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 November 30, 2004

[ ] 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)

          Delaware                                        74-2504501
-------------------------------               ---------------------------------
(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 January 14, 2005, there were
103,270,944 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 November 30, 2004

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

   ITEM 1.  Financial Statements

                Consolidated Balance Sheets as of November 30, 2004
                (unaudited) and August 31, 2004                                             1

                Consolidated Statements of Operations for the Three Month
                Periods Ended November 30, 2004 and 2003 (unaudited)                        2

                Consolidated Statements of Stockholders' Equity for the
                Three Month Periods Ended November 30, 2004 and 2003 (unaudited)            3

                Consolidated Statements of Cash Flows for the Three Month
                Periods Ended November 30, 2004 and 2003 (unaudited)                        4

                Notes to Consolidated Financial Statements                                  5

   ITEM 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                                            19

   ITEM 3.  Controls and Procedures                                                        26

PART II.    Other Information

   ITEM 1.  Legal Proceedings                                                              27

   ITEM 2.  Changes in Securities and Use of Proceeds                                      27

   ITEM 3.  Defaults upon Senior Securities                                                27

   ITEM 4.  Submission of Matters to a Vote of Security Holders                            27

   ITEM 5.  Other Information                                                              27

   ITEM 6.  Exhibits and Reports on Form 8-K                                               28

            Signatures                                                                     29
</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
                                                              November 30,    August 31,
                                                                  2004           2004
<S>                                                             <C>           <C>
CURRENT ASSETS
    Cash and equivalents                                        $  4,483      $  3,458
    Restricted savings account                                       210           210
    Certificates of deposit                                           --            69
    Available for sale investments                                 2,058         1,959
    Accounts receivable, net                                      17,234        15,894
    Due from related party                                           387            --
    Costs and estimated earnings in excess of billings
       on uncompleted contracts                                    1,989         1,879
    Inventory, net                                                 9,050         9,746
    Deferred tax asset                                             1,014         1,014
    Other current assets                                             656           815
                                                                --------      --------
       Total Current Assets                                       37,081        35,044
                                                                --------      --------

OTHER ASSETS
    Property, plant & equipment, net                               4,003         4,038
    Loan origination fees, net                                        30            35
    Goodwill                                                      10,816        10,192
    Other intangible assets, net                                   2,464         2,111
    Other long term assets                                           147           149
                                                                --------      --------
       Total Other Assets                                         17,460        16,525
                                                                --------      --------

       TOTAL ASSETS                                             $ 54,541      $ 51,569
                                                                ========      ========


                        LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Lines of credit                                             $  9,492      $  7,948
    Accounts payable                                               5,092         4,670
    Due to related party                                              84            29
    Current maturities of long-term debt                           2,008         1,999
    Current maturities of long-term debt - related party              45            47
    Health and workers' compensation reserves                      3,756         3,750
    Accrued expenses                                               5,435         5,242
    Income tax liability                                             114           172
    Billings in excess of costs and estimated earnings on
       uncompleted contracts                                       1,665         1,912
    Other current liabilities                                         95           101
                                                                --------      --------
       Total Current Liabilities                                  27,786        25,870
                                                                --------      --------

LONG-TERM LIABILITIES
    Line of credit - related party                              $  6,268      $  6,268
    Long-term debt - related party, less current maturities           95           106
    Long-term debt, less current maturities                        5,765         6,254
    Other long-term liabilities                                      253           253
                                                                --------      --------
       Total Long-term Liabilities                                12,381        12,881
                                                                --------      --------

STOCKHOLDERS' EQUITY
    Common stock                                                   1,017         1,008
    Additional paid-in capital and warrants outstanding           16,583        15,893
    Accumulated deficit                                           (3,386)       (4,089)
    Accumulated other comprehensive income (loss)                    160             6
                                                                --------      --------
       Total Stockholders' Equity                                 14,374        12,818
                                                                --------      --------

       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY               $ 54,541      $ 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>
                                                              Three Months Ended
                                                          November 30,  November 30,
                                                              2004          2003

<S>                                                         <C>           <C>
NET REVENUES BUSINESS SOLUTION SEGMENT (gross
       billings of $34,588,000 less worksite
       employee payroll cost of $29,924,000)                $  4,664      $  2,826
NET REVENUE WIRELESS INFRASTRUCTURE SERVICES                   2,702         1,862
NET REVENUE WIRELESS INFRASTRUCTURE PRODUCTS                  11,998            --
NET REVENUE MANUFACTURING AND DISTRIBUTION SEGMENT             5,684         5,518
                                                            --------      --------

TOTAL NET REVENUES                                            25,048        10,206

COST OF REVENUES BUSINESS SOLUTIONS SEGMENT                    3,660         2,269
COST OF REVENUES WIRELESS INFRASTRUCTURE SERVICES              1,800         1,471
COST OF REVENUES WIRELESS INFRASTRUCTURE PRODUCTS             10,604            --
COST OF REVENUES MANUFACTURING AND DISTRIBUTION SEGMENT        4,094         3,711
                                                            --------      --------

TOTAL COST OF REVENUES                                        20,158         7,451

GROSS PROFIT                                                   4,890         2,755

OPERATING EXPENSES
    Selling, general and administrative expenses               3,553         2,202
    Depreciation and amortization                                377           215
                                                            --------      --------
       Total Operating Expenses                                3,930         2,417
                                                            --------      --------

OPERATING INCOME                                                 960           338

OTHER INCOME (EXPENSE)
    Interest expense                                            (266)          (95)
    Gain (loss) on sales of investments in marketable
     securities, net                                             (29)           29
    Exchange rate gain                                            43            --
    Other income (expense)                                        59           (38)
                                                            --------      --------
       Total Other Income (Expense)                             (193)         (104)
                                                            --------      --------

NET INCOME BEFORE PROVISION
  FOR INCOME TAXES                                               767           234

PROVISION FOR INCOME TAXES                                        64            --
                                                            --------      --------

NET INCOME                                                  $    703      $    234
                                                            ========      ========


BASIC INCOME PER SHARE                                      $   0.01      $   0.00
                                                            ========      ========


DILUTED INCOME PER SHARE                                    $   0.01      $   0.00
                                                            ========      ========
</TABLE>
See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

