Fortune Industries 10Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2008

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

SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-19049

FORTUNE INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

INDIANA	20-2803889
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification Number)

6402 Corporate Drive	46278
Indianapolis, IN	(Zip Code)
(Address of principal executive offices)

(317) 532-1374

(Registrant’s telephone number, including area code)

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

Yes x No o

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

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	x	Smaller reporting company	¨
(Do not check if a smaller reporting company)

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

Yes o No x

As of January 14, 2009, 11,682,173 shares of the Company’s $0.10 per share par value common stock were outstanding.

FORTUNE INDUSTRIES, INC.

FORM 10-Q

For The Quarterly Period Ended November 30, 2008

INDEX

			Page
PART I. Financial Information
	ITEM 1. Financial Statements
		Consolidated Balance Sheets as of November 30, 2008 (unaudited) and August 31, 2008	4
		Consolidated Statements of Operations for the three month periods ended November 30, 2008 and 2007 (unaudited)	5
		Consolidated Statement of Changes in Shareholders’ Equity (Deficit) for the three month period ended November 30, 2008 (unaudited)	6
		Consolidated Statements of Cash Flows for the three month periods ended November 30, 2008(unaudited) and 2007 (unaudited, restated)	7
		Notes to the Unaudited Interim Consolidated Financial Statements	9
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		33
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		42
	ITEM 4. Controls and Procedures		42
PART II. Other Information
	ITEM 1. Legal Proceedings		43
	ITEM 1A. Risk Factors		43
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
	ITEM 3. Defaults Upon Senior Securities		43
	ITEM 4. Submission of Matters to a Vote of Security Holders		43
	ITEM 5. Other Information		43
	ITEM 6. Exhibits		43
Signatures			43

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements.

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

	November 30,		August 31,
	2008		2008
	(Unaudited)		(Audited)

ASSETS
CURRENT ASSETS
Cash and equivalents	$	2,533	$	4,740
Restricted cash (Note 1)		5,578		5,370
Accounts receivable, net (Note 5)		2,610		17,205
Costs and estimated earnings in excess of billings on uncompleted contracts (Note 6)		-		2,785
Inventory, net (Note 7)		13		4,367
Deferred tax asset		1,489		1,535
Prepaid expenses and other current assets		1,069		2,263
Assets of discontinued operations, net (Note 12)		708		-
Total Current Assets		14,000		38,265

OTHER ASSETS
Property, plant & equipment, net (Note 8)		1,033		10,749
Long-term accounts receivable (Note 5)		-		865
Goodwill (Note 9)		12,339		12,491
Other intangible assets, net (Note 9)		3,500		3,602
Term note receivable related party (Note 2)		3,240		-
Other long-term assets		43		140
Total Other Assets		20,155		27,847

TOTAL ASSETS	$	34,155	$	66,112

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(DOLLARS IN THOUSANDS)

	November 30,			August 31,
	2008			2008
	(Unaudited)			(Audited)

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt-majority shareholder (Note 10)	$	-		$	1,280
Short- term debt and current maturities of long-term debt (Note 10)		38			153
Current maturities of convertible term note (Note 10)		-			3,405
Variable interest entity line of credit (Note 10)		-			2,200
Variable interest entity current maturities of long-term debt (Note 10)		-			3,752
Accounts payable		1,485			5,550
Health and workers' compensation reserves		5,447			5,435
Accrued expenses		7,892			11,752
Billings in excess of costs and estimated earnings on uncompleted contracts (Note 6)		-			632
Other current liabilities		42			412
Liabilities of discontinued operations		125			-
Total Current Liabilities		15,029			34,571

LONG-TERM LIABILITIES
Line of credit (Note 10)		-			3,250
Long-term debt, less current maturities (Note 10)		27			189
Variable interest entity long-term debt, less current maturities (Note 10)		-			481
Line of credit term note - majority shareholder (Note 10)		-			30,720
Other long-term liabilities		831			831
Total Long-Term Liabilities		858			35,471

Total Liabilities		15,887			70,042

MINORITY INTEREST IN VARIABLE INTEREST ENTITY (NOTE 3)		-			(517	)

SHAREHOLDERS' EQUITY (DEFICIT) (NOTE 14)
Common stock, $0.10 par value; 150,000,000 authorized; 11,632,173 and 11,383,373 issued and outstanding at November 30, 2008 and August 31, 2008, respectively		1,182			1,117
Preferred stock, $0.10 par value; 1,000,000 authorized; 296,180 and 79,180 issued and outstanding at November 30, 2008 and August 31, 2008, respectively		29,618			7,918
Additional paid-in capital and warrants outstanding		19,243			19,241
Accumulated deficit		(31,775	)		(31,881	)
Accumulated other comprehensive income (Note 15)		-			192
Total Shareholders' Equity (Deficit)		18,268			(3,413	)

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)	$	34,155		$	66,112

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

	Three Month Period Ended
	November 30,			November 30,
	2008			2007
REVENUES
Service revenues	$	18,236		$	22,455
Product revenues		17,929			21,302
TOTAL REVENUES		36,165			43,757

COST OF REVENUES
Service cost of revenues		14,109			17,315
Product cost of revenues		14,944			17,532
TOTAL COST OF REVENUES		29,053			34,847

GROSS PROFIT		7,112			8,910

OPERATING EXPENSES
Selling, general and administrative expenses		6,369			6,965
Depreciation and amortization		376			691
Total Operating Expenses		6,745			7,656

OPERATING INCOME		367			1,254

OTHER INCOME (EXPENSE)
Interest income		30			79
Interest expense		(144	)		(923	)
Gain (Loss) on disposal of assets		3			(46	)
Exchange rate gain		1			19
Other income		73			5
Total Other Income (Expense)		(37	)		(866	)

INCOME BEFORE MINORITY INTEREST IN
VARIABLE INTEREST ENTITY		330			388

Minority Interest in Variable Interest Entity (Note 3)		-			195

INCOME BEFORE PROVISION FOR INCOME TAXES		330			193

Provision for income taxes		28			59

NET INCOME FROM CONTINUING OPERATIONS		302			134

DISCONTINUED OPERATIONS
Loss from discontinued operations (Note 12)		(60	)		-

NET INCOME		242			134

Preferred stock dividends		198			124

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	44		$	10

BASIC INCOME PER COMMON SHARE	$	0.00		$	0.00

Basic weighted average shares outstanding		11,388,222			11,391,823

DILUTED INCOME PER COMMON SHARE	$	0.00		$	0.00

Diluted weighted average shares outstanding		11,766,980			12,768,981

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

(DOLLARS IN THOUSANDS)

(UNAUDITED)

							Additional						Accumulated
							Paid-in Capital						Other			Total
	Common			Preferred			and Warrants			Accumulated			Comprehensive			Shareholders'			Comprehensive
	Stock			Stock			Outstanding			Deficit			Income			Equity (Deficit)			Loss

BALANCE AT AUGUST 31, 2008	$	1,117		$	7,918		$	19,241		$	(31,881	)	$	192		$	(3,413	)
Issuance of 658,800 shares of common stock for compensation		66			-			114			-			-			180			-
Retirement of 10,000 shares of common stock		(1	)		-			(61	)		62			-			-			-
Net income		-			-			-			242			-			242			242
Retirement of 79,180 shares of series B preferred stock		-			(7,918	)		-			-			-			(7,918	)		-
Issuance of 296,180 shares of series C preferred stock					29,618												29,618			-
Disposition of productive business assets		-			-			(51	)		-			(192	)		(243	)		(192	)
Preferred stock dividends		-			-			-			(198	)		-			(198	)		-

