client their
worksite employees' gross wages plus an overall service fee that includes all
components of employment related taxes, employment benefits insurance, and
administration of those items. This service fee is intended to cover PSM's and
CSM's cost of those items and yield a profit to PSM and CSM. What is paid to the
government and vendors is different than what is charged to the client due to
the different methods of calculation as to what PSM and CSM owe those entities
versus what the client is charged. 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 workers' compensation and
unemployment insurance is based, in part, on the client's historical claims
experience. All charges by PSM and CSM are invoiced along with each periodic
payroll delivered to the client.

PSM and CSM report revenues in accordance with Emerging Issues Task Force
("EITF") No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent. PSM and CSM report revenues on a gross basis, 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. PSM and CSM report revenues on a gross basis for such
fees because PSM and CSM are the primary obligor and deemed to be the principal
in these transactions under EITF No. 99-19. However, PSM and CSM report revenues
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.

PSM and CSM account for their revenues 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. PSM and CSM accrue revenues for
service fees, health and welfare

                                       7
<PAGE>

benefit plan fees, workers' compensation and unemployment insurance fees
relating to work performed by worksite employees but unpaid at the end of each
period. PSM and CSM accrue unbilled receivables for payroll and 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 year,
such costs are paid and the related service fees are billed.

Consistent with its revenue recognition policy, PSM's 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. The Company acquired another PEO, CSM, on April 5, 2005 as
disclosed in Note 2. CSM generally follows the same revenue recognition policy
as PSM.

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 and certificates of deposits, and other instruments with
original maturities of three months or less.

Marketable Securities: Marketable securities include common stocks classified as
"available for sale" in accordance with the provisions of Statement of Financial
Accounting Standards 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 stockholders' 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.

Accounts Receivable: Accounts receivable is stated at the amount billable to
customers. The Company provides allowances for doubtful accounts and for returns
and sales allowances, which are based upon a review of outstanding receivables,
historical information and existing economic conditions. Accounts receivable are
ordinarily due 30 days after the issuance of the invoice. Delinquent receivables
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 of raw materials are recorded at the lower of cost
(primarily first-in, first-out) or market value. Inventories of work-in-process
and finished goods include estimated direct labor, indirect labor, and other
manufacturing expenses applied as a function of material costs. The Company's JH
Drew, Kingston and Commercial Solutions subsidiaries record finished goods
inventory on an average cost basis.

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, Equipment, and Depreciation: Property and equipment are carried at
cost and includes expenditures for new additions and those, which substantially
increase the useful lives of existing assets. Depreciation is computed at
various rates by use of the straight-line method and certain accelerated
methods. Depreciable lives are generally ranging from 3 to 30 years.
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 year
of disposal with the resulting gain or loss reflected in earnings or in the cost
of the replacement asset. The provision for depreciation amounted to $817,000
for the nine months ended May 31, 2005.

Goodwill and Other Intangible Assets: The Company has adopted Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". With the adoption of SFAS No. 142, goodwill is no longer amortized but
instead is assessed for impairment at least as often as annually and as
triggering events occurs. 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

                                       8
<PAGE>

data. There are inherent uncertainties related to these factors and management's
judgment in applying them to the analysis of goodwill 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 as required by SFAS 142 as of August 31, the Company's fiscal year-end.
The results of the most recent impairment test indicated that the fair value of
each of the reporting units as of August 31, 2004, exceeded their respective
carrying, or book values, including goodwill, and therefore recorded goodwill
was not subject to impairment.

Long-lived Assets: The Company periodically considers whether indicators of
impairment of long-lived assets are present. If such indicators 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. Fair value is
determined by discounted future cash flows, appraisals or other methods. If the
assets determined to be impaired are to be held and used, the Company recognizes
an impairment charge to the extent the present value of anticipated net cash
flows attributable to the asset are less than the asset's carrying value. 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.
Long-lived assets including the Company's property, plant and equipment, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability is
measured by comparison of the carrying amount to future net undiscounted cash
flows expected to be generated by the related asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount exceeds the fair market value of the assets.

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 securities,
receivables, and payables approximate fair value.

Stock-based Compensation: In December 2004, the FASB issued SFAS No. 123(R),
"Share-Based Payment," which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R) is effective for public companies for
interim or annual periods beginning after June 15, 2005, supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. The new standard will be effective for the Company, beginning
July 1, 2005. The Company has not yet completed their evaluation and expects the
adoption to have no effect on the consolidated financial statements.

Income Per Common Share: Income per share has been computed in accordance with
SFAS No. 128, "Earnings Per Share." Under SFAS No. 128, basic income per 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 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 U.S., U.K.,
Singapore, and Malaysia income tax returns.

                                       9
<PAGE>

Research and Development Costs: Research and development costs are expensed as
incurred and totaled $353,000 for the nine month period ended May 31, 2005.
Research and development expense is recorded in the Company's Nor-Cote
subsidiary.

Self Insurance: The Company's Nor-Cote subsidiary has elected to act as a
self-insurer for certain costs related to employee health and accident benefit
programs. Costs resulting from non-insured losses are estimated and charged to
expense when incurred. The Company has purchased insurance which limits its
annual exposure for individual claims to $40,000 and which limits its aggregate
annual exposure to approximately $460,000.

The Company's PSM subsidiary has elected to enter into a partially self-funded
arrangement related to worksite employees' health and accident benefit programs.
Under the insurance policy, PSM's self-funded liability is limited to $175,000
per employee, with an aggregate liability limit of approximately $11,150,000.
The liability limits are adjusted monthly, based on the number of participants.

NOTE 2 - ACQUISITIONS

Ink Source, Inc.

The Company's Nor-Cote subsidiary, acquired certain assets and assumed certain
liabilities of Ink Source through an asset purchase agreement entered into as of
September 30, 2004 by and among Ink Source, Inc. a Wisconsin corporation
("Seller"), Michael Sloan ("Shareholder") and Nor-Cote International, Inc., an
Indiana corporation ("Purchaser). Purchased assets in the agreement include, at
a minimum, goodwill, customer lists, customer deposits, proprietary property and
products, prepaid expenses, software, furniture, equipment, machinery and other
intellectual property. Nor-Cote accepted and assumed $239,747 of specifically
identified accounts payable and bank debt. In addition to the assumed
liabilities, the consideration given as part of the transaction was $220,000,
which was consideration for a non-compete agreement with Michael Sloan.
Additionally 400,000 restricted shares of the Company's common stock vest per
the employment agreement with Michael Sloan in two years based upon certain
sales volume criteria within the Ink Source division as detailed in the
agreement. The value of the contingent shares were included as a component in
the purchase price in the Company's February 28, 2005 Form 10QSB. The shares
were removed from the purchase price during the quarter ending May 31, 2005 as
management deemed the contingent consideration is tied to employment under
Emerging Issues Task Force 95-8, "Accounting for Contingent Consideration Paid
to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination". Ink Source provides technology in Ultra Violet point of purchase
(POP) inks to round out the suite of ink products provided by Nor-Cote.

MAGTECH Services, Inc.

In November 2004, the Company acquired all of the assets and certain liabilities
of Magtech pursuant to an Asset Purchase Agreement effective November 1, 2004.
The acquired assets include all fixed assets, accounts receivable, certain
intangible assets, sales proposals and like documents and contracts. The Company
accepted and assumed certain specific accounts payable and all of the sellers'
rights and executory obligations under the Assumed Contracts, as defined in the
Asset Purchase Agreement, to be performed after the Closing Date (as defined in
the Asset Purchase Agreement) (excluding any obligations or liabilities of the
sellers under any assumed contracts that were to have been performed, fulfilled
or satisfied on or prior to the Closing Date). In addition to the assumed
liabilities, the consideration given for the acquired assets was $445,213 cash
and 484,500 restricted shares of the Company's stock. Of the 484,500 shares,
84,500 shares vested immediately in the seller and the remaining 400,000 shares
are contingent upon certain EBIT requirements through the period November 1,
2004 to October 31, 2006, as defined in the agreement. The 484,500 shares are
valued at the closing price of the Company's stock on the date of purchase at
$.70 share. The contingent stock consideration is included as a component of the
purchase price in accordance with Emerging Issues Task Force 95-8, "Accounting
for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise
in a Purchase Business Combination," under arrangements not affected by
employment termination. The consideration is included in permanent equity under
SFAS 141 as management of the Company deems likelihood that payment of such
contingent consideration is beyond a reasonable doubt. Magtech operates in the
Company's Wireless Infrastructure segment.

EI Solution, Inc.

The Company's ITC subsidiary acquired all of the assets of EI Solution, Inc.
pursuant to an Asset Purchase Agreement effective February 28, 2005. The
acquired assets include personnel, certain intangible assets, sales proposals
and like documents and contracts. The

                                       10
<PAGE>

consideration given for the acquired assets was $175,000 cash and 450,000
restricted shares of the Company's stock. Of the 450,000 shares, 250,000 shares
vested immediately in the seller and the vesting of the remaining 200,000 shares
is contingent upon certain sales requirements through the period March 1, 2005
to February 28, 2006, as defined in the agreement. The 250,000 shares are valued
at the closing price of the Company's stock on the date of purchase at $.40
share. Vesting of the contingent stock consideration is deemed remote and is not
included as a component of the purchase price in accordance with SFAS 141
business combinations. EI Solution operates in the Company's Wireless
Infrastructure segment under ITC's name and management team.

CSM, Inc.