                                        2
<PAGE>


              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                               Additional              Accumulated
                                               Paid-in Capital  Cost of    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       $ 2,536
                                       =======     =======        ====       =======     =======        =======       =======
Issuance of 884,500 shares of common
  stock for acquisitions                     9         690          --            --          --            699            --
Net income                                  --          --          --           703          --            703           703
Translation adjustments, net of tax         --          --          --            --          65             65            65
Unrealized investments gains (losses),
    net of tax                              --          --          --            --          89             89            89
Reclassification adjustment for
    realized gains (losses) included
    in net income, net of tax               --          --          --            --          --             --            --
                                       -------     -------        ----       -------     -------        -------       -------

BALANCE AT NOVEMBER 30, 2004           $ 1,017     $16,583        $ --       $(3,386)    $   160        $14,374       $ 3,393
                                       =======     =======        ====       =======     =======        =======       =======


</TABLE>
See Accompanying Notes to Unaudited Interim Consolidated Financial Statements







                                        3
<PAGE>


              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                               Three Months Ended
                                                                            November 30,  November 30,
                                                                               2004          2003
<S>                                                                           <C>          <C>
OPERATING ACTIVITIES
    Net Income                                                                $   703      $   234
    Adjustments to reconcile net income to net cash
     provided (used) by operating activities:
      Depreciation and amortization                                               377          215
      (Gain) loss on sale of investments                                           29          (29)
      (Increase) decrease in certain operating assets:
         Accounts receivable                                                   (1,357)        (477)
         Costs and estimated earnings in excess of billings on
           uncompleted contracts                                                 (110)          --
         Inventory                                                                828         (273)
         Other current assets                                                     160          127
         Other long term assets                                                     2           (2)
      Increase (decrease) in certain operating liabilities:
         Accounts payable                                                         278          162
         Accrued expenses and other current liabilities                           (37)        (306)
         Billings in excess of costs and estimated earnings on
           uncompleted contracts                                                 (247)          --
         Health and workers' compensation reserves                                  6          116
         Due to related party                                                      55           --
                                                                              -------      -------
           Net Cash Provided (Used) by Operating Activities                       687         (233)
                                                                              -------      -------

INVESTING ACTIVITIES
    Capital expenditures                                                         (183)        (264)
    Sales (purchases) of available for sale securities                            (39)         344
    Acquisition of productive assets and businesses, net of cash received        (465)       3,302
                                                                              -------      -------
           Net Cash Provided (Used) by Investing Activities                      (687)       3,382
                                                                              -------      -------

FINANCING ACTIVITIES
    Payments to related party                                                      --         (230)
    Net borrowings under line of credit                                         1,544          813
    Borrowings on long-term debt                                                   21          265
    Payments on long-term debt                                                   (674)        (200)
                                                                              -------      -------
           Net Cash Provided by Financing Activities                              891          648
                                                                              -------      -------

           Effect of exchange rate changes on cash                                 65          136


NET INCREASE IN CASH AND EQUIVALENTS                                              956        3,933

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

    End of Period                                                             $ 4,483      $ 4,818
                                                                              =======      =======


SUPPLEMENTAL DISCLOSURES
    Interest paid                                                                (205)         (95)


      Acquisitions (see Note 2)
         Cash and cash equivalents                                                 --        4,496
         Restricted savings account                                                --          246
         Accounts receivable                                                      370          659
         Inventory                                                                132           --
         Prepaid expenses and other current assets                                  1          163
         Vehicles, equipment and leasehold improvements                            63           20
         Goodwill and other intangible assets                                   1,068        4,679
         Accounts payable                                                        (144)        (119)
         Accrued expenses and other current liabilities                          (166)      (1,943)
         Health and workers' compensation reserves                                 --       (3,271)
         Notes Payable                                                           (160)          --
                                                                              -------      -------

                                                                                1,164        4,930
                                                                              -------      -------

         Common stock consideration                                              (699)      (3,930)
                                                                              -------      -------
         Cash paid                                                            $   465      $ 1,000
                                                                              =======      =======
</TABLE>
See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.

                                        4
<PAGE>

              FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared by Fortune Diversified Industries, Inc. (the
Company) without audit. These unaudited financial statements contain, in the
opinion of management, all adjustments (consisting of normal accruals and other
recurring adjustments) necessary for a fair presentation of the consolidated
financial position, results of operations, and cash flows for the periods
presented in conformity with accounting principles generally accepted in the
United States. The operating results for the three-month period ended November
30, 2004 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"); Nor-Cote International, Inc. (Nor-Cote); Kingston Sales
Corporation (Kingston); Commercial Solutions, Inc. (Commercial Solutions);
James H. Drew Corp. (JH Drew);  PDH, Inc. (PDH); Cornerstone Wireless
Services, Inc. (Cornerstone Wireless);  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 (Loss): Comprehensive income (loss) refers to the change in
an entity's equity during a period resulting from all transactions and events
other than capital contributed by and distributions to the entities' owners. For
the Company, comprehensive income (loss) is equal to net income plus the change
in unrealized gains or losses on investments and the change in foreign currency
translation adjustments. The Company has elected to report comprehensive income
(loss) 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.

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


                                        5
<PAGE>

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 Wireless, 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, a licensed Professional Employer
Organization (PEO), bills clients under its 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 the PSM 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 owes the government and its employment insurance vendors are based on the
experience levels and activity of PSM with no consideration to client detail.
There is no direct relationship between what PSM pays versus what is billed to a
client. PSM bills the client its 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 cost of those items and yield a profit to PSM. 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 owes 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 are invoiced along with each periodic payroll
delivered to the client.

PSM reports revenues in accordance with Emerging Issues Task Force ("EITF") No.
99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. PSM
reports 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 reports revenues on a gross basis for such fees because PSM is the
primary obligor and deemed to be the principal in these transactions under EITF
No. 99-19. However, PSM reports revenues on a net basis for the amount billed to
clients for worksite employee salaries and wages. The Company as a result of
recommendations by the Securities and Exchange Commission staff to public
companies in the PEO industry subject to reporting requirements under section 13
or 15(d) of the Securities Exchange Act of 1934, adopted this accounting policy
of reporting revenues net as an agent. 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 accounts for their revenues using the accrual method of accounting. Under
the accrual method of accounting, PSM recognizes their revenues in the period in
which the worksite employee performs work. PSM accrues revenues for service
fees, health and welfare benefit plan fees, workers' compensation and
unemployment insurance fees relating to work performed by worksite employees but

                                        6
<PAGE>

unpaid at the end of each period. PSM accrues 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.

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 deposit, 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 $281,000 at
November 30, 2004.