Total comprehensive loss		-			-			-			-			-			-		$	50

BALANCE AT NOVEMBER 30, 2008	$	1,182		$	29,618		$	19,243		$	(31,775	)	$	-		$	18,268

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

(UNAUDITED)

	Three Months Ended
	November 30,			November 30,
	2008			2007 (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	242		$	134
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization		376			897
Provision for gains on accounts receivable		(4	)		(216	)
Loss (Gain) on disposal of assets		(3	)		46
Stock based compensation		180			-
Minority interest in variable interest entity income		-			195
Deferred income taxes		-			-
Changes in certain operating assets and liabilities:
Restricted cash		(208	)		(114	)
Accounts receivable		560			1,018
Costs and estimated earnings in excess of billings on uncompleted contracts		-			(2,053	)
Inventory, net		245			640
Prepaid assets and other current assets		326			693
Assets of discontinued operations		134			-
Other long-term assets		81			(48	)
Accounts payable		1,019			(3,467	)
Health and workers' compensation reserves		197			(217	)
Accrued expenses and other current liabilities		(1,385	)		36
Billings in excess of costs and estimated earnings on uncompleted contracts		-			579
Liabilities of discontinued operations		64			-
Net Cash Provided by (Used in) Operating Activities		1,824			(1,877	)

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(107	)		(465	)
Variable interest entity proceeds from sale of assets		-			430
Net Cash Used in Investing Activities		(107	)		(35	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net payments under line of credit		-			(305	)
Payments on long-term debt majority shareholder		(300	)		-
Payments on short and long-term debt		(21	)		(643	)
Variable interest entity payments on long-term debt		-			(458	)
Debt issuance costs		-			(113	)
Payments on convertible debentures		(3,405	)		(227	)
Dividends on preferred stock		(198	)		(124	)
Proceeds from variable interest entity member contributions		-			70
Distributions to variable interest entity members		-			(265	)
Net Cash Used in Financing Activities		(3,924	)		(2,065	)

Effect of exchange rate changes on cash		-			40

NET DECREASE IN CASH AND EQUIVALENTS		(2,207	)		(3,937	)

CASH AND EQUIVALENTS
Beginning of Period		4,740			9,830

End of Period	$	2,533		$	5,893

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(DOLLARS IN THOUSANDS)

(UNAUDITED)

	Three Months Ended
	November 30,			November 30,
	2008			2007 (Restated)
SUPPLEMENTAL DISCLOSURES
Interest paid	$	263		$	917

Income taxes paid	$	11		$	27

Non-cash investing and financing activities:
Retirement of series B preferred stock in exchange for series C	$	(7,918	)	$	-
Issuance of series C preferred stock as exchange for series B		7,918			-
Issuance of series C preferred stock for debt extinguishment		21,700			-
Term note receivable for disposition of assets		(3,240	)		-
Reduction in term loan in exchange for disposition of assets		(10,000	)		-
	$	8,460		$	-

Consolidation of Variable Interest Entity (Note 3)
Cash	$	-		$	20
Prepaid Expenses		-			-
Property, plant and equipment		-			6,144
Other long-term assets		-			2
Total Assets	$	-		$	6,166

Line of credit	$	-		$	2,200
Current maturities of long-term debt		-			365
Accrued expenses		-			49
Long-term debt		-			4,239
Minority interest		-			351
Less: Treasury Stock		-			(1,038	)
Total Liabilities and Minority Interest	$	-		$	6,166

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED,

EXCEPT PER SHARE DATA)

(UNAUDITED)

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

General

Basis of Presentation: The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2008 Annual Report on Form 10-K filed by Fortune Industries, Inc. (which, together with its subsidiaries unless the context requires otherwise, shall be referred to herein as the “Company”). The accompanying unaudited consolidated financial statements have been prepared by the Company without audit. These unaudited financial statements contain, in the opinion of management, all adjustments (consisting of normal accruals and other recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States. The operating results for the three-month period ended November 30, 2008 are not necessarily indicative of the operating results to be expected for the full fiscal year.

Nature of Business: Fortune Industries, Inc. is an Indiana corporation, originally incorporated in Delaware in 1988. The Company provides a variety of services and products for selected market segments, which are classified under five operating segments, Business Solutions, Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies and Electronics Integration. As a holding company of various products and services, the Company has historically invested in businesses that are undervalued, underperforming, or in operations that are poised for significant growth. Management’s strategic focus is to support the revenue and earnings growth of its operations by creating synergies that can be leveraged to enhance the performance of the Company’s entities and by investing capital to fund expansion. Effective November 30, 2008 the Company sold its subsidiaries in its Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and Electronics Integration business segments to a related party. Refer to Note 2 for further details. As of this date, management will focus all its financial and human capital resources on its subsidiaries in the Business Solutions segment. The effect of this sale will impact the comparability of the Company’s financial information in future filings.

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Fortune Industries, Inc. and its wholly-owned subsidiaries, and a variable interest entity (“VIE”) as described in Note 3. Nor-Cote International, Inc. (“Nor-Cote”), a wholly-owned subsidiary, contains foreign subsidiaries from the United Kingdom, China, and Singapore, which have been eliminated in consolidation at the Nor-Cote subsidiary level. As of November 30, 2008, the Company did not consolidate the VIE. Refer to Note 3 for further details. All significant inter-company accounts and transactions of the Company have been eliminated.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Restricted Cash: Restricted cash includes certificates of deposits and letters of credit issued as collateral under its health and accident benefit program, its workers compensation program, and certain general insurance coverage related to the Company’s Business Solutions segment. At November 30, 2008, the Company had $5,578 in total restricted cash. Of this, $1,891 is restricted for employer contributions to various health and accident benefit programs established under third party actuarial analysis, $3,227 is restricted for various workers compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credits in accordance with various state regulations.

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

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

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

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

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

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

The Company has elected to perform the annual impairment test of recorded goodwill and other indefinite-lived intangible assets as required by SFAS 142 as of the end of fiscal fourth quarter.

As described in Note 9, the Company recognized impairment charges amounting to $8,740 during fiscal 2008 as a result of triggering events primarily within its Business Solutions, Ultraviolet Technologies and Electronics Integration segments. Triggering events include a) blatant violation of non-compete agreements with certain terminated employees within the Business Solutions segment coupled with the Company’s inability or willingness to enforce such agreements, b) a substantial change in the customer mix and number of worksite employees within the Business Solutions segment, c) losses incurred within certain operating units, d) significant downsizing of personnel and operations, and e) restructuring of management.

The Company has elected to perform the annual impairment test of recorded goodwill and other indefinite-lived intangible assets as required by SFAS 142 as of the end of fiscal fourth quarter. The results of this annual impairment test indicated that the fair value of the Business Solutions segment, as of August 31, 2008, exceeded the carrying, or book value, including goodwill, and therefore recorded goodwill and other indefinite-lived intangible assets were not subject to impairment. The annual impairment test indicated that the fair value of the Ultraviolet Technologies and the Electronics Integration segments, as of August 31, 2008, were lower than the carrying, or book value, including goodwill and intangible assets, and therefore recorded goodwill and intangible assets were subject to impairment. The required annual impairment test may result in future periodic write-downs.

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

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

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

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

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

Research and Development Costs: Research and development costs are expensed as incurred and totaled $131 and $115 for the three month periods ended November 30, 2008 and 2007, respectively. Research and development expense is recorded in the Company’s Ultraviolet Technologies segment.