On April 5, 2005 the Company completed its acquisition of CSM, Inc. ("CSM") and
its subsidiary companies pursuant to an Agreement and Plan of Merger (the
"Agreement") by and between the Company, CSM, CSM Merger Corporation, Carter M.
Fortune, Marc Fortune, Greg Daily, Harbinger Mezzanine Partners, L.P., Doug
Altenbern, Jeff Gould, Bob Boston, and Don Denbo. CSM is the holding company for
Century II Staffing, Inc. ("Century II") and other related subsidiary entities.
CSM is a professional employer organization that is based in Tennessee. The
purpose of the acquisition was to facilitate the Company's growth in the PEO
industry. The terms of the Agreement include, among other things, the payment of
approximately $2 million by the Company to retire certain debts owed by CSM, the
payment of approximately $700,000 in cash by the Company to the shareholders of
CSM, $450,000 of which shall be held in escrow for payment of certain tax debts
that may be owed by CSM, and the issuance of 1,500,000 restricted shares of the
Company's Common Stock to be held in escrow until such time as the shares may be
earned by the shareholders of CSM upon the achievement of certain financial
performance measures by Century II. The effective date of the acquisition for
accounting purposes was April 1, 2005. As a result, two months of operations are
included in the Company's Unaudited Consolidated Statement of Operations for the
nine months ended May 31, 2005.

Per the agreement the 1,500,000 restricted shares will vest over the three year
period from April 1, 2005 through March 31, 2008 based upon annual EBITDA
calculations. For every $1.70 of EBITDA in excess of $850,000 during each twelve
month period, one share of Common Stock will vest. Vesting is limited to 500,000
shares annually and no carryover of excess earnings is permitted. The vested
shares of Common Stock can be put to Carter M. Fortune during the period June 1,
2008 to September 30, 2008 at $1.033 per share. In addition, any holder of
vested shares may only exercise his/ her Put if the Company's common stock is
not listed on the OTC Bulletin Board or any national securities exchange during
the thirty day period preceding the exercise period or if the average bid price
per share during the thirty day period preceding the exercise period is less
than the put price. The 1,500,000 shares are valued at the closing price of the
Company's stock on the date of purchase at $.40 share. The contingent stock
consideration is included as a component of the purchase price in accordance
with SFAS 141, "Business Combinations" and Emerging Issues Task Force 95-8,
"Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination," under arrangements not affected
by employment termination. The consideration is included in permanent equity
under SFAS 141 as management of the Company deems likelihood that payment of
such contingent consideration is beyond a reasonable doubt. CSM operates in the
Company's Business Solutions Segment.

The following is a condensed balance sheet disclosing the amount assigned to
each major asset and liability caption of Ink Source, Magtech, EI Solutions and
CSM at the acquisition dates (amounts in thousands):

<TABLE>
<S>                                                           <C>
Ink-Source:

   Accounts receivable, net                                   $     66
   Inventory, net                                                  106
   Property and equipment                                           57
   Goodwill                                                         13
   Intangible assets                                               342
                                                              --------
                                                                   584
                                                              --------
   Accounts payable                                                 80
   Notes Payable                                                   160
   Other accrued liabilities                                       124
                                                              --------
                                                                   364
                                                              --------
                                                              $    220
                                                              ========
</TABLE>

                                       11
<PAGE>

<TABLE>
<S>                                                           <C>
   Cash consideration                                         $    220
                                                              --------
                                                              $    220
                                                              ========
Magtech:

   Accounts receivable, net                                   $    304
   Other current assets                                             66
   Property and equipment                                            6
   Goodwill                                                        412
   Intangible assets                                               102
                                                              --------
                                                                   890
                                                              --------

   Accounts payable                                                 64
   Other accrued liabilities                                        42
                                                              --------
                                                                   106
                                                              --------
                                                              $    784
                                                              ========

   Cash consideration                                         $    445

   Fair value of common stock consideration                        339
                                                              --------
                                                              $    784
                                                              ========

EI Solution:
   Goodwill                                                         40
   Intangible assets                                               250
                                                              --------
                                                                   290
                                                              --------

 Other accrued liabilities                                          15
                                                              --------
                                                                    15
                                                              --------
                                                              $    275
                                                              ========

Cash consideration                                            $    175

Fair value of common stock consideration                           100
                                                              --------
                                                              $    275
                                                              ========
CSM:

   Cash                                                       $  2,704
   Accounts receivable, net                                        302
   Prepaid expenses and other current assets                     1,290
   Property and equipment                                          132
   Goodwill                                                      1,111
   Intangible assets                                             3,100
   Notes receivable                                                300
                                                              --------
                                                                 8,939
                                                              --------

   Accounts payable                                              1,146
   Other accrued liabilities                                     2,661
   Deferred revenue                                              1,361
</TABLE>

                                       12
<PAGE>

<TABLE>
<S>                                                           <C>
Other current liabilities                                          171
                                                              --------
                                                                 5,339
                                                              --------
                                                              $  3,600
                                                              ========

   Cash consideration                                         $  3,000

   Fair value of common stock consideration                        600
                                                              --------
                                                              $  3,600
                                                              ========
</TABLE>

The following unaudited pro forma data summarize the results of operations for
the periods indicated as if the CSM, Ink Source, Magtech, EI Solution, JH Drew,
ITC, Commercial Solutions and PSM acquisitions 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 (dollars in thousands)
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.

<TABLE>
<CAPTION>
                                              Nine months        Nine months
                                                 Ended              Ended
                                                 May 31,           May 31,
                                                  2005               2004
                                             -------------      -------------
<S>                                          <C>                <C>
Net revenue                                  $      86,112      $      84,880
Cost of revenues                                    69,461             68,871
                                             -------------      -------------

Gross profit                                        16,651             16,009
Operating expenses                                  16,458             14,013
                                             -------------      -------------

Operating income                                       193              1,996
Other income (expenses)                               (800)              (741)
                                             -------------      -------------

Net income before taxes                                607              1,255
                                             -------------      -------------

Taxes                                                    0                 25
                                             -------------      -------------
Net income                                             607              1,230
                                             =============      =============

Net Income Available for Common
 Stockholders                                $         607      $       1,230
                                             =============      =============

Basic Income Per Share:                      $         .06      $         .12
                                             =============      =============

Diluted Income Per Share:                    $         .06      $         .12
                                             =============      =============

Shares Outstanding:

Basic weighted average number of common
shares outstanding                              10,549,094         10,549,094
Dilutive effect of conversion of options                --                 --
                                             -------------      -------------

         Total Shares Outstanding               10,549,094         10,549,094
                                             =============      =============
</TABLE>

                                       13
<PAGE>

NOTE 3 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE

Accounts receivable and contracts receivable include the following (amounts in
thousands):

<TABLE>
<CAPTION>
                                          Unaudited        Audited
                                           May 31,       August 31,
                                            2005            2004
                                         ----------      ----------
<S>                                      <C>             <C>
Amounts currently due                    $   13,919      $   12,005
Contracts in process
      Progress billing                        4,630           4,560
      Retainages                              1,665             576
                                         ----------      ----------
                                             20,214          17,141

Less allowance for doubtful accounts         (1,175)         (1,112)
Less allowance for sales returns               (135)           (135)
                                         ----------      ----------
                                         $   18,904      $   15,894
                                         ==========      ==========
</TABLE>

NOTE 4 - COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS

Information related to contracts in progress are as follows (amounts in
thousands):

<TABLE>
<CAPTION>
                                          Unaudited        Audited
                                           May 31,       August 31,
                                            2005            2004
                                         ----------      ----------
<S>                                      <C>             <C>
Cost incurred on uncompleted contracts   $   28,450      $   24,475
Estimated earnings recognized to date
  on uncompleted contracts                    6,869           5,502
                                         ----------      ----------
                                             35,319          29,977

Less billings on uncompleted contracts      (34,849)        (30,010)

                                         ----------      ----------
      Net                                $      470      $      (33)
                                         ==========      ==========
</TABLE>

The net amount is included in the accompanying consolidated balance sheets under
the following captions (amounts in thousands):

<TABLE>
<CAPTION>
                                          Unaudited        Audited
                                           May 31,       August 31,
                                            2005            2004
                                         ----------      ----------
<S>                                      <C>             <C>
Costs and estimated earnings in excess
  of billings on uncompleted contracts   $    2,165      $    1,879
Billings in excess of costs and
  estimated earnings on uncompleted
  contracts                                   1,695           1,912
                                         ----------      ----------

                                         $      470      $      (33)
                                         ==========      ==========
</TABLE>

                                       14
<PAGE>

NOTE 5 - INVENTORIES

Inventories reflected on the accompanying consolidated balance sheets are
summarized as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                          Unaudited        Audited
                                           May 31,       August 31,
                                            2005            2004
                                         ----------      ----------
<S>                                      <C>             <C>
Raw materials                            $      831      $      559
Work-in-process                                  76              12
Finished goods                                8,982           9,425
Less inventory reserve                         (300)           (250)
                                         ----------      ----------

                                         $    9,589      $    9,746
                                         ==========      ==========
</TABLE>

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment, including capital leases, is comprised of the following
(amounts in thousands):

<TABLE>
<CAPTION>
                                          Unaudited        Audited
                                           May 31,       August 31,
                                            2005            2004
                                         ----------      ----------
<S>                                      <C>             <C>
Land and building                        $    1,951      $    1,903
Machinery and equipment                       5,506           5,181
Research equipment                              384             380
Office equipment                              3,426           2,943
Vehicles                                      3,157           3,631
Leasehold improvements                          147             151
                                         ----------      ----------

                                         $   14,571      $   14,189

Less accumulated depreciation               (10,011)        (10,151)
                                         ----------      ----------

                                         $    4,560      $    4,038
                                         ==========      ==========
</TABLE>

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill, as reclassified for the adoption
of SFAS 142, are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                BUSINESS     MANUFACTURING AND      WIRELESS        HOLDING       SEGMENT
                SOLUTIONS      DISTRIBUTION      INFRASTRUCTURE     COMPANY       TOTALS
               ----------    -----------------   --------------   ----------    ----------
<S>            <C>           <C>                 <C>              <C>           <C>
Goodwill
at August
31, 2004       $    3,580       $    5,957         $      655     $      -0-    $   10,192

Goodwill
Acquired            1,111               13                752            -0-         1,876

Impairment
losses                -0-              -0-                -0-            -0-           -0-

               ----------       ----------          ---------     ----------    ----------
Goodwill
at May
31, 2005       $    4,691       $    5,970         $    1,407     $      -0-    $   12,068
               ==========       ==========         ==========     ==========    ==========
</TABLE>

                                       15
<PAGE>

The total amount of goodwill that is deductible for tax purposes is $1,823 at
May 31, 2005.