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

                                        7
<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: The Company has elected to account for all stock based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and to adopt the
disclosure-only provisions as required under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), and
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS No. 148). The Company accounts
for stock awards to nonemployees in accordance with the provisions of FAS 123
and FAS 148, and Emerging Issues Task Force Consensus No. 96-18 "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" (EITF 96-18). Under FAS 123, FAS
148, and EITF 96-18, stock awards issued to nonemployees are accounted for at
their deemed fair value based on independent valuations or by using an
option-pricing model, as appropriate.

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

                                        8
<PAGE>

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.
Research and Development Costs:  Research and development costs are expensed
as incurred and totaled $120,000 at November 30, 2004.  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
income when incurred. The Company has purchased insurance which limits its
annual exposure for individual claims to $30,000 and which limits its aggregate
annual exposure to approximately $290,000.

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 $11,153,000.
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
the minimum goodwill, customer lists, customer deposits, proprietary property
and products, prepaid expenses, software, furniture, equipment, machinery and
other intellectual property, to its Nor-Cote subsidiary. Ink Source will move
its operations from Wisconsin to Nor-Cote's facilities in Crawfordsville, IN.
Nor-Cote accepted and assumed $239,747 of specifically identified accounts
payable and bank debt. In addition to the assumed liabilities, the consideration
given for the acquired assets was $220,000, which includes 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 within the Ink Source division, as
defined in the agreement. The purchase price includes $360,000 of contingent
stock consideration. This amount consists of 400,000 shares valued at the
closing price of the Company's stock on the date of purchase at $.90 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.

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, 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, customer lists,
customer agreements, trade secrets, intellectual property, sales proposals and
like documents and contracts. The Company accepted and assumed certain specific
accounts payable and all of Sellers' rights and executory obligations under the
Assumed Contracts to be performed after the Closing Date (excluding any
obligations or liabilities of 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 shall vest immediately in 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

                                        9
<PAGE>

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.

Ink-Source:

     Accounts receivable, net                            $       66
     Inventory, net                                             132
     Property and equipment                                      57
     Goodwill                                                   347
     Intangible assets                                          342
                                                         ----------
                                                                944
                                                         ----------

     Accounts payable                                            80
     Notes Payable                                              160
     Other accrued liabilities                                  124
                                                         ----------
                                                                364
                                                         ----------

                                                         $      580
                                                         ==========


Cash consideration                                       $      220

Fair value of common stock consideration                        360
                                                         ----------

                                                         $      580
                                                         ==========

Magtech:

     Accounts receivable, net                            $      304
     Other current assets                                       201
     Property and equipment                                       6
     Goodwill                                                   277
     Intangible assets                                          102
                                                         ----------
                                                                890
                                                         ----------

     Accounts payable                                            64
     Other accrued liabilities                                   42
                                                         ----------
                                                                106
                                                         ----------

                                                         $     784
                                                         =========


Cash consideration                                       $     445

Fair value of common stock consideration                       339
                                                         ---------

                                                         $     784
                                                         =========

The following unaudited pro forma data summarize the results of operations for
the periods indicated as if the Ink Source, Magtech, 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

                                       10

<PAGE>

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.



                                            Three months      Three months
                                                Ended             Ended
                                             November 30,      November 30,
                                                2004              2003
                                            -------------     -------------

Net revenue                                 $      25,155     $      28,552
Cost of revenues                                   20,355            23,575
                                            -------------     -------------

Gross profit                                        4,800             4,977
Operating expenses                                  3,893             3,729
                                            -------------     -------------

Operating income                                      907             1,248
Other income (expenses)                              (164)             (265)
                                            -------------     -------------

Net Income                                            743               983
Dividends                                              --                --
                                            -------------     -------------

Net Income Available for Common
 Stockholders                               $         743     $         983
                                            =============     =============

Basic Income Per Share:                     $         .01     $         .01
                                            =============     =============

Diluted Income Per Share:                   $         .01     $         .01
                                            =============     =============

Shares Outstanding:

Basic weighted average number of common
shares outstanding                            103,270,944       103,270,444
Dilutive effect of conversion of options               --                --
                                            -------------     -------------

         Total Shares Outstanding             103,270,944       103,270,444
                                            =============     =============


NOTE 3 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE

Accounts receivable and contracts receivable include the following(amounts in
thousands):
<TABLE>
<CAPTION>
                                                               Unaudited          Audited
                                                              November 30,       August 31,
                                                                  2004              2003
                                                               ----------        ---------
<S>                                                               <C>              <C>
     Amounts currently due                                        $13,534          $12,005
     Contracts in process

         Progress billing                                           2,956            4,560
         Retainages                                                 2,051              576
                                                               ----------       ----------
                                                                   18,541           17,141

     Less allowance for doubtful accounts                          (1,172)          (1,112)
     Less allowance for sales returns                                (135)            (135)
                                                               ----------       ----------
                                                                  $17,234          $15,894
                                                               ==========       ==========
</TABLE>

                                       11
<PAGE>

NOTE 4 - Costs and Billings on Uncompleted Contracts

Information related to contracts in progress is as follows:
<TABLE>
<CAPTION>
                                                               Unaudited          Audited
                                                              November 30,       August 31,
                                                                  2004              2004
                                                               ----------        ---------
<S>                                                            <C>               <C>
Costs incurred on uncompleted contracts                        $   28,142        $  24,475
Estimated earnings recognized to date on uncompleted
    contracts                                                       6,182            5,502
                                                               ----------       ----------
                                                                   34,324           29,977

Less billings on uncompleted contracts                            (34,000)         (30,010)
                                                               ----------       ----------

               Net                                                 $  324             ($33)
                                                               ==========       ==========
</TABLE>

The net amount is included in the accompanying consolidated balance sheets under
the following captions:
<TABLE>
<CAPTION>
                                                               Unaudited          Audited
                                                              November 30,       August 31,
                                                                  2004              2004
                                                               ----------        ---------
<S>                                                            <C>               <C>
Costs and estimated earnings in excess of billings on
     uncompleted contracts                                     $    1,989        $   1,879
Billings in excess of costs and estimated earnings on
     uncompleted contracts                                          1,665            1,912
                                                               ----------       ----------

                                                               $      324             ($33)
                                                               ==========       ==========
</TABLE>

NOTE 5 - INVENTORIES

Inventories reflected on the accompanying consolidated balance sheets are
summarized as follows:
<TABLE>
<CAPTION>
                                                               Unaudited          Audited
                                                              November 30,       August 31,
                                                                  2004              2004
                                                               ----------        ---------
<S>                                                            <C>               <C>
Raw materials                                                  $      808        $     559
Work-in-process                                                        25               12
Finished goods                                                      8,467            9,425
Less inventory reserve                                               (250)            (250)
                                                               ----------       ----------