Advertising Costs: Adverting costs including marketing, advertising, publicity, promotion and other distribution costs are expensed as incurred and totaled $94 and $151 for the three months ended November 30, 2008 and 2007, respectively.

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

Debt and equity issuances may have features, which allow the holder to convert at beneficial conversion terms, which are then measured using similar valuation techniques and amortized to interest expense in the case of debt or recorded as dividends in the case of preferred stock instruments. No issuances have beneficial conversion terms during of the three months ended November 30, 2008 and 2007.

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

The Company’s PSM subsidiary maintains a loss-sensitive worksite employees’ health and accident benefit program. Under the insurance policy, PSM’s self-funded liability is limited to $200 per employee, with an aggregate liability limit of approximately $11,500. The aggregate liability limits are adjusted annually, based on the number of participants.

Workers’ Compensation: The Company’s PSM and CSM subsidiaries maintain partially self-funded workers’ compensation insurance programs. Under the insurance policies established at each company, PSM and CSM’s deductible liability is limited to $250 per incident, with an aggregate liability limit of approximately $1,750. Under the insurance policy established at ESG, the deductible liability is limited to $350 per incident, with no aggregate liability limit.

New Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a formal framework for measuring fair value and expands disclosures about fair value measurements. The Statement is effective beginning in fiscal 2009. The adoption of SFAS 157 did not have a material effect on our financial statements.

In November 2006, the FASB ratified the consensuses of Emerging Issues Task Force (EITF) Issue No. 06-6, “Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments” (EITF 06-6). This consensus supersedes EITF Issue No. 05-7, “Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues and applies to modifications or exchanges of debt instruments that occur during interim or annual reporting periods for our fiscal year beginning September 1, 2008. We are currently evaluating the impact of EITF 06-6 on our consolidated financial statements. The adoption of EITF 06-6 did not have a material effect on our financial statements.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007, our fiscal 2009. The adoption of SFAS 159 did not have a material effect on our financial statements.

In December 2007, the FASB issued SFAS No. 141R “Business Combinations.” SFAS 141R establishes the principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS 141R also requires certain disclosures to enable uses of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption is not permitted. Acquisitions, if any, after the effective date will be accounted for in accordance with SFAS No. 141R.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective on November 15, 2008. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.

NOTE 2 – DISPOSITION OF ASSETS AND PRO FORMA RESULTS

On December 11, 2008, the Company completed a transaction with an effective date as of November 30, 2008 to sell all of the outstanding shares of common stock of the following wholly-owned subsidiaries: James H Drew Corporation; Nor-Cote International, Inc.; Fortune Wireless, Inc.; and Commercial Solutions, Inc. The subsidiaries were sold to related party entities owned by the Company’s two majority shareholders, the Chairman and the CEO. The shares were sold in exchange for a $10,000 reduction in the outstanding balance of the Term Loan Note due to the Chairman, and a three year Promissory Note receivable in the amount of $3,240 with a maturity date of November 30, 2011. The Promissory Note bears interest at the prime rate plus 1% and is interest-only for the first twelve months, with $50,000 and $100,000 monthly principal payments due beginning December 30, 2009 and December 30, 2010, respectively. The unpaid balance at maturity is due in a lump sum payment.

As part of the terms of the sales transaction, the Chairman received 217,000 shares of Series C Preferred Stock as consideration for cancellation of the Term Note Balance of $21,700. In addition, the Company converted 79,180 shares of Series B Preferred Stock previously issued to and held by the Chairman to 79,180 shares of Series C Preferred Stock. The Series C Preferred Stock with a par value of $0.10 per share is non-redeemable, non-voting cumulative preferred and bears annual dividends of $5 per share in years one and two subsequent to the transaction date, $6 per share in year three subsequent to the transaction date and $7 per share thereafter. The dividends will be paid on a pro-rata basis monthly. Additionally, as part of the terms of the sales transaction, the Company issued the Chairman 2,200,000 warrants with a ten-year term and an exercise price of $ .40 per share.

At the request of the independent Directors, the Company received a fairness opinion from an independent financial advisor concluding that the consideration received by the Company in connection with the transaction is fair to the Company’s shareholders as a group from a financial point of view.

The transaction was approved by the Company’s Board of Directors on December 10, 2008.

The following is a condensed balance sheet disclosing the amount assigned to each major asset and liability caption of the sold subsidiaries at the disposition date:

Assets
Cash and equivalents	$	556
Accounts receivable, net		12,927
Costs and estimated earnings in excess of billings on uncompleted contracts		3,292
Inventory, net		4,073
Deferred tax asset		46
Prepaid expenses and other current assets		790
Property, plant & equipment, net		3,527
Goodwill		152
Other long term assets		13
Total Assets		25,376

Liabilities
Accounts payable		4,248
Accrued expenses		1,510
Billings in excess of costs and estimated earnings on uncompleted contracts		402
Line of credit		5,500
Other liabilities		476
Total Liabilities		12,136

Net Assets	$	13,240

Cash considertation - related party term note offset	$	10,000
Term note receivable - three year		3,240

Total consideration	$	13,240

Pro Forma Financial Statements

The accompanying unaudited pro forma consolidated statements of operations for the three months ended November 30, 2008 is presented as if the sale had been completed as of the beginning of the periods presented. The unaudited pro forma consolidated statements of operations is presented for illustrative purposes only and is not necessarily indicative of the results of operations for the three months ended November 30, 2008, that would have actually been reported had the sales transaction occurred at the dates indicated, nor is it indicative of future financial position or results of operations. The unaudited pro forma condensed consolidated statements of operations are based upon the respective historical financial statements of the Company and the Subsidiaries. The pro forma data give effect to actual operating results as if the previous acquisitions occurred as of the beginning of the period presented. The pro forma data give effect to actual operating results prior to the dispositions and adjustments for the following:

To eliminate the impact of consolidating Fisbeck Fortune Development, LLC (“FFD”) which prior to completion of the sales transaction was considered a variable interest entity in conjunction with FIN 46R. With the sale of the Subsidiaries and the cancellation of the lease agreement between Fortune Industries, Inc. and FFD the primary beneficiary relationship between the entities ceased to exist.

To eliminate the results of operations of the Subsidiaries sold.

To adjust the dividends to the terms of the Series C Preferred shares that were issued in conjunction with the sales transaction.

	For the Three Months Ended
	November 30,			November 30,			November 30,
	2008			2007			2006

Revenues	$	16,741		$	20,369		$	18,925
Cost of Revenues		13,340			16,255			15,046

Gross Profit		3,401			4,114			3,879

Operating Expenses
Selling, general and administrative expenses		3,148			3,473			3,237
Depreciation and amortization		169			353			142

Total Operating Expenses		3,317			3,826			3,379

Operating Income		84			288			500

Other Income (Expense)		31			78			(28	)

Income Before Provision for Income Taxes		115			366			472

Provision for income taxes		24			55			28

Net Income		91			311			444

Preferred stock dividends		370			370			370

Net Income (Loss) available to common shareholder	$	(279	)	$	(59	)	$	74

Basic income (loss) per common share	$	(0.02	)	$	(0.01	)	$	0.01

Diluted income (loss) per common share	$	(0.02	)	$	(0.01	)	$	0.01

NOTE 3 – VARIABLE INTEREST ENTITY

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

Effective November 30, 2008, the Company terminated its building lease for its corporate facilities with Fisbeck-Fortune Development, LLC. No early termination penalties were incurred by the Company. In addition, the Company sold its James H. Drew and Nor-cote subsidiaries which were leasing the remainder of the facilities from Fisbeck-Fortune Development, LLC. Refer to Note 2 for further details. The termination of the lease and the sale of the subsidiaries provided for a triggering event under FIN 46. As a result, effective November 30, 2008, the Company is no longer considered the primary beneficiary of the variable interest entity and is not required to consolidate Fisbeck-Fortune Development as of this date.