The following table sets forth the gross carrying amount and accumulated
  amortization of the Company's intangible assets (amounts in thousands):

<TABLE>
<CAPTION>
                                           AT MAY 31, 2005                             AT AUGUST 31, 2004
                               ----------------------------------------     ----------------------------------------
                                                              WEIGHTED                                     WEIGHTED
                                  GROSS                       AVERAGE         GROSS                         AVERAGE
                                CARRYING      ACCUMULATED      AMORT         CARRYING      ACCUMULATED       AMORT
                                 AMOUNT      AMORTIZATION      PERIOD         AMOUNT      AMORTIZATION      PERIOD
                               ----------     ----------     ----------     ----------     ----------     ----------
<S>                            <C>           <C>             <C>            <C>           <C>             <C>
Customer Relationships         $    3,748     $      421         10 YRS     $    1,824     $      239         10 YRS
Non-compete                           484            181          4 YRS            234            122          4 YRS
Non-compete                         1,229            161          5 YRS            399             73          5 YRS
Non-compete                           100             36          3 YRS            100             12          3 YRS
Non-compete                           200             13         10 YRS            -0-            -0-          0 YRS
                               ----------     ----------         ------     ----------     ----------         ------

 Intangible assets
   subject to amortization     $    5,761     $      812          8 YRS     $    2,557     $      446          7 YRS
                               ----------     ----------         ------     ----------     ----------         ------

Tradename                             590            -0-              -            -0-            -0-              -
                               ----------     ----------         ------     ----------     ----------         ------

   Intangible assets not
   subject to amortization            590            -0-              -            -0-            -0-              -
                               ----------     ----------         ------     ----------     ----------         ------

   Total                            6,351     $      812          8 YRS     $    2,557     $      446          7 YRS
                               ==========     ==========         ======     ==========     ==========         ======
</TABLE>

Intangible asset amortization expense for the nine months ended May 31, 2005 was
$386,000 which includes $20,000 of amortization related to loan origination
fees.

Amortization expense on intangible assets currently owned by the Company at May
31, 2005 for each of the next five fiscal years are approximately as follows
  (amounts in thousands):

<TABLE>
<S>                                                    <C>
        2006                                             825
        2007                                             752
        2008                                             733
        2009                                             629
        2010                                             500
2011 and thereafter                                    1,510
                                                       -----

       Total                                           4,949
                                                       =====
</TABLE>

NOTE 8 - LINES OF CREDIT AND DEBT ARRANGEMENTS

Lines of Credit:

Effective February 28, 2005, the Company entered into an agreement with the bank
for a $13.0 million revolving line of credit available through February 28,
2006. Effective April 13, 2005 through a loan modification agreement with the
bank, the Company increased its line of credit with the bank $1 million, for an
aggregate amount of $14 million. Effective June 10, 2005 the Company increased
its line of credit with the bank $5 million, for an aggregate amount of $19
million. Interest on the line is charged at .5% less than the credit facility's
Prime Rate. The funds from this line of credit were used to pay off all of the
Company's other lines of credit with the same bank. Borrowings under the old
lines of credit as of August 31, 2004 were $7.948 million. As of May 31, 2005
$13.918 million was borrowed on this line of credit.

                                       16
<PAGE>

The aforementioned lines of credit are secured by substantially all assets of
the Company and personal guarantees of the Company's majority stockholder and a
different stockholder.

The Company also has a $7 million long-term unsecured line of credit with a
stockholder available through May 1, 2007. Interest on the line is charged at 3%
plus the one-month London Interbank Offered Rate (one-month LIBOR). Outstanding
borrowings amounted to $6.618 million at May 31, 2005 and $6.268 million at
August 31, 2004.

Total unused lines of credit amounted to approximately $464,000 at May 31, 2005
and approximately $2.535 million at July 13, 2005.

Long-term debt arrangements:

      Long-term debt consisted of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                           Unaudited     Audited
                                                                            May 31,     August 31,
                                                                              2005         2004
                                                                           ---------    --------
<S>                                                                        <C>          <C>
Notes payable to financial institutions:

  $2,400 reducing term loan with monthly line reductions equal to 1/60th
  of the loan amount through maturity date, July 15, 2009. Interest is
  variable at .5% less than the credit facility's Prime Rate. The loan
  is secured by the business assets of Kingston, with a second lien on
  assets pledged by a stockholder.                                         $     -0-    $    2,400

  $2,160 reducing term loan with monthly line reductions equal to 1/54th
  of the loan amount through maturity date, June 15, 2009. Interest is
  variable a .5% less than the credit facility's Prime Rate. The loan is
  secured by the business assets of the Company, with a second lien on
  assets pledged by a stockholder.                                             2,040           -0-

  $1,200 reducing term loan with monthly line reductions equal to 1/24th
  of the loan amount through maturity date, March 31, 2007. Interest is
  variable at .5% less than the credit facility's Prime Rate. The loan
  is secured by the business assets of the Company, with a second lien
  on assets pledged by a stockholder.                                            -0-           -0-

  $2,000 reducing term loan with monthly line reductions equal to 1/60th
  of the loan amount through maturity date, July 15, 2009. Interest is
  variable a .5% less than the credit facility's Prime Rate. The loan is
  secured by the business assets of Nor-Cote, with a second lien on
  assets pledged by a stockholder.                                               -0-         2,000

  $1,800 reducing term loan with monthly line reductions equal to 1/54th
  of the loan amount through maturity date, June 15, 2009. Interest is
  variable a .5% less than the credit facility's Prime Rate. The loan is
  secured by the business assets of the Company, with a second lien on
  assets pledged by a stockholder.                                             1,700           -0-

  $1,950 secured term loan with monthly line reductions equal to 1/54th
  of the loan amount through maturity date, April 30, 2009. Interest is
  variable at Prime rate less .5% The loan is secured by the business
  assets of JH Drew, with guarantees by the Company's majority stock-
  holder and a different stockholder.                                            -0-         1,853
</TABLE>

                                   17

<PAGE>

<TABLE>
<S>                                                                        <C>          <C>
  $1,690 secured term loan with monthly line reductions equal to 1/54th
  of the loan amount through maturity date, April 30, 2009. Interest is
  variable at Prime rate less .5% The loan is secured by the business is
  secured by the business assets of the Company, with guarantees by
  the Company's majority stockholder and a different stockholder.              1,563           -0-

  $2,050 secured term loan with monthly line reductions equal to 1/36th
  of the loan amount through maturity date, April 30, 2007. Interest is
  variable at Prime rate less .5% The loan is secured by the business
  assets of JH Drew, with guarantees by the Company, the Company's
  majority stockholder and a different stockholder.                              -0-         1,879

  $1,594 secured term loan with monthly line reductions equal to 1/30th
  of the loan amount through maturity date, April 30, 2007. Interest is
  variable at Prime rate less .5% The loan is secured by the business
  assets of the Company, with guarantees by the Company's majority
  stock-holder and a different stockholder.                                    1,375           -0-

  $1,200 secured term loan with monthly line reductions equal to 1/24th
  of the loan amount through maturity date, April 30, 2007. Interest is
  variable at Prime rate less .5% The loan is secured by the business
  assets of the Company, with guarantees by the Company's majority
  stock-holder and a different stockholder.                                    1,150           -0-

  Due in monthly installments of $2.105 including interest at ranges
  from 4.9% to 9.03% through October 2007.
  Secured by vehicles.                                                            27            23

Debt with stockholder:

  Due in monthly installments of $3.637 including interest at 4.00%
  though September 2008.
  Secured by vehicles.                                                           103           153

Capital Leases:

  Due in monthly installments of $5.472, including interest at 4.00%
  though February 2007.
  Secured by vehicles and equipment.                                              90            98
                                                                           ---------    ----------

                                                                               8,048         8,406

  Less current maturities                                                     (2,650)       (2,046)

                                                                           ---------    ----------
                                                                           $   5,398    $    6,360
                                                                           =========    ==========
</TABLE>

                                   18
<PAGE>

Principal payments due on long-term debt outstanding at May 31, 2005 are
  approximately as follows (amounts in thousands):

<TABLE>
<S>                               <C>
       2006                         2,650
       2007                         2,596
       2008                         1,530
       2009                         1,272
2010 & thereafter                       -
                                  -------

                                  $ 8,048
                                  =======
</TABLE>

NOTE 9 - STOCKHOLDERS' EQUITY

The following are the details of the Company's common stock as of May 31, 2005
and August 31, 2004:

<TABLE>
<CAPTION>
                                                          Number of Shares
                                   --------------------------------------------------------------
                                    Authorized         Issued        Outstanding        Amount
                                   -----------      -----------      -----------     ------------
<S>                                <C>              <C>              <C>             <C>
May 31, 2005 (Unaudited)
Common stock, $0.10 par value      150,000,000       10,549,094       10,549,094     $      1,033
                                                                                     ============

August 31, 2004 (Audited)
Common stock, $0.10 par value      150,000,000       10,238,644       10,238,644     $      1,008
                                                                                     ============
</TABLE>

NOTE 10 - INCOME TAXES

The reconciliation for 2005 and 2004 of income tax expense (benefit) computed at
the U.S. Federal statutory tax rate to the Company's effective income rate is as
follows:

<TABLE>
<CAPTION>
                                                   Unaudited       Audited
                                                    May 31,       August 31,
                                                      2005           2004
                                                  ----------     -----------
<S>                                               <C>            <C>
Tax at U.S. Federal statutory rate                    34.0%          34.0%
State and local taxes, net of federal benefit          5.6            5.8
Other                                                    0            1.4
Change in valuation allowance                        (39.6)         (73.3)
                                                     -----          -----
                                                       0.0%         (32.1)%
                                                     =====          =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                   Unaudited       Audited
                                                    May 31,       August 31,
                                                      2005           2004
                                                  ----------     -----------
<S>                                               <C>            <C>
Current:
  Federal                                         $      126     $       690
  State                                                   20             172
                                                  ----------     -----------
                                                         146             862
                                                  ----------     -----------
</TABLE>