                                                               $    9,050       $    9,746
                                                               ==========       ==========
</TABLE>

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment, including capital leases, is comprised of the following:
<TABLE>
<CAPTION>
                                                               Unaudited          Audited
                                                              November 30,       August 31,
                                                                  2004              2004
                                                               ----------        ---------
<S>                                                            <C>               <C>
Land and building                                              $    1,929        $   1,903
Machinery and equipment                                             5,313            5,181



                                                     12
Research equipment                                                    383              380
Office equipment                                                    3,024            2,943
Vehicles                                                            3,646            3,631
Leasehold improvements                                                162              151
                                                               ----------       ----------
                                                                   14,457           14,189

Less accumulated depreciation                                     (10,454)         (10,151)
                                                               ----------       ----------

                                                               $    4,003       $    4,038
                                                               ==========       ==========
</TABLE>

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the quarter ended November
30, 2004, as reclassified for the adoption of SFAS 142, are as follows (amounts
in thousands):

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

     Goodwill
     Acquired
     during quarter         -0-                  347             277          -0-             -0-         624

     Impairment
     losses                 -0-                  -0-             -0-          -0-             -0-         -0-
                        -------              -------         -------     --------          ------    --------
     Goodwill
     at November
     30, 2004           $ 3,580              $ 6,304         $   932     $    -0-          $  -0-    $ 10,816
                        =======              =======         =======     ========          ======    ========
</TABLE>

The total amount of goodwill that is deductible for tax purposes is $1,900 at
November 30, 2004.

The following table sets forth the gross carrying amount and accumulated
amortization of the Company's intangible assets (amounts in thousands):
<TABLE>
<CAPTION>
                                                AT NOVEMBER 30, 2004                          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              $ 2,068     $      285      10 YRS          $ 1,824      $     239        10 YRS

     Non-compete                             234            137       4 YRS              234            122        4 YRS

     Non-compete                             399             93       5 YRS              399             73        5 YRS

     Non-compete                             100             19       3 YRS              100             11        3 YRS

     Non-compete                             200              3      10 YRS              -0-            -0-        0 YRS

                                      ----------     ----------      ------       ----------     ----------       ------
     Total                             $   3,001      $     537       8 YRS        $   2,557      $     446        7 YRS
                                      ==========     ==========      ======       ==========     ==========       ======
</TABLE>

Intangible asset amortization expense for the quarter ended November 30, 2004
was $96,000 which includes $5,000 of amortization related to loan origination
fees.

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

                                       13
<PAGE>

         Year Ending August 31,
         ------------------------
                2005                                394
                2006                                389
                2007                                324
                2008                                324
                2009                                229
                2010 and thereafter                 804
                                               --------

                Total                          $  2,464
                                               ========


NOTE 8 - LINES OF CREDIT AND DEBT ARRANGEMENTS

Lines of Credit:

The Company has a $1.3 million line of credit available through July 15, 2005.
Interest on the line is charged at .5% less than the credit facility's Prime
Rate. Outstanding borrowings amounted to $1.3 million at November 30, 2004 and
$909,000 at August 31, 2004.

The Company has a $1.6 million line of credit available through July 15, 2005.
Interest on the line is charged at .5% less than the credit facility's Prime
Rate. Outstanding borrowings amounted to $1.431 million at November 30, 2004 and
$1.383 million at August 31, 2004.

The Company has a $3.0 million line of credit available through February 12,
2005. Interest on the line is charged at .5% less than the credit facility's
Prime Rate. Outstanding borrowings amounted to $2.815 million at November 30,
2004 and $1.621 million at August 31, 2004. Covenants under the agreement
include certain limitations and require Commercial Solutions to meet certain
financial covenants. At November 30, 2004 and August 31, 2004 the Company was
not in compliance with certain covenants, however, the bank has granted a waiver
of default remedies with respect to noncompliance as of those dates.

The Company has a $5.0 million line of credit available through April 30, 2005.
Interest on the line is charged at the credit facility's Prime Rate less .5%.
Outstanding borrowings amounted to $3.946 million at November 30, 2004 and
$4.035 August 31, 2004.

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 $6.5 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 $6.268 million at November 30, 2004 and August 31, 2004.

Total unused lines of credit amounted to approximately $1.640 million at
November 30, 2004.


Long-term debt arrangements:
----------------------------

         Long-term debt consisted of the following at November 30 (amounts in
thousands):
<TABLE>
<CAPTION>
                                                               Unaudited            Audited
                                                              November 30,         August 31,
                                                                 2004                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.                                                    $2,280              $2,400


$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 at .5% less

                                       14


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.                                        1,900               2,000

$1,950 secured term loan with monthly line reductions equal to
1/60th of the loan amount per month. 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
stockholder and a different stockholder.                         1,755               1,853

$2,050 secured term loan with monthly line reductions equal to
1/36th of the loan amount per month. 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.      1,708               1,879

Due in monthly installments of $2.539, including interest at
ranges from 4.9% to 9.03% through October 2007.
Secured by vehicles.                                                39                  23


Debt with majority stockholder:
-------------------------------

Due in monthly installments of $3.637, including interest at
4.00% through September 2008.
Secured by vehicles.                                               140                 153

Capital Leases:
---------------

Due in monthly installments of $8.916, including interest at
4.00% through February 2007. Secured by vehicles and
equipment.                                                          91                  98
                                                                ------              ------
                                                                 7,913               8,406
     Less current maturities                                    (2,053)             (2,046)
                                                                ------              ------
                                                                $5,860              $6,360
                                                                ======              ======
</TABLE>

Principal payments due on long-term debt outstanding at August 31, 2004 are
approximately as follows (amounts in thousands):


          2005                                                   2,052
          2006                                                   2,037
          2007                                                   1,675
          2008                                                   1,289
          2009                                                     860
          2010 & thereafter                                          0
                                                                ------
                                                                $7,913
                                                                ======

NOTE 9 - STOCKHOLDERS' EQUITY

The following are the details of the Company's common stock as of November 30,
2004 and August 31, 2004:

                                               Number of Shares
                                 ----------------------------------------------
                                 Authorized     Issued     Outstanding   Amount
                                 ----------     ------     -----------   ------
November 30, 2004 (Unaudited)
Common stock, $0.01 par value    150,000,000  103,270,944  103,270,944  $ 1,017
                                                                        =======
August 31, 2004 (Audited)
Common stock, $0.01 par value    150,000,000  102,386,444  102,386,444  $ 1,008
                                                                        =======

                                       15
<PAGE>

NOTE 10 - INCOME TAXES

The reconciliation for 2004 and 2003 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
                                                          November 30,        August 31,
                                                             2004                2004
                                                           --------            --------
<S>                                                            <C>                 <C>
Tax at U.S. Federal statutory rate                             34.0%               34.0%
State and local taxes, net of federal benefit                   8.0                 5.8
Other                                                           1.0                 1.4
Change in valuation allowance                                 (35.0)              (73.3)
                                                           --------            --------
                                                                8.0%              (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
                                                          November 30,        August 31,
                                                             2004                2004
                                                           --------            --------
<S>                                                        <C>                 <C>
Current:
   Federal                                                 $    140            $    690
   State                                                         33                 172
                                                           --------            --------
                                                                173                 862
                                                           --------            --------
Deferred:
   Federal                                                      129                 (55)
   State                                                         31                  (3)
                                                           --------            --------
                                                                160                 804
                                                           --------            --------
Change in valuation allowance                                  (269)             (1,257)
                                                           --------            --------
Net income tax (benefit)                                   $     64            $   (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
                                                          November 30,        August 31,
                                                             2004                2004
                                                           --------            --------
<S>                                                        <C>                 <C>
Deferred Tax Assets:
 Current:
  Allowances for doubtful accounts and inventory           $    168            $    156
  Accrued liabilities and other                                 358                 446
 Noncurrent:
  Amortization of covenants                                      50                  50
  Depreciation                                                   95                 170
  Net operating losses and other carryforwards                2,169               2,287
                                                           --------            --------
                                                              2,840               3,109
 Valuation allowance                                         (1,826)             (2,095)
                                                           --------            --------
                                                              1,014               1,014
                                                           ========            ========
Deferred tax liabilities:
 Noncurrent:
  Depreciation                                                   --                  --
                                                           --------            --------
                                                                 --                  --
                                                           --------            --------
                                                           $  1,014            $  1,014
                                                           ========            ========
</TABLE>
                                       16
<PAGE>

SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, at November 30, 2004, 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 $1,826 valuation allowance at November 30 2004 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 $269.
At November 30, 2004 the Company has federal net operating loss carryforwards of
$4,014 which expire during the years of 2020, 2021, 2022 and 2023. The state tax
operating loss carryforwards were $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 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.

NOTE 11 - PER SHARE DATA

     The following presents the computation of basic income per share and
diluted income per share:
<TABLE>
<CAPTION>
                                                           Unaudited           Unaudited
                                                          Three Months       Three Months
                                                             Ended              Ended
                                                          November 30,       November 30,
                                                              2004               2003
                                                          ------------       ------------
<S>                                                       <C>                <C>
Net Income                                                $        703       $        234
Dividends                                                           --                 --
                                                          ------------       ------------

Net Income Available for Common
     Stockholders                                         $        703       $        234
                                                          ============       ============


Basic Income Per Share:                                   $       0.01       $       0.00

Diluted Income Per Share:                                 $       0.01       $       0.00


Shares Outstanding:
     Basic weighted average number of common shares
       outstanding                                         102,643,444         89,070,000
     Dilutive effect of conversion of options                  400,000            400,000
                                                          ------------       ------------

         Total Shares Outstanding                          103,043,444         89,470,000
                                                          ============       ============
</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 and PSM 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 $98,000 for the quarter ended
November 30, 2004.

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 $45,000 for the quarter
ended November 30, 2004.

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.

                                       17
<PAGE>

Following is a summary of all related party assets and (liabilities) included in
the consolidated balance sheets at November 30, 2004 and August 31, 2004
(amounts in thousands):

                               November 30,       August 31,
                                  2004              2004

    Due from related party          387               --
    Due to shareholders             (84)             (29)
    Long-term line of credit     (6,268)          (6,268)
    Installment notes payable      (134)            (153)
                                -------          --------
    Net assets (liabilities)    $(6,099)         $(6,450)
                                =======          ========


NOTE 13 - SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                   Professional  Manufacturing
                                                      Business       and          Wireless      Holding       Segment
                                                     Solutions   Distribution  Infrastructure   Company       Totals
<S>                                                   <C>          <C>           <C>           <C>           <C>
Three Months Ended November 30, 2004
Net revenues                                          $  4,664     $  5,684      $ 14,700      $     --      $ 25,048
Cost of revenues                                         3,660        4,094        12,404            --        20,158
                                                      --------     --------      --------      --------      --------
Gross profit                                             1,004        1,590         2,296            --         4,890
Operating expenses
  Selling, general and administrative expenses             621        1,654           939           339      $  3,553
  Depreciation and amortization                             40          137           182            18           377
                                                      --------     --------      --------      --------      --------
    Total operating expense                                661        1,791         1,121           357         3,930
                                                      --------     --------      --------      --------      --------

Segment operating income (loss)                       $    343     $   (201)     $  1,175      $   (357)     $    960
                                                      ========     ========      ========      ========      ========

As of November 30, 2004
Cash                                                  $  3,011     $    930      $    234      $    308      $  4,483
Restricted savings account                                 210           --            --            --           210
Available for sale investments                           2,058           --            --            --         2,058
Accounts receivable                                        787        3,623        12,820             4        17,234
Due from related party                                      --          387            --            --           387
Costs and estimated earnings in excess of billing
  of billing on uncompleted contracts                       --           --         1,989            --         1,989
Inventory, net                                               8        3,982         5,060            --         9,050
Other current assets                                       111          145           406            (6)          656
Deferred tax asset                                         563           --           451            --         1,014
Loan origination fees, net                                  --           19            --            11            30
Property and equipment, net                                 34        2,158         1,551           260         4,003
Goodwill                                                 3,580        6,304           932            --        10,816
Other intangible assets, net                               924        1,310           230            --         2,464
Other long term assets                                      43           71            19            14           147
                                                      --------     --------      --------      --------      --------

Total Segment Assets                                  $ 11,329     $ 18,929      $ 23,692      $    591      $ 54,541
                                                      ========     ========      ========      ========      ========