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

	August 31,
	2008
	(Audited)

Assets
Cash	$	20
Prepaid expenses		11
Property, plant and equipment		6,002
Other assets		1
Total Assets	$	6,034

Liabilities and Members Equity
Accounts payable	$	15
Line of credit		2,200
Current maturities of long-term debt		3,752
Accrued expenses		104
Long-term debt		481
		6,552

Members equity (deficit)		(517	)
Total Liabilities and Members Equity (Deficit)	$	6,034

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

NOTE 4 – ACQUISITIONS

Acquisitions

During the three month period ended November 30, 2008, the Company had no acquisitions.

The Company acquired ESG in March 2007 details of which are included in previous filings. Of the 577,143 total shares issued; 217,143 shares were issued to the sellers at closing and 360,000 contingent shares are held in escrow and may be earned based on the EBITDA schedule below. During the year ended August 31, 2008, the sellers earned 120,000 shares based on their annual EBITDA. The Company entered into an agreement in which the sellers may put (put option) the 217,143 shares issued at closing to the Company during the thirty (30) day period that begins on March 1, 2010. The Company recorded $814 related to the put option on the 217,143 shares as other long term liabilities, since the Company is not able to control whether such options can be put to the Company during the required time period. The contingent shares are earned based on the table below:

	(3)EBITDA Target
	Minimum		Maximum			Total Shares

Year 1 - 3/1/2008*	$	1,600	$	1,800			120,000
Year 2 - 3/1/2009*	$	1,600	$	2,000			120,000
Year 3 - 3/1/2010*	$	1,600	$	2,400			120,000
							360,000
					closing share price*		4.20
						$	1,512,000

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

Precision Employee Management, LLC (“PEM”) (Business Solutions segment)

The Company acquired all membership units of PEM through a unit purchase agreement entered into as of February 1, 2007 by and among PEM, an Arizona company, Tom Lickliter, Larry Bailliere, Charmaine Hayes, the Company, Carter Fortune and John Fisbeck details of which are included in previous filings. The Company’s acquisition of PEM enabled the Company to expand its geographic presence in the PEO marketplace. The purchase price of $2,376 includes cash paid by the Company of $1,100 and issuance of 305,883 shares of the Company’s common stock valued at the closing price of the Company’s stock on the date of purchase at $4.17 per share. Of the 305,883 total shares issued; 258,824 shares were issued to the sellers at closing and 47,059 contingent shares are held in escrow and may be earned based on certain EBITDA criteria as defined in the agreement. The Company’s two majority shareholders individually entered into an agreement in which the sellers may put (put option) the 258,824 shares issued at closing to the majority shareholders during the thirty (30) day period that begins on February 1, 2009.

NOTE 5 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE

Accounts receivable and contracts receivable are summarized as follows:

	November 30, 2008 (Unaudited)			August 31, 2008 (Audited)

Account receivable	$	2,907		$	12,786
Contracts receivable
Progress billing		-			5,077
Retainages		-			897
		2,907			18,760
Less allowance for doubtful accounts and sales returns		(297	)		(1,555	)
	$	2,610		$	17,205

Long-term accounts receivable	$	-		$	865

NOTE 6 – CONTRACTS IN PROGRESS

Information related to contracts in progress is summarized as follows:

	November 30, 2008 (Unaudited)		August 31, 2008 (Audited)

Costs incurred on uncompleted contracts	$	-	$	20,904
Estimated earnings recognized to date on uncompleted contracts		-		3,910
		-		24,814
Less bilings on uncompleted contracts		-		(22,661	)
	$	-	$	2,153

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

	November 30, 2008 (Unaudited)		August 31, 2008 (Audited)

Costs and estimated earnings in excess of billings on uncompleted contracts	$	-	$	2,785
Billings in excess of costs and estimated earnings on uncompleted contracts		-		632
	$	-	$	2,153

NOTE 7 – INVENTORY

Inventories are summarized as follows:

	November 30, 2008 (Unaudited)		August 31, 2008 (Audited)

Raw materials	$	-	$	766
Work-in-process		-		21
Finished goods		13		4,190
		13		4,977
Less inventory reserve		-		(610	)
	$	13	$	4,367

NOTE 8 - PROPERTY, PLANT AND EQUIPMENT

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

	November 30, 2008 (Unaudited)			August 31, 2008 (Audited)

Land and building	$	-		$	8,960
Machinery and equipment		-			6,586
Research equipment		-			371
Office equipment		2,565			5,229
Vehicles		394			3,173
Leasehold improvements		100			454
		3,059			24,773
Less accumulated depreciation		(2,026	)		(14,024	)
	$	1,033		$	10,749

The provision for depreciation amounted to $196, of which $0 is included in cost of revenues, and $487, of which $206 is included in cost of revenues, for the three-month periods ended November 30, 2008 and 2007, respectively. Gains on disposal of assets totaled $3 for the three month period ended November 30, 2008 related to various office equipment disposals. Losses on disposal of assets totaling $46 was recorded for the three-month period ended November 30, 2007 related to various building, office equipment, and vehicle disposals. A total of $6,144 net of $682 of accumulated depreciation is included in the property, plant and equipment at November 30, 2007, related to a consolidated variable interest entity. Effective November 30, 2008, the Company is no longer required to consolidate the variable interest entity. Refer to Notes 2 and 3 for further details.

NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill, as recorded under SFAS 142, are summarized as follows:

	Business Solutions		Transportation Infrastructure			Total

Goodwill at August 31, 2008	$	12,339	$	152		$	12,491
Goodwill disposition with sale of division		-		(152	)		(152	)
Goodwill at November 30, 2008	$	12,339	$	-		$	12,339

The total amount of goodwill that is deductible for tax purposes is $9,462 and $9,476 at November 30, 2008 and 2007, respectively. The Company recognized impairment on certain goodwill within its Ultraviolet Technologies segment of $4,694 and its Electronics Integration segment of $1,276 for the year ended August 31, 2008 based upon losses incurred within operating units and significant downsizing of personnel and operations.

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

	November 30, 2008
	(Unaudited)
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Weighted Average Amortization Period (in years)

Customer relationships	$	4,063	$	1,153	$	2,910		10
Tradename (not subject to amortization)		590		-		590
	$	4,653	$	1,153	$	3,500

	August 31, 2008
	(Audited)
	Gross Carrying Amount		Accumulated Amorization		Net Book Value		Weighted Average Amortization Period (in years)

Customer relationships	$	4,063	$	1,051	$	3,012		10
Tradename (not subject to amortization)		590		-		590
	$	4,653	$	1,051	$	3,602

Intangible asset amortization expense is $180 and $410 for the three month periods ended November 30, 2008 and 2007, respectively, which includes $78 and $102 of amortization related to loan origination fees, respectively. The Company recognized impairment charges amounting to $2,770 during fiscal 2008 as a result of triggering events primarily within its Business Solutions and Ultraviolet Technologies. Triggering events include a) blatant violation of non-compete agreements with certain terminated employees within the Business Solutions segment coupled with the Company’s inability or willingness to enforce such agreements, b) a substantial change in the customer mix and number of worksite employees within the Business Solutions segment, c) losses incurred within certain operating units, d) significant downsizing of personnel and operations, and e) restructuring of management.