                                   19
<PAGE>

<TABLE>
<S>                                               <C>            <C>
Deferred:

   Federal                                              (120)            (55)

   State                                                (229)             (3)
                                                  ----------     -----------
                                                        (349)            (58)

Change in valuation allowance                            203          (1,257)
                                                  ----------     -----------

Net income tax (benefit)                           $       -        $   (453)
                                                  ==========     ===========
</TABLE>

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:

<TABLE>
<CAPTION>
                                                            (amounts in thousands)
                                                            Unaudited       Audited
                                                             May 31,       August 31,
                                                              2005            2004
                                                           ----------      ----------
<S>                                                        <C>             <C>
Deferred Tax Assets:
    Current:
        Allowances for doubtful accounts and inventory     $      437      $      156
        Accrued liabilities and other                             375             446
    Noncurrent:
        Amortization of covenants                                  52              50
        Depreciation                                              (98)            170
        Net operating losses and other carryforwards            2,546           2,287
                                                           ----------      ----------

                                                                3,312           3,109
    Valuation allowance                                        (2,298)         (2,095)
                                                           ----------      ----------

                                                           $    1,014      $    1,014
                                                           ==========      ==========
</TABLE>

SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, at May 31, 2005, 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
$2.298 million valuation allowance at May 31, 2005 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 $203,000. At May
31, 2005 the Company has federal net operating loss carryforwards of
approximately $4.768 million which expire during the years of 2020, 2021, and
2022. The state tax operating loss carryforwards were approximately $0. 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 $933,000 and it expires in the fiscal year ending August 31,
2007. The Company also incurred net operating losses related to European
operations that can be carried forward indefinitely.

                                       20
<PAGE>

NOTE 11 - PER SHARE DATA

The following presents the computation of basic income per share and diluted
income per share (amounts in thousands):

<TABLE>
<CAPTION>
                                                                       Unaudited        Unaudited
                                                                     Three Months     Three Months
                                                                         Ended            Ended
                                                                        May 31,          May 31,
                                                                         2005             2004
                                                                     ------------     ------------
<S>                                                                  <C>              <C>
Net Income Available for Common Stockholders                         $      1,078     $        639
                                                                     ============     ============

Basic Income Per Share:                                              $        .10     $        .06

Diluted Income Per Share:                                            $        .10     $        .06

Shares Outstanding:

      Basic weighted average number of common shares outstanding       10,420,549       10,046,444
      Dilutive effect of conversion of options                                  0                0
                                                                     ------------     ------------

      Total Shares Outstanding                                         10,420,549       10,046,444
                                                                     ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                       Unaudited        Unaudited
                                                                      Nine Months      Nine Months
                                                                         Ended            Ended
                                                                        May 31,          May 31,
                                                                         2005             2004
                                                                     ------------     ------------
<S>                                                                  <C>              <C>
Net Income Available for Common Stockholders                         $        457     $      1,282
                                                                     ============     ============

Basic Income Per Share                                               $        .04     $        .13

Diluted Income Per Share:                                            $        .04     $        .13

                                                                     ------------     ------------
Shares Outstanding:

      Basic weighted average number of common shares outstanding       10,420,549       10,046,444
      Dilutive effect of conversion of options                                  0                0
                                                                     ------------     ------------

      Total Shares Outstanding                                         10,420,549       10,046,444
                                                                     ============     ============

</TABLE>

NOTE 12 - RELATED PARTY TRANSACTIONS

The Company leases office and warehouse space from a related party entity. All
of the Company's subsidiaries, excluding JH Drew, Nor-Cote, PSM and CSM are
located in the facility. The lease agreement includes a five-year term with one
option to extend the lease term for a one-year period. The agreement provides
for base rent of $20,000 plus 1% of the gross revenues of the Company's
Commercial Solution's subsidiary. Following the first twelve-month period, 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. The Company recognized rent expense of approximately $196,000 for the
nine months ended May 31, 2005.

                                       21
<PAGE>

The Company's JH Drew subsidiary leases three buildings located in Indiana,
Tennessee and Missouri with the same related party. 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 $15,000. Following the first twelve-month period,
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. The Company recognized expense of approximately $90,000 for the nine
months ended May 31, 2005.

The Company's Nor-Cote subsidiary entered into an operating lease agreement to
rent a building with a related party. The lease agreement includes a five-year
term with the option to extend the lease for a one-year period. The base rent
for the first twelve months of the lease is $7,000 per month. Following the
first twelve month period the base rent will be adjusted by the greater of 3% of
the base rent or the increase in the Consumer Price Index. In addition Nor-Cote
shall pay certain expenses including taxes, assessments, maintenance and repairs
to the premises. The Company recognized expense of approximately $63,000 for the
nine months ended May 31, 2005.

The related party in the previous paragraphs is considered a variable interest
entity by the Company. FIN 46, Consolidation of Variable Interest Entities,
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. For variable
interest entities other than special-purpose entities, the provisions of FIN 46,
as amended, are applicable no later than March 31, 2004. Consolidation is not
required since the variable interest entity has sufficient equity at risk to
finance its activities without additional subordinated financial support from
other parties.

The Company borrowed $600,000 from a stockholder on December 15, 2004. The terms
of the promissory note agreement dated December 15, 2004 included interest
payable monthly at an annual percentage rate of 6.5%. The $600,000 was paid in
full along with accrued interest during quarter ending May 31, 2005.

Following is a summary of all related party liabilities included in the
consolidated balance sheets at May 31, 2005 and August 31, 2004 (amounts in
thousands):

<TABLE>
<CAPTION>
                               May 31,      August 31,
                                2005           2004
                              ---------     ----------
<S>                           <C>           <C>
Due to shareholders                   -            29
Long-term line of credit          6,618         6,268
Installment notes payable           103           153
                              ---------     ---------

Net liabilities)              $   6,721     $   6,450
                              =========     =========
</TABLE>

NOTE 13 - SUBSEQUENT EVENTS

Effective June 10, 2005 the Company increased its line of credit with the bank
in the amount of $5 million. The funds will be used for future business
acquisitions and for short term financing of operations.

Effective June 23, 2005, the Company listed its securities on a national
exchange, the American Stock Exchange. Previously the Company was listed on the
NASDAQ Over the Counter Bulletin Board Exchange.

Effective June 1, 2005, Carter M. Fortune resigned as Chief Executive Officer of
the Company and became Chairman of the Board. John F. Fisbeck was appointed
President and Chief Executive Officer of the Company, effective June 1, 2005.
Prior to and during the period from June 2000 through May, 2004, Mr. Fisbeck was
employed by Merrill Lynch as Senior Financial Advisor and after May 28, 2004 he
was employed by Wachovia Securities as Senior Financial Advisor/Branch Office
Manager. The material terms of the employment agreement between Mr. Fisbeck and
the Company are not yet determined. Mr. Fisbeck was also elected as a Director
of the Company on May 27, 2005 through a written consent of the Shareholders of
a majority of the Company's voting stock. At the time of this filing it is not
known to which committees of the Company's board of directors Mr. Fisbeck will
be named.

                                       22
<PAGE>

On May 17, 2005 pursuant to a Written Consent of Stockholders in Lieu of a
Meeting, certain stockholders, holding a majority of the Company's outstanding
Common Stock, consented to the election of Andy Rayl as a new Director of the
Company. Mr. Rayl was appointed to the Company's Audit Committee and was
appointed as the Audit Committee's Financial Expert pursuant to a Consent in
Lieu of a Special Meeting of the Directors of the Company. The Company has not
been a party to any transactions with Mr. Rayl and there are currently no
proposed transactions between the Company and Mr. Rayl that meet the criteria
described under Item 404 (a) of Regulation S-B.

Effective May 31, 2005, the Company changed its state of domicile from Delaware
to Indiana by means of a merger of the Company with and into FDI Indiana, Inc.,
a newly formed Indiana corporation. As a result the Company Restated its
Articles of Incorporation, to change or add certain provisions as required by
Indiana law.

Effective June 2, 2005 the Company executed a 1 for 10 reverse split of the
Company's Common Stock and amended the Company's Certificate of Incorporation to
reflect the change in the par value of the Company's Common Stock from $.01 to
$.10. As a result all number of shares data and per share calculations have
taken the reverse split into consideration.