Three Months Ended November 30, 2003
Net revenues                                          $  2,826     $  5,518      $  1,862      $     --      $ 10,206
Cost of revenues                                         2,269        3,711         1,471            --         7,451
                                                      --------     --------      --------      --------      --------
Gross profit                                               557        1,807           391            --         2,755
Operating expenses
  Selling, general and administrative expenses             311        1,302           392           197         2,202
  Depreciation and amortization                             33          148            31             3           215
                                                      --------     --------      --------      --------      --------
    Total operating expense                                344        1,450           423           200         2,417
                                                      --------     --------      --------      --------      --------

Segment operating income (loss)                       $    213     $    357      $    (32)     $   (200)     $    338
                                                      ========     ========      ========      ========      ========

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
Loan origination fees, net                                  --           21            --            14            35
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           73            19            14           149
                                                      --------     --------      --------      --------      --------

Total Segment Assets                                  $ 11,272     $ 16,869      $ 23,122      $    306      $ 51,569
                                                      ========     ========      ========      ========      ========
</TABLE>
                                       18
<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 Delaware
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"); Nor-Cote International, Inc.
(Nor-Cote); Kingston Sales Corporation (Kingston); Commercial Solutions,
Inc. (Commercial Solutions); James H. Drew Corp. (JH Drew);  PDH, Inc.
(PDH); Cornerstone Wireless Services, Inc. (Cornerstone Wireless);  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).

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 Wireless, Cornerstone
Construction, Magtech, TTC, StarQuest, JH Drew, and ITC) and its Professional
Business Solutions Segment (PSM).

Manufacturing and Distribution Segment
--------------------------------------
The Company's Manufacturing and Distribution Segment is conducted through its
Kingston, Commercial Solutions, and Nor-Cote subsidiaries. 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 "master distributor" for commercial distribution of
manufactured products of Thomson, Inc. (RCA products)(televisions, DVD, and
other electronic products), Panasonic (televisions, DVD, and other electronic
products), and Rubbermaid (carts, cleaning equipment, trash receptacles, and
other products). Commercial Solutions sells to distributors covering various
territories in North America.

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. Nor-Cote
entered into an exclusive patent license agreement in August 2003 with a
manufacturer in the United States to expand its product line for uses in new
applications. 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.


Wireless Infrastructure Segment
-------------------------------

The Company's Wireless Infrastructure Segment is conducted through its JH Drew,
PDH, Cornerstone Wireless, Magtech, Cornerstone Construction, ITC, 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,

                                       19
<PAGE>

site acquisition, zoning and permitting, architectural & engineering design,
construction management, co-location facilitation, environmental services, lease
capitalization, lease renegotiation, site marketing and asset management.

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. This is
achieved by knowledgeable management structure with regional offices located
throughout the US and with corporate headquarters strategically positioned in
the Midwest.

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
Professional Staff Management, Inc., Professional Staff Management, Inc. II and
Pro Staff, Inc. (collectively "PSM"). PSM is one of the Midwest's largest
Professional Employer Organizations (PEO) providing cost-effective employee
administrative solutions to companies in more than 25 states nationwide. The
three companies are engaged in providing services in employment-related matters,
such as payroll and tax processing, worker's compensation and risk management,
benefits administration, unemployment administration, legal and regulatory
employer compliance, 401k and retirement plan administration and employee
assessments.


Other Information
-----------------

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.

The completion of any additional acquisitions or other business opportunities,
as well as the expected rapid growth of the Company's existing businesses, could
result in the need for substantial additional funding. The Company expects to
fund current operations and other cash expenditures through the use

                                       20
<PAGE>

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.

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.

RESULTS OF OPERATIONS:  COMPARISON OF THE THREE MONTH PERIODS ENDED
NOVEMBER 30, 2004 AND NOVEMBER 30, 2003
---------------------------------------

Manufacturing and Distribution
------------------------------

Revenues

Revenues for the quarter ended November 30, 2004 were $5.684 million compared to
$5.518 million for the quarter ended November 30, 2003, an increase of $116,000
or 2%. The increase in revenues was partially the result of the Company starting
Commercial Solutions, which began sales activity starting in February 2004.
Commercial Solutions reported revenues during the quarter ended November 30,
2004 of $1.507 million (which includes intercompany sales to Kingston of
approximately $346,000). Additionally, Kingston reported revenues of $1.975
million and $2.771 million for the quarter ended November 30, 2004 and November
30, 2003, a 29% decrease; Nor-Cote reported revenues of $2.592 million and
$2.768 million for the quarter ended November 30, 2004 and November 30, 2003, a
6% decrease.

Kingston's decrease in sales is mainly the result of a decrease in its customer
base due mainly to the poor credit of customers and poor execution of sales to
new customers. The decrease in sales reported by Nor-Cote is mainly due to the
loss of three large customers in fiscal year 2004. The revenues generated from
sales to these customers faded out over last fiscal year as they geared up on
new product launches thus phasing out the use of Nor-Cote's ink. This loss was
partially offset by the acquisition of other clients, which management expects
to continue throughout fiscal 2005.

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 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.

Nor-Cote expects to launch new products in several new markets in the current
and subsequent fiscal year. The new products are driven by a significant
increase in research and development. The Company increased spending for
research and development by approximately $28,000 or 30% in the quarter ended
November 30, 2004 as compared to quarter ended November 30, 2003. The demand

                                       21
<PAGE>

for some of the new products, such as the membrane switch for high ticket
durable goods, are sensitive to interest rate fluctuations and consumer
spending.

Cost of Revenues

Cost of revenues for the quarter ended November 30, 2004 was $4.094 million
compared to $3.711 million for the quarter ended November 30, 2003, an increase
of $383,000 or 10%. The increase in cost of revenues was partially the result of
the Company starting Commercial Solutions, which began sales activity in
February 2004. Commercial Solutions reported cost of revenues during the quarter
ended November 30, 2004 of $1.400 million. Additionally, Kingston reported cost
of revenues of $1.624 million and $2.229 million for the quarter ended November
30, 2004 and November 30, 2003, a 27% decrease; Nor-Cote reported cost of
revenues of $1.416 million and $1.473 million for the quarter ended November 30,
2004 and November 30, 2003, a 6% decrease.

Gross Profit

Gross profit for the quarter ended November 30, 2004 was $1.590 million
representing 28% of sales, compared to $1.807 million representing 33% of sales
for the quarter ended November 30, 2003, a decrease of $217,000. The percentage
decrease was due mainly to the addition of Commercial Solutions in February 2004
who reported gross profit of 7%. Comparative to Kingston and Nor-Cote, this
gross profit percentage is substantially lower due to the nature of Commercial
Solutions primary product, commercial television sets.