Amortization expense on intangible assets currently owned by the Company at November 30, 2008 for each of the next five fiscal years is as follows:

2009	$	305
2010		406
2011		406
2012		406
2013		406
2014 and thereafter		1,571
Total	$	3,500

NOTE 10 - DEBT ARRANGEMENTS

The Company’s debt liabilities consisted of the following:

	November 30, 2008 (Unaudited)			August 31, 2008 (Audited)

Debt with majority shareholder
Term loan note due May 5, 2011. Interest at LIBOR plus 1.75% adjusted annually on June 1 until maturity. The loan requires a guarantee fee of 1.88% beginning June 5, 2008. The loan is secured by all assets and a personal guarantee of the Company’s Chief Executive Officer. Reduction in debt of $10,000 with disposition of divisions. Remainder converted to preferred stock on November 30, 2008.	$	-		$	32,000

Term note due in monthly installments of $3 including interest at 4.0% through September 2008. The loan is secured by vehicles and equipment. The loan was repaid in September 2008.		-			2

Notes payable
Revolving line of credit due May 31, 2010. Availability is limited to the lesser of $6 million or the borrowing base amount which is calculated monthly. Interest at prime minus .5%. The loan is secured by certain assets of the Company and limited personal guaranties of the two majority shareholders (the Chairman of the Board and the CEO of the Company). The loan is subject to certain covenants including a minimum tangible net worth and current ratio requirements. The note was sold on November 30, 2008. Refer to Note 2 for further details.		-			3,250

Term note due in monthly installments of $1, including interest at 4.3% through October 2009. The loan is secured by a vehicle. The remainder of the term notes were sold on November 30, 2008. Refer to Note 2 for further details.		10			274

Convertible Term Note
Convertible term note due in monthly installments of $227 plus interest at the Prime Rate plus 3.0% (subject to adjustments as described below) through maturity date, November 30, 2008. The loan is guaranteed by the Company’s two majority shareholders. The loan was repaid in November 2008.		-			3,405

Variable interest entity
Revolving line of credit promissory note due August 29, 2008. Interest at LIBOR plus 1.6%. The loan is secured by real estate and personal guarantees of the Company’s two majority shareholders. Refer to Note 3 for further details.		-			2,200

Various term loans due in monthly installments totaling $44 plus interest at ranges from LIBOR plus 1.5% to LIBOR plus 1.6%. The loans mature at dates ranging from February 2009 through April 2011. The notes are secured by real estate and personal guarantees of the Company’s two majority shareholders. Refer to Note 3 for further details.		-			4,233

Capital leases
Various notes due in monthly installments of $2 including interest at ranges from 2.3% to 7.51% through November 2010. The loans are secured by equipment.		55			66

Total debt obligations		65			45,430

Less current maturities		(38	)		(10,790	)

Long-term portion of outstanding debt	$	27		$	34,640

Fiscal year principal payments due on long-term debt outstanding at November 30, 2008 are approximately as follows:

2009	$	38
2010		21
2011		6
2012		-
2013		-
2014 and thereafter		-
	$	65

Credit Facility Loan and Security Agreement

Effective June 2, 2008, the Company entered into a $32,000 term loan note with its majority shareholder and Chairman of the Board of Directors. The credit facility replaced the Company’s Term Loan Note in the amount of $16,648 in principal and interest and the Revolving Line of Credit Promissory Note in the amount of $15,056 in principal and interest. The credit facility matures on May 5, 2011 and bears interest at the one year LIBOR plus 1.75% adjusted on June 1 of each year until maturity. In addition, the loan requires a guarantee fee of 1.88% beginning June 5, 2008. The loan is secured by substantially all assets of the Company and personally guaranteed up to 50% by the Chief Executive Officer of the Company. On December 11, 2008, the Company terminated the $32,000 Term Loan Note with an outstanding balance of $21,700 after the completion of the debt reduction for the disposition of assets with the Company’s majority shareholder and Chairman of the Board of Directors of the Company (the “Chairman”). This termination was effective as of November 30, 2008. The Company satisfied the Note in connection with the disposition of assets as set forth in Note 2, and did not incur any early termination penalties. Refer to Note 2 for further details.

On June 10, 2008, the Company’s wholly-owned subsidiary, James H. Drew Corporation, entered into a $6 million revolving line of credit with Key Bank. Availability under the credit facility is the lesser of $6 million or the borrowing base amount, which is calculated monthly as a percentage of the Company’s eligible assets. The revolving line of credit incurs interest at the Prime Rate minus 0.5% and matures on May 31, 2010. The credit facility is secured by certain assets of the James H. Drew and limited personal guaranties of Fortune’s two majority shareholders. The credit facility is subject to certain covenants including a minimum tangible net worth and current ratio requirements. Outstanding borrowings on this line of credit amounted to $3,250 at August 31, 2008. The Company had $2,750 availability under the line of credit at August 31, 2008. In November 2008, the Company utilized borrowing availability under this line of credit to pay off the remaining balance due on the convertible notes with Laurus Master Fund. Effective November 30, 2008, James H. Drew Corporation was sold and the revolving line of credit with Key Bank was no longer a liability of the Company. Refer to Note 2 for further details.

Cancellation of Line of Credit - Related Party

On June 30, 2008, the Company exchanged 66,180 shares of non-voting Series A Preferred Stock with $0.10 par value and a dividend of $7.50 per share for 66,180 shares of non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10.00 per share.

As described in Note 14, on June 30, 2008, the Company issued 13,000 shares of non-voting Series B Preferred Stock with a par value of $0.10 per share and a dividend of $10.00 per share in consideration for the termination of the Company’s Term Loan Note in the amount of $1,300 with its majority shareholder. The unsecured Term Note was due on November 1, 2010 and paid interest at LIBOR plus 3.0%.

On December11, 2008, the Company exchanged 79,180 shares of non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10 per share for 79,180 shares of non-voting Series C Preferred Stock with $0.10 par value and a dividend of $5 per share in years one and two subsequent to the transaction date, $6 per share in year three subsequent to the transaction date and $7 per share thereafter.

As described in Note 14, on December 11, 2008 with an effective date of November 30, 2008, the Company issued 217,000 shares of non-redeemable, non-voting cumulative Series C preferred stock with a par value of $0.10 per share and an annual dividend of $5 per share in years one and two subsequent to the transaction date, $6 per share in year three subsequent to the transaction date and $7 per share thereafter. The shares were issued in consideration for the termination of the Company’s Term Loan Note in the amount of $21,700 with its majority shareholder. Refer to Note 2 for further details.

Convertible Term Note

On November 21, 2005, the Company issued a convertible term note (the “Note”) payable to an unrelated party, Laurus Master Fund, Ltd. (“Laurus”), in the principal amount of $7,500. The note was paid in full in November 2008. The Note has a term of three years and is convertible into the Company’s common stock at an exercise price of $5.50 per share subject to certain adjustments contained in the Note. Principal payments are payable monthly at $227 beginning March 1, 2006. Interest is payable monthly in arrears beginning January 1, 2006 at prime plus 3.0% subject to a floor of 9.5%. This interest rate is subject to adjustments as later described and as fully set forth in the Note. Additionally, the Company issued a warrant to Laurus (the “Laurus Warrant”) to purchase up to an aggregate of 272,727 shares of the Company's common stock. The Company also issued a warrant (the “CB Capital Warrant”) exercisable for shares of the Company’s common stock to CB Capital Partners, Inc. (“CB Capital”), a financial advisor to purchase up to an aggregate of 13,636 shares of the Company’s common stock. The Laurus and CB Capital warrants (collectively, “the Warrants”) have a term of five years and an exercise price of $6.60 per share. The Company used the proceeds from the offering of the Note and the Warrants for general working capital purposes. The Note is unsecured by the Company, but guaranteed by the Company’s two majority shareholders. The Company has registered the shares of common stock underlying the Note and Warrants.