NOTE 14 - SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                  PROFESSIONAL     MANUFACTURING AND     WIRELESS         HOLDING        SEGMENT
                                               BUSINESS SOLUTIONS    DISTRIBUTION     INFRASTRUCTURE      COMPANY         TOTALS
<S>                                            <C>                 <C>                <C>                 <C>            <C>
THREE MONTHS ENDED MAY 31, 2005
Net revenues                                        $  8,290           $  5,665           $ 17,949        $      -        $ 31,904
Cost of revenues                                       6,398              3,850             15,025               -          25,273
                                                    --------           --------           --------        --------        --------
Gross profit                                           1,892              1,815              2,924               -           6,631
Operating expenses
  Selling, general and administrative expenses         1,099              1,491              1,731             493           4,814
  Depreciation and amortization                          116                145                179              32             472
                                                    --------           --------           --------        --------        --------
     Total operating expense                           1,215              1,636              1,910             525           5,286
                                                    --------           --------           --------        --------        --------

Segment operating income (loss)                     $    677           $    179           $  1,014        $   (525)       $  1,345
                                                    ========           ========           ========        ========        ========
NINE MONTHS ENDED MAY 31, 2005
Net revenues                                        $ 18,588           $ 16,029           $ 42,484        $      -        $ 77,101
Cost of revenues                                      14,382             11,368             36,121               -          61,871
                                                    --------           --------           --------        --------        --------
Gross profit                                           4,206              4,661              6,363               -          15,230
Operating expenses
  Selling, general and administrative expenses         2,465              4,792              4,242           1,313        $ 12,812
  Depreciation and amortization                          198                436                499              70           1,203
                                                    --------           --------           --------        --------        --------
     Total operating expense                           2,663              5,228              4,741           1,383          14,015
                                                    --------           --------           --------        --------        --------

Segment operating income (loss)                     $  1,543           $   (567)          $  1,622        $ (1,383)       $  1,215
                                                    ========           ========           ========        ========        ========

AS OF MAY 31, 2005
Cash                                                $  3,232           $    885                $ -        $   (192)       $  3,925
Restricted savings account                             1,234                  -                  -               -           1,234
Available for sale investments                         2,118                  -                  -               -           2,118
Accounts receivable                                    1,079              3,365             14,457               3          18,904
Costs and estimated earnings in excess of billing
  of billing on uncompleted contracts                      -                  -              2,165               -           2,165
Inventory, net                                            13              3,728              5,848               -           9,589
Prepaid expenses and other current assets                255                311                581             446           1,593
Deferred tax asset                                       625                  -                389              56           1,070
Loan origination fees, net                                 -                  -                  -              25              25
Property and equipment, net                              233              2,040              1,882             405           4,560
Goodwill                                               4,690              5,970              1,408               -          12,068
Other intangible assets, net                           3,893              1,207                439               -           5,539
Other long term assets                                    43                 84                  -             300             427
                                                    --------           --------           --------        --------        --------

Total Segment Assets                                $ 17,415           $ 17,590           $ 27,169        $  1,043        $ 63,217
                                                    ========           ========           ========        ========        ========

THREE MONTHS ENDED MAY 31, 2004
Net revenues                                        $  4,988           $  6,302           $  5,965        $      -        $ 17,255
Cost of revenues                                       4,049              4,502              4,649               -          13,200
                                                    --------           --------           --------        --------        --------
Gross profit                                             939              1,800              1,316               -           4,055
Operating expenses
  Selling, general and administrative expenses           435              1,490                767             345           3,037
  Depreciation and amortization                           47                142                 39               7             235
                                                    --------           --------           --------        --------        --------
     Total operating expense                             482              1,632                806             352           3,272
                                                    --------           --------           --------        --------        --------

Segment operating income (loss)                     $    457           $    168           $    510        $   (352)       $    783
                                                    ========           ========           ========        ========        ========
NINE MONTHS ENDED MAY 31, 2004
Net revenues                                        $ 13,108           $ 16,701           $ 10,462        $      -        $ 40,271
Cost of revenues                                      10,586             11,468              8,255               -          30,309
                                                    --------           --------           --------        --------        --------
Gross profit                                           2,522              5,233              2,207               -           9,962
Operating expenses
  Selling, general and administrative expenses         1,279              4,120              1,546             751           7,696
  Depreciation and amortization                          129                430                106              16             681
                                                    --------           --------           --------        --------        --------
     Total operating expense                           1,408              4,550              1,652             767           8,377
                                                    --------           --------           --------        --------        --------

Segment operating income (loss)                     $  1,114           $    683           $    555        $   (767)       $  1,585
                                                    ========           ========           ========        ========        ========
AS OF AUGUST 31, 2004
Cash                                                $  2,767           $    633           $     50        $      8        $  3,458
Restricted savings account                               210                  -                  -               -             210
Certificates of deposit                                   69                  -                  -               -              69
Available for sale investments                         1,959                  -                  -               -           1,959
Accounts receivable                                      844              3,601             11,442               7          15,894
Costs and estimated earnings in excess of billing
  of billing on uncompleted contracts                      -                  -              1,879               -           1,879
Inventory, net                                            11              3,253              6,482               -           9,746
Other current assets                                     227                198                358              32             815
Deferred tax asset                                       563                  -                451               -           1,014
Property and equipment, net                               37              2,121              1,649             231           4,038
Goodwill                                               3,580              5,957                655               -          10,192
Other intangible assets, net                             962              1,012                137               -           2,111
Other long term assets                                    43                 94                 19              28             184
                                                    --------           --------           --------        --------        --------

Total Segment Assets                                $ 11,272           $ 16,869           $ 23,122        $    306        $ 51,569
                                                    ========           ========           ========        ========        ========
</TABLE>

                                        23
<PAGE>

Item 2.  Management's Discussion and Analysis.

Fortune Diversified Industries, Inc. (formerly known as WOW Entertainment, Inc.
and prior to that American Gaming & Entertainment, Ltd.), is a Indiana
corporation incorporated in 1988. The Company has conducted its business
directly and through wholly-owned subsidiaries. The term "Company" as used
herein refers to Fortune Diversified Industries, Inc. and such subsidiaries
unless the context otherwise requires. The Company is the parent company of
Professional Staff Management, Inc., Professional Staff Management, Inc. II and
Pro Staff, Inc. (collectively "PSM"); CSM, Inc. (CSM); Nor-Cote International,
Inc. (Nor-Cote); Kingston Sales Corporation (Kingston); Commercial Solutions,
Inc. (Commercial Solutions); James H. Drew Corp. (JH Drew); PDH, Inc. (PDH);
Magtech Services, Inc. (Magtech); Cornerstone Wireless Construction Services,
Inc. (Cornerstone Construction); Innovative Telecommunications Consultants, Inc.
(ITC); Telecom Technology Corp. (TTC); StarQuest Wireless Services, Inc.
(StarQuest); Women of Wrestling, Inc. (WOW); and Murphy Development, Ltd
(Murphy).

On or about May 31, 2005 the Company re-domesticated from Delaware to Indiana
through a merger with and into a wholly owned Indiana subsidiary of the Company.
Additional details regarding this action can be found in this filing and in the
Definitive Schedule 14C Information Statement that was filed by the Company on
May 10, 2005.

The Company's current operating focus is achieved through its Manufacturing and
Distribution Segment (Kingston, Commercial Solutions, and Nor-Cote); its
Wireless Infrastructure Segment (PDH, Cornerstone Construction, Magtech, TTC,
StarQuest, JH Drew, and ITC) and its Professional Business Solutions Segment
(PSM and CSM).

Manufacturing and Distribution Segment

The Company's Manufacturing and Distribution Segment is conducted through its
Nor-Cote, Kingston, and Commercial Solutions subsidiaries. Nor-Cote is a
manufacturer of UV curable screen printing inks. Nor-Cote inks are printed on
many types of plastic, metals and other substrates that are compatible with the
UV curing process. Typical applications are plastic sheets, cell phones, bottles
& containers, CD and DVD disks, rotary-screen printed labels, and membrane
switch overlays for which Nor-Cote provides conductive ink. Nor-Cote has
operating facilities in the United States, United Kingdom, Singapore, and
Malaysia, with worldwide distributors located in Africa, Australia, Canada,
China, Colombia, Hong Kong, India, Italy, Japan, Korea, New Zealand, Poland,
Taiwan, Thailand, Latin America and the United States. The acquisition of Ink
Source on September 30, 2004 provides Nor-Cote with a new entry into the retail
"Point of Purchase" (POP) ink/signage and decal market.

Kingston is a manufacturer's representative and distributor for prominent
national companies in the electronic, sound, security, and video markets.
Kingston offers the latest technology in TVs, sound systems, electronic locking
devices, wire, cable and fiber optics, and intercom systems.

Commercial Solutions is a distributor for commercial products of Thomson, Inc.
(RCA products including televisions, DVD, and other electronic products),
Panasonic (televisions, DVD, and other electronic products), and Rubbermaid
(carts, cleaning equipment, trash receptacles, and other products).
Additionally, beginning March 1, 2005 Commercial Solutions began selling the
LG/Zenith commercial line of television products. Effective April 1, 2005,
Commercial Solutions lost its distributor agreement with Thomson, Inc.
Commercial Solutions sells to distributors covering various territories in North
America and to the hotel/ motel and healthcare industries.

Wireless Infrastructure Segment

The Company's Wireless Infrastructure segment is conducted through its JH Drew,
PDH, Cornerstone Wireless, Magtech, Cornerstone Construction, ITC, and TTC and
StarQuest subsidiaries. JH Drew is a specialty contractor in the field of
infrastructure, including fiber optic, smart highway systems, traffic signals,
street signs, high mast and ornamental lighting, guardrail, wireless
communications, and fabrications of structural steel. JH Drew has been operating
over fifty years serving contractors and state departments of transportation,
and has established relationships in the industry, earning a well-respected
reputation for reliability and quality.

PDH's business strategy is to offer a full range of network infrastructure, real
estate development services to the telecommunications industry, among other
types of real estate network critical industries. PDH's full service list of
network real estate development services includes program management, site
acquisition, zoning and permitting, architectural & engineering design,
construction management, co-location facilitation, environmental services, lease
capitalization, lease renegotiation, site marketing and asset management.

                                       24
<PAGE>

Cornerstone Wireless and Magtech specialize in providing engineering and
architectural services for the telecommunications and the traditional real
estate development 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.

Cornerstone Construction offers a full range of construction services to the
telecommunications industry, primarily developing wireless networks for wireless
carriers. Such services include: civil construction, electrical, foundation and
tower installations, as well as, antennae and line installations. Cornerstone
Construction can provide a complete turnkey solution to the development of
telecommunications infrastructure.

ITC is a technical services company that provides customer specific turnkey
solutions for wireless equipment manufacturers and wireless service providers.
Technical services include switch and radio base station engineering as well as
providing the site, survey, delivery, installation and integration process for
the implementation of end user equipment offered by a wide range of wireless
equipment manufacturers. Nationwide availability is provided by individual
program management allowing ITC to offer maintenance solutions for the
continuous development of existing service provider's wireless networks.
Effective February 28, 2005, ITC acquired the assets of EI Solution, Inc. This
acquisition expanded the product service capabilities that ITC can offer to
wireless equipment manufacturers and wireless service providers.