Operating Income

Operating loss for the quarter ended November 30, 2004 was ($201,000), compared
to $357,000 for the quarter ended November 30, 2003, a decrease of $558,000. The
decrease in operating income was mainly due to Nor-Cote's increase in general
and administrative expenses of $192,000 over the prior year's fiscal quarter
along with Kingston's decrease in gross profits of $119,000 as discussed above
and customer bad debt allowance increase of $77,000.

The increase in general and administrative expense reported by Nor-Cote was due
mainly to the hiring of additional personnel mainly in the areas of sales,
business development, laboratory, and health and safety.


Wireless Infrastructure
-----------------------

Revenues

Revenues for the quarter ended November 30, 2004 were $14.700 million compared
to $1.862 million for the quarter ended November 30, 2003, an increase of
$12.838 million. The increase in revenues is due mainly to the acquisition of JH
Drew on April 30, 2004. JH Drew reported revenues of $11.956 million for the
quarter ended November 30, 2004. ITC, which was acquired on May 1, 2004 reported
$540,000 in revenues. Combined revenues of the other subsidiaries in the
wireless infrastructure division had a net increase in revenues of $342,000 for
the fiscal quarter ended November 30, 2004 as compared to fiscal quarter ended
November 30, 2003.

The Company's JH Drew subsidiary represents the segment's largest contributor to
revenue, reporting $11.956 million in the three month period ended November 30,
2004.

With additional capital investment by wireless carriers in the wireless
communications industry, the Company has experienced increased revenues in its
PDH, Cornerstone Wireless and Cornerstone Construction subsidiaries. In addition
to increased activity in the industry, the Company's acquisition of ITC in May
2004 and Magtech in November 2004, further increases the Company's ability to
offer turnkey services to wireless carriers, thus creating a competitive
advantage over companies who do not offer these services. Management anticipates
continued growth in the Company's Wireless Infrastructure segment. This growth
is expected to create the demand for increasing investment in working capital.
This investment in working capital may require additional debt or equity
financing.

                                       22
<PAGE>

Cost of Revenues

Cost of revenues for the quarter ended November 30, 2004 was $12.404 million,
compared to $1.471 million for the quarter ended November 30, 2003, an increase
of $10.933 million. The increase in the cost of revenues is due mainly to the
acquisition of JH Drew. JH Drew reported cost of revenues of $10.592 million for
quarter ended November 30, 2004. ITC acquired on May 1, 2004, reported cost of
revenues of $319,000 for the fiscal quarter ended November 30, 2004.

Gross Profit

Gross profit for the quarter ended November 30, 2004 was $2.296 million
representing 16% of sales, compared to $391,000 representing 21% of sales for
the quarter ended November 30, 2003. The increase in the gross profit dollars is
due mainly to the acquisition of JH Drew. JH Drew reported gross profit of
$1.364 million for the quarter ended November 30, 2004. ITC reported gross
profit of $221,000. The decrease in gross profit as a percentage of sales was
due mainly to the lower profit margins JH Drew and Cornerstone Construction
generate due to being in the construction industry as compared to some of the
other subsidiaries in the segment who are mainly in the service industry.

Operating Income

Operating income for the quarter ended November 30, 2004 was $1.175 million,
compared to $(32,000) for the quarter ended November 30, 2003, an increase of
$1.207 million. The increase in operating income is due mainly to the
acquisition of JH Drew and ITC. JH Drew reported operating income of $716,000
for three months ended November 30, 2004 and ITC reported operating income of
$142,000 for fiscal quarter ended November 30, 2004. Combined operating income
of the other subsidiaries in the wireless infrastructure division increased in
fiscal quarter ended November 30, 2004 as compared to fiscal quarter ended
November 30, 2003 due mainly to increased revenues.


Business Solutions
------------------
Revenues

Revenues for the quarter ended November 30, 2004 were $4.664 million, compared
to $2.826 million for the two months ended November 30, 2003, an increase of
$1.838 million. PSM was acquired by the Company on October 1, 2003 and only
reported two months of activity for the quarter end November 30, 2003.

PSM has increased its customer base over the last year and recently opened a new
office in Dayton, OH in the fourth quarter of fiscal year 2004. Though PSM's
primary focus involves fee revenue associated with the administration of payroll
and related services, the Company continues to expand other services including
human resource outsourcing, employment training and testing. The business
variables that the Company works to overcome include the volatile insurance
industry, government regulations on employment, and the risk of our partially
self funded insurance reserves.

Cost of Revenues

Cost of revenues for the quarter ended November 30, 2004 was $3.660 million,
compared to $2.269 million for the two months ended November 30, 2003, an
increase of $1.391 million. These costs represent payroll taxes and benefits of
our work-site employees billed to customers. Volume changes to PSM's cost of
revenues correlate directly to regulatory change to taxes and fluctuation of
costs in the insurance industry.

Gross Profit

Gross profit for the quarter ended November 30, 2004 was $1.004 million
representing 22% of sales, compared to $557,000 representing 20% of sales for
the two months ended November 30, 2003. Changes in the gross profit is directly
related to items discussed above.

Operating Income

Operating income for the year ended November 30, 2004 was $343,000, compared to
$213,000 for the two months ended November 30, 2003, an increase of

                                       23

<PAGE>

$130,000. The decrease in operating income as a percentage of revenue is due
mainly to PSM hiring additional sales and other HR professionals in order to
increase client base and service expanding client base.


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
November 30, 2004 were $357,000, compared to $200,000 for the quarter ended
November 30, 2003, an increase of $157,000. This increase was due mainly to the
Company's hiring of additional personnel in accounting and information
technology departments. Additionally, accounting and legal expenses tripled due
mainly to corporate growth through acquisitions. The Company expects to double
its budget in fiscal year 2005 for personnel and outside accounting and
consulting due primarily to Sarbanes Oxley legislation. In order to absorb these
increased costs the Company is looking to outside investors to provide financing
through various private stock offering arrangements, or a move to a national
stock exchange.

In general, across the Company's diversified businesses the negative business
risks the Company faces are not unusual or specific to the Company. Like other
companies and industries, the Company faces rising oil and health care costs.
The Company also faces the potential adverse affect of natural disasters,
terrorist attacks, unexpected negative downturns in the economy and new
competition. These factors can have an adverse impact on revenues and costs
throughout all of the Fortune companies. Management is aware of these risks and
works to manage the Company around and through these risks as a part of our
planning and operational execution within our family of companies.