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

•

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

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

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

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

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

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

•

a failure to make payments under the Note when due;

•

a material breach of the transaction documents by the Company;

•

bankruptcy related events;

•

a change of control transaction without prior approval; and

•

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

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

Laurus also has the option to convert all or a portion of the Note into shares of the Company’s common stock at any time, at an initial fixed conversion price of $5.50 per share, subject to limitations and adjustment as described below. The Note was repaid in full on November 21, 2008 and therefore is not convertible into the Company’s common stock as of November 30, 2008. The conversion price is adjustable on a weighted average basis upon certain future issuances of securities by the Company at a price less than the conversion price then in effect. There are a number of limitations on Laurus’ ability to convert the Note and exercise the Laurus Warrant. These limitations include:

•

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

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

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

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

NOTE 11- RETIREMENT PLAN

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

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

NOTE 12 - DISCONTINUED OPERATIONS

Effective November 30, 2008, the Company ceased its operations in Kingston Sales Corporation and Telecom Technology, Corporation, which were part of the Electronics Integration segment. The results of the above are reported in discontinued operations in the accompanying consolidated balance sheets, statements of operations, and statements of cash flows as of, and for the three months ending November 30, 2008. The segment results in Note 22 for the three months ending November 30, 2008 reflect the reclassification of the discontinued operations. Revenues from discontinued operations were $830 and $869 for the three months ending November 30, 2008 and 2007, respectively. The net losses from discontinued operations were $60 and $288 for the three months ending November 30, 2008 and 2007, respectively.

NOTE 13– EQUITY INCENTIVE PLANS AND OTHER STOCK COMPENSATION

Restricted Share Units

Effective April 13, 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan. Under terms of the 2006 Equity Incentive Plan, the Company may grant options, restricted share units and other stock-based awards to its management personnel as well as other individuals for up to one million shares of common stock. During the period ended November 30, 2008, 658,800 restricted share units were issued under this plan.

Warrants

In connection with the disposition of assets referred to in Note 2, the Company issued the Chairman and majority shareholder 2,200,000 warrants that are each convertible into one share of common stock with an exercise price of $ .40 per share. The remaining contractual term on these warrants is through November 30, 2018.

NOTE 14- SHAREHOLDERS’ EQUITY (DEFICIT)

Common Stock

The following are the details of the Company's common stock as of November 30, 2008 and August 31, 2008:

	Number of Shares
	Authorized		Issued		Outstanding		Amount
November 30, 2008
Common stock, $0.10 par value		150,000,000		11,632,173		11,632,173	$	1,182

August 31, 2008
Common stock, $0.10 par value		150,000,000		11,383,373		11,383,373	$	1,117

There were a total of 658,800 shares issued for the period ended November 30, 2008. There was a total 10,000 shares that were retired during the period ended November 30, 2008.

At November 30, 2008 the Company had 473,800 shares of common stock under the terms of a restricted share unit agreement entered into as part of the Company’s Employee Stock. The Company also had 2,200,000 outstanding warrants issued as part of the disposition of assets transaction and 286,090 outstanding warrants issued as part of the Laurus transaction.

Preferred Stock

The following are the details of the Company's non-voting preferred stock as of November 30, 2008 and August 31, 2008:

	Number of Shares
	Authorized		Issued		Outstanding		Amount
November 30, 2008:
Preferred stock, Series A $0.10 par value		1,000,000		66,180		-	$	-
Preferred stock, Series B $0.10 par value		1,000,000		79,180		-	$	-
Preferred stock, Series C $0.10 par value		1,000,000		296,180		296,180	$	29,618

August 31, 2008:
Preferred stock, Series A $0.10 par value		1,000,000		66,180		-	$	-
Preferred stock, Series B $0.10 par value		1,000,000		79,180		79,180	$	7,918

On November 30, 2005, the Company issued 66,180 shares of $0.10 par value non-voting Series A Preferred Stock to the Company’s majority shareholder as consideration for cancellation of certain debt obligations owed by the Company under a line of credit promissory note dated May 25, 2005. The shares are not convertible to common stock and have various restrictions pertaining to their transferability as they are not registered under the Securities Act of 1933. On June 30, 2008, the Company exchanged the 66,180 shares of non-voting Series A Preferred Stock with $0.10 par value and a dividend of $7.50 per share for 66,180 shares of non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10.00 per share.

In addition on June 30, 2008, the Company issued 13,000 shares of non-voting Series B Preferred Stock with a par value of $0.10 per share and a dividend of $10.00 per share in consideration for the termination of the Company’s Term Loan Note in the amount of $1,300 with its majority shareholder. The unsecured Term Loan Note was due on November 1, 2010 and paid interest at LIBOR plus 3.0%.

On November 30, 2008, the Company exchanged the 79,180 shares non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10.00 per share for non-voting Series C Preferred Stock with $0.10 par value and annual dividends of $5 per share in years ending November 30, 2009 and 2010, $6 per share in the year ending November 30, 2011 and $7 per share thereafter. The dividends will be paid on a pro-rata basis monthly.

Effective November 30, 2008, the Company issued 217,000 shares of $0.10 par value non-voting Series C Preferred Stock to the Company’s majority shareholder as consideration for cancellation of certain debt obligations owed by the Company under a line of credit promissory note dated June 5, 2008. The shares are not convertible to common stock and have various restrictions pertaining to their transferability as they are not registered under the Securities Act of 1933.

The shares issued are single class and pay on a monthly basis an annual cash dividend of $5 per share in years ending November 30, 2009 and 2010, $6 per share in the year ending November 30, 2011 and $7 per share thereafter. Dividends of $198 and $124 were paid for the three months ended November 30, 2008 and 2007, respectively.

Treasury Stock

The Company had no outstanding shares of treasury stock at November 30, 2008 or August 31, 2008.

NOTE 15- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

	Foreign Currency Adjustments			Accumulated Other Comprehensive Income

Balance at August 31, 2008	$	192		$	192

Period change		(192	)		(192	)

Balance at November 30, 2008	$	-		$	-

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

NOTE 16 - PER SHARE DATA

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

	Three Month Period Ended
	November 30, 2008 (Unaudited)		November 30, 2007 (Unaudited)

Net Income Available to Common Shareholders	$	44	$	10

Basic Income per Common Share	$	-	$	-

Basic weighted average number of common shares outstanding		11,388,222		11,391,823

Diluted Income per Common Share	$	-	$	-

Diluted weighted average number of common shares outstanding		11,766,980		12,768,981

NOTE 17- OPERATING LEASE COMMITMENTS

Property Lease Commitments

Segment		Location(s)		Description
Business Solutions		Richmond, IN (1); Indianapolis, IN (2); Brentwood, TN (3); Provo, UT (4); Tucson, AZ (5); Loveland, CO (6)		Offices

(1)	The lease on this property is with the former Chief Operating Officer of the Company. The operating lease agreement provides for monthly base rent of $4 through August 31, 2010, with nominal annual increases. The agreement also includes a one-year renewal option.