TTC specializes in the design, engineering and installation of structured
cabling systems for the commercial marketplace and sells telephone and voice
mail systems. TTC provides the data cabinets, racks, cable trays, HUBS, patch
panels, computer furniture, cable management and any peripheral equipment
necessary for a complete voice and data-cabling infrastructure.

StarQuest is a provider of premium communication/ information services,
including digital satellite television, high speed (broadband) Internet, both
wired and wireless. These services are provided exclusively to the United States
multi-dwelling unit (MDU) marketplace.

Professional Business Solutions Segment

The Company's Professional Business Solutions segment is conducted through its
PSM and CSM subsidiaries. PSM and CSM, Professional Employer Organizations
(PEO), provide cost-effective employee administrative solutions to companies in
37 states nationwide. The companies 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.

RESULTS OF OPERATIONS: COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED MAY
31, 2005 AND MAY 31, 2004

Executive Overview

Financial Summary

Net income was $1.078 million or $.10 per share for the third quarter of 2005
compared with $639,000 or $.06 per share for the third quarter of 2004,
representing a 69% percent increase in net income. Income per share calculations
take into consideration the 1:10 reverse split effective June 2, 2005. Revenues
were $31.904 million for the third quarter of 2005 compared with $17.255 million
for the third quarter of 2004. The increase in net income in the third quarter
was mainly the result of revenues growth in the Company's wireless
telecommunications infrastructure division and a decrease in the health
insurance reserves in the PEO division due to sustained decreases in claims
activity. Due to the demand in the marketplace for expansion and upgrades of
wireless carrier networks, along with effective marketing of turnkey solutions
to these carriers and subcontractors in the Company's real estate, engineering
and construction companies, the Company reported record revenues in the wireless
infrastructure division. These increases were partially offset by an increase in
costs of goods sold and administrative expenses increasing at a rate greater
than sales in some of the Company's divisions due to increased costs in raw
material and freight, state unemployment and workers compensation insurance, and
sales and marketing. Additionally, interest expense for the quarter increased
172% due mainly to partial bank financing of the JH Drew and CSM acquisitions.
Net income was $457,000 or $.04 per share for the first nine months of 2005
compared with $1.282 million or $.13 per share for the first nine months of
2004, representing a 64% percent decrease in net income. The decrease in net
income in the first nine months of 2005 were driven by the same factors
affecting the third quarter 2005 as well as additional expenses including
research and development and branch expansion in the U.S. and abroad.

                                       25
<PAGE>

Recent Developments Affecting Future Revenues and Earnings

Management's expectations for the final quarter by division are as follows:

Manufacturing and Distribution

Management anticipates sales to increase slightly over third quarter due mainly
to a increases in certain subsidiaries pricing and increases in customers in
Nor-Cote's POP/ decal inks. Restructuring costs in Kingston and Commercial
Solutions divisions may produce reduced profits.

Wireless Infrastructure

JH Drew, the Company's largest revenue contributor is reporting backlog at the
end of May of $32.3 million. Although this amount is greater than previous
years' backlog, management estimates recognized revenues to decrease fourth
quarter 2005 as compared to fourth quarter 2004. Additionally JH Drew's
operating profits, based on normal weather patterns, are expected to be down in
the fourth quarter as compared to the fourth quarter 2004 due to the number of
contracts acquired at tight margins due to an over capacitated market. The new
federal highway bill has not yet been passed to help alleviate this pressure.
Management anticipates that the increased demand for services in the other
subsidiaries that service the wireless carriers network expansion and upgrades
will offset JH Drew's decrease in revenues and operating profits.

Business Solutions

Fourth quarter revenues are expected to increase approximately 15 - 20% due to
the purchase of CSM on April 5, 2005 as well as the compounded effect of
increased revenues at PSM. Profits are expected to increase, although not
proportionately with revenue, due mainly to the investment in the expansion of
the companies' Human Resource divisions.

Manufacturing and Distribution

Revenues

Revenues for the quarter ended May 31, 2005 were $5.665 million compared to
$6.302 million for the quarter ended May 31, 2004, a decrease of $637,000 or
10%. Year to date revenues for the nine months ended May 31, 2005 were $16.029
million compared to $16.701 million for the nine months ended May 31, 2004, a 4%
decrease. Decrease in quarter revenues was due mainly to the loss of Commercial
Solutions' master distributor agreement with a manufacturer of commercial
television products in April 2005. Additionally, Kingston's implementation of a
more stringent sales policy and customer credit extension policy affected sale
negatively but has had a positive effect on gross margins. Commercial Solutions
lost product sales as a result of the loss of the master distributor agreement
was offset somewhat by sales generated from a larger offering of other
manufacturers' products. This quarterly decrease in sales in the distribution
companies was offset by a 12% increase in sales in the Company's ink
manufacturing division. This increase was due mainly to new revenues generated
by the POP/ decal inks due to Nor-Cote's acquisition of Ink Source on September
30, 2004. Additionally ink sales in Asia increased 4% due mainly to a stronger
marketing of container and nameplate inks and the building of stronger
relationships with Asian distributors. These increases were offset somewhat by
lower Nor-Cote U.S. sales to the loose leaf, tag and label and compact disk
markets due to competition. The decrease in year to date revenues was due mainly
to Kingston's poor execution of sales during the first quarter of 2005 as well
as a change in sales and credit policies as discussed above. Year to date sales
for Nor-Cote increased 1.4% due mainly to new sales in the POP/ decal market as
a result of acquiring Ink Source. These sales were offset by erosion in the
loose leaf, tag and label and compact disk markets for the same reasons as
discussed above.

Future trends for revenue and profitability for Kingston and Commercial
Solutions are difficult to predict due to a variety of known and unknown risks
and uncertainties, including, without limitation, (i) dependence upon principal
suppliers and availability and price of electronic and rubber products; (ii)
loss of significant customers or a reduction in prices we charge these
customers; (iii) lack of demand for our products and services in certain markets
and our inability to maintain margins; (iv) our ability to absorb, through
revenue growth, the increasing operating costs that we have incurred and
continue to incur in connection with our activities; (v) uncertainty regarding
whether electronic equipment manufacturers will continue to outsource aspects of
their business to us; (vi) possible

                                       26
<PAGE>

adverse effect on demand for our products resulting from consolidation of
electronic manufacturers (vii) economic conditions in our markets; (viii)
ability to respond to rapid technological changes in the electronics industry;
(ix) possible difficulties collecting our accounts receivable; (x) access to or
the cost of increasing amounts of capital, trade credit or other financing; (xi)
risks of foreign operations, including currency, trade restrictions and
political risks in our foreign markets; (xii) effect of hostilities or terrorist
attacks on our operations; (xiii) reliance on sophisticated information systems
technologies; (xiv) ability to meet intense industry competition; (xv) ability
to manage and sustain future growth at our historical or industry rates; (xvii)
success of relationships with electronics equipment manufacturers, (xviii)
seasonality; (xix) ability to attract and retain qualified management and other
personnel; (xx) ability to maintain adequate business insurance at reasonable
cost and (xxi) existence of anti-takeover measures. Because of the
aforementioned uncertainties affecting our future operating results, past
performance should not be considered to be a reliable indicator of future
performance, and investors should not use historical trends to anticipate future
results or trends.

The demand for some of Nor-Cote's new products, such as the membrane switch for
high ticket durable goods, is sensitive to interest rate fluctuations and
consumer spending.

Gross Profits

Gross profits for the quarter ended May 31, 2005 were $1.815 million or 32.0% of
revenues compared to $1.8 million or 28.6% of revenues for the quarter ended May
31, 2004. Year to date gross profits for the nine months ended May 31, 2005 were
$4.661 million or 29.1% of revenues compared to $5.233 million or 31.3% of
revenues over the same period in the prior year. The increase in gross profit
dollars for the quarter was due to the 12% increase in revenues at Nor-Cote as
well as Kingston selling products at higher margins. The gross profit percentage
increase for the quarter was mainly due to Nor-Cote's sales increasing as a
percentage of total sales in the segment due to reduced sales in the
distribution divisions as discussed above. Nor-Cote sells at higher margins as
the result of being in the ink manufacturing business. Additionally, Kington's
gross profits increased 2.6% in the quarter ending May 31, 2005 over the quarter
ending May 31, 2004, mainly due to management's change in selling standards as
well as a new distribution agreement with LG electronics which allows Kingston
to sell at a higher margin. Commercial Solutions reported a 2% decrease in
margins quarter over quarter due mainly to higher freight costs not passed on to
the customer and Nor-Cote reported a 1.4% decrease in margins due mainly to
increase in raw material costs at Nor-Cote that were not passed on to the
customer. Year to date decrease in gross profit percentage was due mainly to the
start up of Commercial Solutions in the distribution division in February 2004,
who only reported four months of activity in 2004 as compared to nine months in
2005. Commercial Solutions reports lower gross profit margins due to the nature
of its primary product, commercial television sets, and its customer base,
consisting of other distributors.

Operating Income

Operating income for the quarter ended May 31, 2005 was $179,000, compared to
$168,000 for the quarter ended May 31, 2004. For the nine months ended May 31,
2005 there was a $567,000 operating loss as compared to operating income of
$683,000 for the nine months ended May 31, 2004, a $1.250 million decrease. The
decrease in year to date operating income was due mainly to the decreased sales
of Kingston combined with an increase in general and administrative expenses of
Nor-Cote due mainly to the hiring of additional personnel, increased research
and development costs, and increased marketing efforts in Latin America and
Asia.