The Company's strategy is to grow current companies; focus on acquisitions in
the Wireless and Business Solutions Segments, and to review other opportunities
for acquisition or expansion. These strategies have served the Company well to
date, as demonstrated by the growth in revenues and earnings.

Interest expense for the quarter ended November 30, 2004 was approximately
$266,000 due to an increase in debt mainly due to funding the acquisition of JH
Drew on May 1, 2004. Interest expense for the quarter ended November 30, 2003
was approximately $95,000.

Income taxes for the quarter ended November 30, 2004, resulted in a state income
tax expense of $64,000. Federal income tax expense was offset through the
release of the Company's valuation allowance to the extent of current period
earnings. As of November 30, 2004, the Company reported no additional release of
the valuation allowance for future periods. Management deems the likelihood of
incurring taxable income in from December 1, 2004 through August 31, 2005, in
excess of the deferred tax benefit of $1,014,000, to be more likely than not.
Management believes the majority of our 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 and recognition of
the deferred tax benefit, our effective tax rate is substantially lower than
statutory rates.



LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

As of November 30, 2004 the Company had working capital of approximately $9.295
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 includes $4.483 million in cash and
cash equivalents and various lines of credit totaling approximately 17.4 million
with availability of approximately $1.640 million at November 30, 2004. The
lines of credit are secured by substantially all assets of the Company and by
personal guarantees of the Company's majority stockholder and a different
stockholder.

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

                                       24
<PAGE>

ratios (as defined) and is subject to annual capital expenditure limitations. At
November 30, 2004 the Company was not in compliance with certain covenants,
however, the bank has granted a waiver of default remedies with respect to
noncompliance as of that date.

For the quarter ended November 30, 2004, cash flows provided by operating
activities were $687,000, as compared to cash flows used by operating activities
of $233,000 for the quarter ended November 30, 2003. The change is primarily
related to the Company's net income of $703,000 for quarter ended November 30,
2004 as compared to net income of $234,000 for quarter ended November 30, 2003.
Additionally inventory the Company's JH Drew subsidiary had a reduction of
inventory of $1.464 million while the Company's manufacturing and distribution
segment had an increase in inventory of 602,000 (net of 132,000 acquired through
the acquisition of Ink Source.) This increase in cash flows was offset by an
increase in accounts receivable of $1.357 million due mainly to 97% increase in
sales over the previous quarter in the Company's ITC and Cornerstone
Construction subsidiaries in its wireless infrastructure segment. Additionally
the Company reported a receivable in the amount of $387,000 from a related party
which was paid back to the Company in December 2004.

For the quarter ended November 30, 2004, cash flows used by investing activities
were $687,000 as compared to cash flows provided by investing activities $3.382
million for the quarter ended November 30, 2003. The increase in cash flows used
for investing activities is due primarily to the cash outflow of $465,000 for
the acquisitions of Ink Source and Magtech during the quarter end November 30,
2004 as compared to net cash received of $3,302 million for the acquisition of
PSM during the quarter ended November 30, 2003.

For the quarter ended November 30, 2004, cash flows provided by financing
activities were $891,000 as compared to $648,000 for the quarter ended November
30, 2003. The increase was primarily related to borrowings under the line of
credit of $1.544 million during the quarter to finance the increase in inventory
in the manufacturing and distribution segment along with borrowings in order to
finance the Ink Source acquisition.

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.

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. As previously stated, the
Company expects to double its budget for the Holding Company in fiscal year 2005
for personnel and outside accounting and consulting due to Sarbanes Oxley
legislation. In order to absorb these increased costs the Company is looking to
utilize funding from outside investors or a move to a national stock exchange.

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.


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 May 2004, the Company's JH Drew subsidiary entered into an operating

                                       25
<PAGE>

lease agreement to rent three buildings located in Indiana, Tennessee and
Missouri 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 $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 a 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 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

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<PAGE>

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.
------  ---------------------

(c)  Sales of Unregistered Securities by Company

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

Date                  Title of            Amount of           Recipient of
Of Sale               Securities          Sold Securities     Issued Securities
-------------         -----------------   -----------------   -----------------
September 30, 2004   Common Stock         400,000             Michael Sloan (1)
November 1, 2004     Common Stock         484,500             MGTS, Corp.   (2)

(1) Per the terms of Mr. Sloan's Employment Agreement with Nor-Cote
International, Inc. Mr. Sloan is to receive up to 400,000 shares of the
Company's Common stock. The vesting of these shares is contingent on Mr. Sloan's
achievement of certain performance standards contained in his Employment
Agreement, dated September 30, 2004.

(2) Per the Terms of the Asset Purchase Agreement between Magtech Acquisition,
Inc., a subsidiary of the Company, Magtech Services, Inc. and other parties,
MGTS, is to receive 484,500 shares of the Company's Common Stock as partial
consideration for certain assets of Magtech Services, Inc. 84,500 of those
shares are to vest immediately and the remainder of those shares are to vest
upon the achievement of certain performance criteria by Magtech Acquisition,
Inc.


Item 3. Defaults Upon Senior Securities.
------  -------------------------------

     None


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

     None

Item 5. Other Information.
------  -----------------

     None


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Item 6. Exhibits and Reports on Form 8-K.
------  --------------------------------

(a) Exhibits

         10.1     Asset Purchase Agreement by and among Ink Source, Inc.,
                  Michael Sloan, and Nor-Cote International, Inc.
         10.2     Asset Purchase Agreement by and among Magtech Servies, Inc.,
                  Magtech Acquisition, Inc., The Shareholders of Magtech
                  Services, Inc., and Carter M. Fortune
         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



(b) Reports on Form 8-K.

     The following reports were filed by the Company during the first quarter of
fiscal year 2004-2005:


         Amended Current Report on Form 8-K, dated November 29, 2004, amending
Exhibit 7.3 of the Current Report on Form 8-K originally filed on October 10,
2003 that related to the acquisition of PSM.

         Amended Current Report on Form 8-K, dated November 29, 2004, amending
Exhibit 7.3 of the Current Report on Form 8-K originally filed on July 17, 2003
that related to the acquisition of Nor-Cote.









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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:  January 14, 2005               By: /s/ Carter M. Fortune
                                          --------------------------------
                                          Carter M. Fortune,
                                          Chief Executive Officer


Date:  January 14, 2005               By: /s/ Amy Gallo
                                          --------------------------------
                                          Amy Gallo,
                                          Chief Financial Officer







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