(2)

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

(3)	The Company maintains an operating lease agreement that provides for monthly base rent of $12 through January 31, 2014. In addition to an escalating base monthly rent, the agreement requires the Company to pay any increase in operating costs, real estate taxes, or utilities over the base year.

(4)

The Company maintains an operating lease agreement that provides for monthly base rent of $26 through January 31, 2012 and is increased 5% annually. The lessee pays most expenses related to repairs, maintenance, property taxes, and insurance. The lessor is required to carry minimal amounts of insurance.

(5)

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

(6)	The Company maintains an operating lease agreement that provides for monthly base rent of $3 through January 31, 2009. The lessee pays most expenses related to repairs, maintenance, property taxes, and insurance. The lessor is required to carry minimal amounts of insurance.

Rent expense under these agreements amounted to $147 and $654 for the three months ending November 30, 2008 and 2007, respectively.

Future minimum commitments under these agreements at November 30, 2008 are approximately as follows:

	Facilities
2009	$	658
2010		568
2011		1,014
2012		-
2013		-
2014 and thereafter		-
	$	2,240

NOTE 18 - RELATED PARTY TRANSACTIONS

The following is a summary of related party amounts included in the consolidated financial statements at November 30, 2008 and August 31, 2008, respectively:

	November 30, 2008 (Unaudited)		August 31, 2008 (Audited)
Assets:
Long-term note receivable	$	3,240	$	-

Liabilities:
Long-term line of credit		-		(32,000	)
Installment notes payable		-		(2	)

Net assets (liabilities)	$	3,240	$	(32,002	)

The note receivable represents a loan with a business owned by the Company’s majority shareholders in connection with the disposition of the assets. Refer to Note 2 for further details. The loan expires on November 30, 2011 and bears interest at the Prime Rate plus 1%. Beginning on December 30, 2008 and each month thereafter, interest will be paid. Commencing on December 30, 2009, monthly principal payments of $50 are due and commencing on December 30, 2010, monthly principal payments of $100 are due.

In addition, the Company had $1,300 borrowed at March 31, 2008 under a long-term unsecured line of credit with the Company’s majority shareholder. Effective June 30, 2008, the Company issued 13,000 shares of $0.10 par value Series B preferred stock to the Company’s majority shareholder as consideration for cancellation of this debt obligation. On November 30, 2008, the 13,000 shares of $0.10 par value Series B preferred stock was exchanged for 13,000 shares of $0.10 par value Series C preferred stock.

The term loan represents a loan from the Company’s majority shareholder and matures on May 5, 2011. See Note 10 for further details. Effective November 30, 2008, the Company issued 217,000 shares of $0.10 par value Series C preferred stock to the Company’s majority shareholder as consideration for cancellation of this debt obligation. Refer to Note 2 and Note 10 for further details.

The installment notes payable represents loans for equipment and vehicle purchases by the Company’s majority shareholder. The loans are secured by the respective assets acquired and expire no later than September 30, 2008. The notes were repaid in September 2008. Interest expense is immaterial. See Note 10 for further details.

The following is a summary of related party amounts included in the consolidated statements of operations for the three months ending November 30, 2008 and 2007, respectively:

	November 30, 2008 (Unaudited)		November 30, 2007 (Unaudited)
Revenues:
Electronics Integration (1)	$	5	$	-
Total		5		-

Expenses:
Business Solutions (2)		105		87
Wireless Infrastructure (3) (4) (5)		39		223
Transportation Infrastructure (6)		75		117
Ultraviolet Technologies (7)		21		21
Electronics Integration (3)		44		45
Holding Company (8) (9) (10)		420		245
Total	$	704	$	738

(1)	During the three months ending November 30, 2008, the Company’s TTC subsidiary performed $5 worth of services for a business owned by the Company’s two majority shareholders.

(2)

The Company’s PSM subsidiary holds a lease for an office building in Richmond, IN from a former director of the Company. The lease is for a period of five years and expires in August 2010. The agreement provides for base rent of $4 per month with nominal annual increases. Rent and related expense of $12 was recognized for the three months ended November 30, 2008 and 2007, respectively. The Company’s ESG subsidiary is entered into a lease agreement for an office building in Provo, Utah which is leased from a limited liability company in which a former employee is a member of the limited liability company. The lease is due to expire January 31, 2012. Rent and related expense of $78 and $75 were recognized for the three months ended November 30, 2008 and 2007, respectively. The Company’s ESG subsidiary holds a lease for an office building in Tucson, AZ from a Company owned by a former employee. The lease is for a period of three years and expires in January 2010. Rent and related expenses of $15 were recognized for the three months ended November 30, 2008 and 2007, respectively.

(3)

The Company maintained an operating lease agreement for the rental of a building with a limited liability company owned by the Company’s two majority shareholders. A majority of the Company’s subsidiaries maintain offices and or warehouse space in the facility. The lease agreement includes a ten-year term with one option to extend the lease term for a one-year period. The lease was terminated on November 30, 2008. The agreement provides for a monthly base rent of $28 per month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs. Rent and related expenses of $82 and $255 were recognized for the three months ended November 30, 2008and 2007, respectively.

(4)

The Company maintains a debt obligation to its majority shareholder for the purchase of vehicles and equipment. The loans are secured by the assets and pay interest at 6%. Interest expense of $1 was recognized for the three months ending November 30, 2008 and 2007, respectively. The debt was repaid in November 2008.

(5)

The Company’s Fortune Wireless subsidiary maintains an operating lease agreement for rental of a building with a limited liability company owned by the Company’s two majority shareholders. The operating lease agreement provides for monthly base rent of $4 through April 30, 2011, adjusted annually to fair market value. The building was sold and the lease was terminated in November 2007. Rent and related expenses of $12 was recognized for the three months ended November 30, 2007.

(6)

The Company’s JH Drew subsidiary maintains an operating lease agreement for rental of three buildings located in Indiana, Tennessee and Missouri with a limited liability company owned by the Company’s two majority shareholders. The lease agreement includes a five-year term with one option to extend the lease term for a one-year period and provides for base rent of $25 per month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs. Rent and related expenses of $75 and $117 were recognized for the three months ending November 30, 2008 and 2007, respectively.

(7)

The Company’s Nor-Cote subsidiary maintains an operating lease agreement for rental of a building with a limited liability company owned by the Company’s two majority shareholders. The agreement provides for monthly base rent of $7 and expires in August 2009. The base rent shall be adjusted annually to fair market value. The Agreement also includes one renewal option, which allows the Company to extend the lease term for an additional year. Rent and related expenses of $21were recognized for the three months ending November 30, 2008 and 2007, respectively.

(8)

The Company maintains an operating lease agreement for the rental of a building with a limited liability company owned by the Company’s two majority shareholders. The lease agreement includes a ten-year term with one option to extend the lease term for a one-year period. The agreement provides for a monthly base rent of $88 per month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs. The lease was terminated on November 30, 2008. Rent and related expenses of $263 and $227 were recognized for the three months ending November 30, 2008 and 2007, respectively.

(9)	As described in Note 10, the Company entered into various unsecured line of credit agreements with its majority shareholder. Interest expense booked on these agreements amounted to $7 and $18 for the three months ending November 30, 2008 and 2007, respectively.

(10)

Guarantee fees approved by the Company’s Board of Directors were paid during the three months ending November 30, 2008 to the Company’s Chief Executive Officer in the amount of $150. The fees were associated with the Chief Executive Officer providing personal guarantees for a substantial portion of the Company’s debt obligations.