Wireless Infrastructure

Revenues

Revenues for the quarter ended May 31, 2005 were $17.949 million compared to
$5.965 million for the quarter ended May 31, 2004, an increase of $11.984
million. Year to date revenues for the nine months ended May 31, 2005 were
$42.484 million compared to $10.462 million for the nine months ended May 31,
2004, an increase of $32.022 million. The increase in revenues is due mainly to
the acquisition of JH Drew on April 30, 2004. JH Drew reported revenues of
$4.278 million for the one month ended May 31, 2004 and $12.212 million for the
quarter ended May 31, 2005, an increase of $7.934 million. JH Drew saw an
increase in revenues of approximately 16% for actual third quarter 2005 over
actual third quarter 2004, which included two months of activity prior to
ownership by the Company. The increased revenues were due mainly to milder
spring weather conditions in 2005 as compared to 2004. In addition to the
increase in revenues from JH Drew, the Company's PDH and Cornerstone
Construction subsidiaries reported an approximate $2.326 million increase in
revenues, or 252%, for comparative quarters ending May 31, 2005 and 2004. The
companies' increases were due to an increase in new customers and additional
work from existing customers due to the wireless carriers' investment in the
expansion of their networks. The Company reported combined quarterly revenues
for ITC and Magtech, which were acquired on May 1, 2004 and November 1, 2004
consecutively, of $2.295 million for the quarter ended May 31, 2005 as compared
to revenues of $252,000 for the quarter ended May 31, 2004, which included one
month

                                        27
<PAGE>

of revenues for ITC. Revenues in these subsidiaries as compared to
pre-acquisition revenues show an increase of approximately 72% for Magtech and
300% for ITC. The increases were due mainly to the increase in demand for our
services due to wireless carriers' build-outs and station engineering upgrades.

The $32.022 million increase in year to date revenues was due mainly to the
acquisition of JH Drew on May 1, 2004. JH Drew reported $31.629 million for the
nine months ended May 31, 2005 as compared to $4.278 million for the one month
ended May 31, 2004, a $27.351 million increase. JH Drew saw a decrease of
approximately 2% for the actual nine months ended May 31, 2005 over actual nine
months ended May 31, 2004, which includes eight months of activity prior to
ownership by the Company. The remainder of the $4.671 million increase in year
to date revenues was due mainly to an increase in third quarter revenues of
approximately $4.05 million in all the remaining subsidiaries who service and
construct the wireless carriers' networks including PDH, Cornerstone
Construction, Magtech, and ITC. In addition to increased activity in the
build-out and upgrades of the wireless carriers, the Company's acquisition of
ITC in May 2004, Magtech in November 2004, and EI Solution on May 31, 2005,
further increased the Company's ability to offer turnkey services to wireless
carriers, thus creating a competitive advantage over companies who do not offer
these services.

This growth has created the demand for increased investment in working capital.
This investment in working capital has required additional debt financing.

Gross Profits

Gross profit for the quarter ended May 31, 2005 was $2.924 million representing
16.3% of revenues, compared to $1.316 million representing 22% of revenues for
the quarter ended May 31, 2004. Year to date gross profits for the nine months
ended May 31, 2005 were $6.363 million or 15.0% of revenues compared to $2.207
million or 21% of revenues for the nine months ended May 31, 2004. The increase
in gross profits is due mainly to the acquisition of JH Drew on April 30, 2004.
JH Drew reported gross profits of $814,000 for the one month ended May 31, 2004
and $1.240 million for the quarter ended May 31, 2005. Additionally combined
gross profits of the other subsidiaries increased approximately $1.111 million
for the quarter ended May 31, 2005 as compared to the quarter ended May 31, 2004
due mainly to an increase in revenues of approximately $4.050 million in the
companies who service and construct the wireless carriers' networks including
PDH, Cornerstone Construction, Magtech, and ITC. The $4.156 million increase in
year to date gross profits was due mainly to the acquisition of JH Drew on May
1, 2004, which reported gross profits of $2.989 million for the nine months
ended May 31, 2005 as compared to one month gross profit of $814,000 year to
date May 31, 2004. Additionally combined gross profits of the other subsidiaries
increased approximately $2.016 million for the nine months ended May 31, 2005 as
compared to the nine months ended May 31, 2004 due mainly to the $4.671 million
increase in revenues generated by the subsidiaries. The decrease in gross profit
as a percentage of revenues was due mainly to the lower profit margins JH Drew
generates due to being in the highway construction industry as compared to
certain other subsidiaries in the segment which operate in the service industry.

Operating Income

Operating income for the quarter ended May 31, 2005 was $1.014 million compared
to $510,000 for the quarter ended May 31, 2004, an increase of $504,000.
Operating income for the nine months ended May 31, 2005 was $1.622 million as
compared to $555,000 for the nine months ended May 31, 2004, an increase of
$1.067 million. The increase in quarterly and year to date operating income was
due mainly to the increased revenues reported by the Company's subsidiaries that
service and construct the wireless carriers' networks including PDH, Cornerstone
Construction, Magtech, and ITC, which reported increases in operating income of
approximately $695,000 quarter over quarter and approximately $1.146 million
year over year. JH Drew, who reported one month activity for the quarter ended
May 31, 2004 reported a $144,000 decrease in operating income for the three
months ended May 31, 2005 as compared to the one month ended May 31, 2004 due
mainly to the negative effects weather had on profits in March and April due to
the seasonality of the business in the Midwest. Proforma comparison of operating
profit for the third quarter 2004, which included 2 months activity prior to
ownership by the Company, as compared to third quarter 2005 shows a 5% increase
in operating income. Additionally JH Drew reported operating income year to date
of $575,000 as compared to one month ended May 31, 2005 of $571,000. Due to the
seasonality of the construction business in the Midwest May - August are the
profit generating months. Proforma comparison of the nine months ended May 31,
2005 as compared to the nine months ended May 31, 2004, which included eight
months prior to the acquisition by the Company, show an increase in operating
profits of approximately $760,000 with JH Drew reporting a 9 month loss in 2004
of $178,000.

                                        28
<PAGE>

Business Solutions

Revenues

Revenues for the quarter ended May 31, 2005 were $8.29 million compared to
$4.988 million for the quarter ended May 31, 2004, an increase of $3.302
million. Year to date revenues for the nine months ended May 31, 2005 were
$18.588 million compared to $13.108 million for the nine months ended May 31,
2004 or a $5.480 million increase. PSM was acquired by the Company on October 1,
2003 and only reported eight months of activity for nine months ended May 31,
2004. Additionally, the Company acquired CSM on April 5, 2005 which reported two
months revenues of $2.572 million for the quarter and year to date May 31, 2005.
PSM reported an increase in revenues of approximately $722,000 or 14.5% for the
quarter ended May 31, 2005 over the quarter ended May 31, 2004 and an increase
of approximately $1.657 million or 11% for the nine months ended May 31, 2005 as
compared to nine months ended May 31, 2004, which for comparative purposes
includes one month of pre-acquisition revenues. The increase in PSM quarterly
and year to date revenues was due mainly to additional clients acquired in the
PEO business. In April 2005 PSM executed a large contract with a 400 employee
group.

Though PSM and CSM's primary focus involves fee revenue associated with the
administration of payroll and employee benefits, the companies continue to
expand other services including human resource outsourcing, employment training
and testing. The business variables that the PSM and CSM work to overcome
include the volatile insurance industry, government regulations on employment,
and the risk of partially self funded insurance reserves.

Gross Profit

Gross profit for the quarter ended May 31, 2005 was $1.892 million representing
22.8% of sales, compared to $939,000 representing 19% of sales for the quarter
ended May 31, 2004. Year to date gross profits for the nine months ended May 31,
2005 were $4.206 million or 22.6% compared to $2.522 million or 19% for the nine
months ended May 31, 2004. The increase in gross profits for the quarter ended
May 31, 2005 as compared to the quarter ended May 31, 2004 was due mainly to the
acquisition of CSM on April 5, 2005, with reported gross profits of $571,000 or
22.2% of sales for the two months ended May 31, 2005. In addition, gross profits
increased $350,000 due to a decrease in PSM's health insurance reserve related
to sustained decreases in claims activity. The $1.684 million increase in gross
profits, year to date, is due to the acquisition of CSM, reporting $571,000
gross profits. Additionally PSM, acquired on October 1, 2004, only reported
eight months of activity in the previous year.

Operating Income

Operating income for the quarter ended May 31, 2005 was $677,000, compared to
$457,000 for the quarter ended May 31, 2004, an increase of $220,000. Operating
income for the nine months ended May 31, 2005 was $1.543 million, as compared to
$1.114 million for the nine months ended May 31, 2004. The increase in operating
profits was due mainly to the increase in gross profits related to PSM's health
insurance reserves as discussed previously. Additionally CSM, which reported two
months of activity for the quarter, reported operating profits of $108,000. The
increase in profits from the health insurance reserve were offset by additional
costs incurred by PSM including the SUTA and workers compensation increases
discussed above plus the hiring of additional sales and other HR professionals
in order to increase sales to new geographic markets and expand HR services
offered to clients.

Holding Company

The Company's Holding Company does not have any income producing operating
assets. As such, the operating loss is equal to operating expenses. Operating
expenses consist primarily of employee compensation and benefits, legal,
accounting and consulting fees. Operating expenses for the quarter ended May 31,
2005 were $525,000, compared to $352,000 for the quarter ended May 31, 2004, an
increase of $173,000 or 49%. Operating expenses for the nine months ended May
31, 2005 were $1.383 million, compared to $767,000 for the quarter ended May 31,
2004, an increase of $616,000 or 80%. This increase was due mainly to an
increase in (a) accounting

                                        29
<PAGE>
and legal fees primarily attributable to Company growth through acquisitions,
and (b) internal salaries due to hiring of additional personnel mainly in
administration, accounting and information technology departments. The Company
expects to double its budget in fiscal year 2006 for personnel and outside
accounting and consulting due primarily to Sarbanes Oxley legislation.

Interest expense for the quarter and nine months ended May 31, 2005 was $383,000
and $972,000 compared to $141,000 and $330,000 for the quarter and nine months
ended May 31, 2004. The Company financed a large portion of the acquisitions of
JH Drew on May 1, 2004 and CSM on April 5, 2005. Additionally the increasing
prime rate during fiscal year 2005 contributed to the increase in expense as
well as the Company's need for additional personnel and training in order to
meet the demand for services in the wireless telecommunication infrastructure
build-out and system upgrades.

Federal income tax expense was $203,0000 for the nine months period which was
offset through the release of the Company's valuation allowance. As of May 31,
2005, the Company reported no additional release of the valuation allowance for
future periods. Management deems the likelihood of incurring taxable income from
June 1, 2005 through August 31, 2005, in excess of the deferred tax benefit of
$1,014,000, to be more likely than not. Management believes a significant
portion of the remaining net operating loss carryforwards may be absorbed in
2005. As a result of the release of our valuation allowance to offset 100% of
current federal taxes through the third quarter of 2005 and recognition of the
deferred tax benefit, our effective tax rate is substantially lower than
statutory rates.

LIQUIDITY AND CAPITAL RESOURCES

As of May 31, 2005 the Company had working capital of approximately $4.039
million, composed primarily of cash and equivalents, net accounts receivable,
available for sale investments, inventories, and costs & estimated earnings in
excess of billings on uncompleted contracts.

The Company's principal sources of liquidity included $6.043 million in cash,
cash equivalents and available for sale investments. At May 31, 2005 the Company
had approximately $464,000 available on its lines of credits. Subsequent to May
31, 2005, the Company procured an additional $5 million on its line of credit
with the bank, increasing the line of credit from $14 million to $19 million. At
July 13, 2005, the Company had approximately $2.535 million available on its'
lines of credit.

The various debt agreements contain restrictive covenants which limit, among
other things, certain mergers and acquisitions, redemptions of common stock, and
payment of dividends. In addition, the Company must meet certain financial
ratios (as defined) and is subject to annual capital expenditure limitations.

Cash provided by financing activities of $5.802 million mainly consisted of
increased borrowings on the Company's line of credit and additional term loan
borrowings to finance in part operating uses of cash of $2.742 million, capital
expenditures of $1.164 million and acquired businesses of $1.371 million net of
cash received.

The Company reviews, as opportunities arise, the potential acquisition and/or
operation of other businesses. Any such action will be based upon the Company's
analysis of the specific business and the respective industry, as well as the
Company's ability to utilize a capital structure that is beneficial to the
Company's stockholders. The Company intends to continue to aggressively pursue
acquisitions and other business opportunities.

                                       30
<PAGE>

The Company's short and long term capital requirements will depend upon many
factors, including whether it acquires and/or operates other businesses and the
operating success of its current operating segments. Many of these and other
factors are beyond the Company's control.

Over the next 12 months, the Company plans to hire additional employees in all
of its segments; however, the hiring of these employees will be approximately
correlated with an increase in operating revenue. The Company expects to fund
current operations and other cash expenditures through the use of available
cash, cash from operations, funds available under its credit facilities and
possible new debt or equity sources. The Company believes that there will be
sufficient funds from current cash, operations and available financing to fund
operations and cash expenditures for the foreseeable future. We are considering
payment of a portion of our debt during 2005 by raising capital through a common
stock offering.

OFF BALANCE SHEET ARRANGEMENTS

The Company does not have any material off balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors.

During September 2004, the Company's Nor-Cote subsidiary entered into an
operating lease agreement to rent a building with a related party. The lease
agreement includes a five-year term with the option to extend the lease for a
one-year period. The base rent for the first twelve months of the lease is
$7,000 per month. Following the first twelve month period the base rent will be
adjusted by the greater of 3% of the base rent or the increase in the Consumer
Price Index. In addition Nor-Cote shall pay certain expenses including taxes,
assessments, maintenance and repairs to the premises.

During May 2004, the Company's JH Drew subsidiary entered into an operating
lease agreement to rent three buildings located in Indiana, Tennessee and
Missouri with the same related party. The lease agreement includes a five-year
term with the option to extend the lease for a one-year period. The base rent
for the first twelve months of the lease is $15,000 per month. Following the
first twelve month period the base rent will be adjusted by the greater of 3% of
the base rent or the increase in the Consumer Price Index. In addition JH Drew
shall pay certain expenses including taxes, assessments, maintenance and repairs
to the premises.

During March 2004, the Company entered into an operating lease agreement to rent
a building with the same related party. All of the Company's subsidiaries,
excluding JH Drew, Nor-Cote and PSM moved into the new facility between the
months of March 2004 through May 2004. The lease agreement includes a five- year
term with one option to extend the lease term for a one-year period. The
agreement provides for base rent of $20,000 plus 1% of the gross revenues of the
Company's Commercial Solution's subsidiary. Following the first twelve-month
period, 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. The related party is considered a variable interest
entity by the Company. FIN 46, Consolidation of Variable Interest Entities,
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. For variable
interest entities other than special-purpose entities, the provisions of FIN 46,
as amended, are applicable no later than March 31, 2004. Consolidation is not
required since the variable interest entity has sufficient equity at risk to
finance its activities without additional subordinated financial support from
other parties.

The Company does not expect these Interpretations to have an effect on these
arrangements and the Company's consolidated financial statements. The Company
will continue to evaluate what effect, if any, the recognition and measurement
provisions will have on its consolidated financial statements and related
disclosures in future periods.

FORWARD-LOOKING STATEMENTS

This report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect," "estimate," "anticipate," "predict," "believe" and similar expressions
and variations thereof are intended to identify

                                       31
<PAGE>

forward-looking statements. These statements appear in a number of places in
this report and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things, trends affecting the Company's financial condition or
results of operations. The readers of this report are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties that could cause actual results to differ materially.
Factors that might cause or contribute to such differences, include, but are not
limited to, the risks and uncertainties that are discussed under the heading
"Management's Discussion and Analysis or Plan of Operations". The Company does
not ordinarily make projections of its future operating results and undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Readers
should carefully review the risk factors referred to above and the other
documents filed by the Company with the Securities and Exchange Commission.

Item 3.  Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports we file 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 disclosure. The
Company's management, including the Chief Executive Officer and Chief Financial
Officer, does not expect the 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.

The Company carries out ongoing procedures under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, to evaluate the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of the period covered by this report. There have been no
significant changes in the Company's internal controls over financial reporting
or in other factors that are reasonably likely to significantly affect internal
controls over financial reporting.

PART II--OTHER INFORMATION.

Item 1. Legal Proceedings.

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

Item 2. Changes in Securities.

The following table sets forth, for the period covered by this Form 10QSB, all
sales of unregistered securities by the Company.

      (c) Sales of Unregistered Securities by Company

<TABLE>
<CAPTION>
     Date              Title of            Amount of              Recipient of
   Of Sale            Securities        Sold Securities        Issued Securities
-------------      -----------------   -----------------       -----------------
<S>                <C>                 <C>                 <C>
April 5, 2005      Common Stock          1,500,000         CSM, Inc. Shareholders (1)
April 14, 2005     Common Stock             20,000         Charles McHargue (2)
April 15, 2005     Common Stock            200,000         Michael Sloan (3)
May 1, 2005        Common Stock             50,000         Walter Coggins (4)
</TABLE>

                                       32
<PAGE>

(1) Per the Terms of an Agreement and Plan of Merger by and between the Company,
CSM, CSM Merger Corporation, Carter M. Fortune, Marc Fortune, Greg Daily,
Harbinger Mezzanine Partners, L.P., Doug Altenbern, Jeff Gould, Bob Boston, and
Don Denbo, Drewry, Simmons Vornehm, LLP, Escrow Agent was issued 1,500,000
shares of the Company's Common Stock to hold in escrow for the Shareholders of
CSM, Inc. The 1,500,000 shares of common stock may vest per the terms of the
Agreement based upon the achievement of certain financial performance measures
during the period April 1, 2005 through March 31, 2008.

(2) On April 14, 2005 Charles McHargue was issued 20,000 shares of the Company's
Common Stock as consideration for his employment with Nor-Cote.

(3) On or about April 15, 2005, pursuant to the terms of the Asset Purchase
Agreement wherein the assets of Ink Source were acquired, Mr. Sloan was issued
200,000 shares of the Company's Common Stock.

(4) On or about May 1, 2005, Walter Coggins was issued 50,000 shares of the
Company's Common Stock as part of his employment compensation.

Item 3. Defaults Upon Senior Securities.

      None

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

      None

Item 5. Other Information.

      None

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits

      2.1   Agreement and Plan of Merger filed with the State of Indiana and
            effective May 31, 2005, by and between the Company and FDI Indiana,
            Inc. (1)

      3.1   Restated Articles of Incorporation for Fortune Diversified
            Industries, Inc. filed with the State of Indiana and effective June
            1, 2005. (2)

      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

(1) The Agreement and Plan of Merger was filed as an exhibit to the Company's
    Definitive Information Statement on Schedule 14C, filed May 10, 2005 and is
    incorporated by reference.

(2) The Restated Articles of Incorporation we filed as an exhibit to the
    Company's Definitive Information Statement on Schedule 14C, filed May 10,
    2005 and is incorporated by reference.

(b) Reports on Form 8-K.

      The following reports were filed by the Company during the third quarter
of fiscal year 2005:

            Current Report on Form 8-K, dated April 11, 2005 furnishing Items
            2.01 and 9.01 related to the acquisition of CSM by the Company.

            Current Report on Form 8-K, dated April 14, 2005 furnishing Item
            8.01 related to the Company's application for listing on the AMEX
            exchange and related to an authorized stock buy-back by the Company.

            Current Report on Form 8-K, dated May 23, 2005 furnishing Item 5.02
            related to the election of Andy Rayl as a Director of the Company.

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<PAGE>

                                   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 Diversified Industries, Inc.
                                                  (Registrant)

Date: July 13, 2005                     By: /s/ John F. Fisbeck
                                            --------------------------------
                                            John F. Fisbeck,
                                            Chief Executive Officer

Date: July 13, 2005                     By: /s/ Amy Gallo
                                            --------------------------------
                                            Amy Gallo,
                                            Chief Financial Officer

                                       34