Other Related Party Transactions

The Company’s majority shareholders have entered into various put/call option agreements (“option agreements”) with the Company’s common stock over the last five years. Option agreements with these shareholders are included in the acquisitions of Nor-Cote, PSM, and CSM. The put/ call options range in price from $1 to $4 per common share. During fiscal year 2008, the majority shareholders acquired 102,843 shares of the Company’s common stock related to option agreements with CSM for approximately $1,062. During fiscal 2007, the majority shareholders acquired 2,489,000 shares of the Company’s common stock related to option agreements with Nor-Cote and PSM for approximately $12,050.

Guaranties

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

NOTE 19- SIGNIFICANT ESTIMATES

Significant estimates have been made by management with respect to the realizability of the Company’s deferred tax assets. Actual results could differ from these estimates making it reasonably possible that a change in these estimates could occur in the near term. The net decrease in the valuation allowance for deferred income tax assets was $436 and $181 at November 30, 2008 and 2007, respectively. The valuation allowance relates primarily to net operating loss carry forwards, tax credit carry forwards, and net deductible temporary differences. The Company evaluates a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS No. 109, including the number of years the Company’s operating loss and tax credits can be carried forward, the existence of taxable temporary differences, the Company’s earnings history and the Company’s near-term earnings expectations. At November 30, 2008, management believes it is more likely than not that the majority of net deferred income tax assets will not be realized.

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

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

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

NOTE 20- CONCENTRATION OF CREDIT RISK

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

NOTE 21- COMMITMENTS AND CONTINGENCIES

Litigation

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

Restricted Cash

Certain states and vendors require us to post letters of credit to ensure payment of taxes or payments to the Company’s vendors under health insurance and workers compensation contracts and to guarantee performance under the Company’s contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates that the Company has failed to perform specified actions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, the Company may also have to record a charge to earnings for the reimbursement. The Company does not believe that it is likely that any claims will be made under a letter of credit in the foreseeable future. As of November 30, 2008, the Company had approximately $5.6 million in restricted cash primarily to secure obligations under its PEO contracts in the Business Solutions segment.

Payment and Performance Bonds

Within the Company’s Wireless Infrastructure and Transportation Infrastructure segments, certain customers, particularly in connection with new construction, require the Company to post payment or performance bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that the Company will perform under the terms of a contract and that the Company will pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for any expenses or outlays it incurs. Under the Company’s continuing indemnity and security agreement with the surety, the Company has posted letters of credit in the amount of $3 million in favor of the surety and, with the consent of the Company’s lenders under its credit facility; the Company has granted security interests in certain of its assets to collateralize its obligations to the surety. The Company expects this letter of credit in favor of the surety to be reduced in the future. To date, the Company has not been required to make any reimbursements to the surety for bond-related costs. The Company believes that it is unlikely that it will have to fund claims under its surety arrangements in the foreseeable future.

NOTE 22 - SEGMENT INFORMATION

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

Segment & Entity		Business Activity

Business Solutions
Professional Staff Management, Inc. and subsidiaries; CSM, Inc. and subsidiaries and related entities; Employer Solutions Group, Inc. and related entities; Precision Employee Management, LLC		Provider of outsourced human resource services

Wireless Infrastructure
Fortune Wireless, Inc.; Magtech Services, Inc.; Cornerstone Wireless Construction Services, Inc.; James Westbrook & Associates, LLC		Provider turnkey development services for the deployment of wireless networks

Transportation Infrastructure
James H. Drew Corp. and subsidiaries		Installer of fiber optic, smart highway systems, traffic signals, street signs, high mast and ornamental lighting, guardrail, wireless communications, and fabrications of structural steel

Ultraviolet Technologies
Nor-Cote International, Inc. and subsidiaries		Manufacturer of UV curable screen printing ink products

Electronics Integration
Kingston Sales Corporation; Commercial Solutions, Inc.; Telecom Technology, Corp.		Distributor and installer of home and commercial electronics

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

	Business		Wireless		Transportation		Ultraviolet			Electronics		Holding			Segment
	Solutions (1)		Infrastructure		Infrastructure		Technologies			Integration		Company			Totals
3-Months Ended November 30, 2008
Revenue	$	16,741	$	3,312	$	12,090	$	2,771		$	1,251	$	-		$	36,165
Cost of revenue		13,340		2,458		10,747		1,596			912		-			29,053
Gross profit		3,401		854		1,343		1,175			339		-			7,112
Operating expenses
Selling, general and administrative		3,160		650		781		1,320			238		220			6,369
Depreciation and amortization		169		11		5		59			1		131			376
Total operating expenses		3,329		661		786		1,379			239		351			6,745

Segment operating income (loss)	$	72	$	193	$	557	$	(204	)	$	100	$	(351	)	$	367

(1) Gross billings of $149,548 less worksite employee payroll costs of $132,808.

	Business Solutions (1)		Wireless Infrastructure		Transportation Infrastructure		Ultraviolet Technologies		Electronics Integration			Operating Total
3-Months Ended November 30, 2007
Revenue	$	20,369	$	5,527	$	11,580	$	3,266	$	3,013		$	43,755
Cost of revenue		16,255		3,841		10,258		1,882		2,611			34,847
Gross profit		4,114		1,686		1,322		1,384		402			8,908
Operating expenses
Selling, general and administrative		3,386		1,080		815		1,301		425			7,007
Depreciation and amortization		353		41		4		70		14			482
Impairment		-				-		-					-
Total operating expenses		3,739		1,121		819		1,371		439			7,489

Segment operating income (loss)	$	375	$	565	$	503	$	13	$	(37	)	$	1,419

	Holding Company			Consolidated VIE		VIE Elimination			Segment Totals
3-months ended November 30, 2007
Revenue	$	-		$	433	$	(431	)	$	43,757
Cost of revenue		-			-		-			34,847
Gross profit		-			433		(431	)		8,910
Operating expenses
Selling, general and administrative		372			17		(431	)		6,965
Depreciation and amortization		160			49		-			691
Impairment		-			-		-			-
Total operating expenses		532			66		(431	)		7,656

Segment operating income (loss)	$	(532	)	$	367	$	-		$	1,254

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

	Business		Electronics		Holding
	Solutions		Integration		Company			Totals
As of November 30, 2008 (Unaudited)
Current Assets
Cash and equivalents	$	2,612	$	-	$	(79	)	$	2,533
Restricted cash		5,578		-		-			5,578
Accounts receivable, net		2,582		-		28			2,610
Costs and estimated earnings in excess
of billings on uncompleted contracts		-		-		-			-
Inventory, net		13		-		-			13
Deferred tax asset		1,489		-		-			1,489
Prepaid expenses and
other current assets		1,011		-		58			1,069
Assets of discontinued operations, net		-		708		-			708
Total Current Assets		13,285		708		7			14,000

Other Assets
Property, plant & equipment, net		643		-		390			1,033
Accounts receivable - long term		-		-		-			-
Goodwill		12,339		-		-			12,339
Other intangible assets, net		3,500		-		-			3,500
Term note receivable-related party		-		-		3,240			3,240
Other long term assets		22		-		21			43
Total Other Assets		16,504		-		3,651			20,155

Total Assets	$	29,789	$	708		3,658		$	34,155

	Business		Wireless		Transportation		Ultraviolet		Electronics		Operating
	Solutions		Infrastructure		Infrastructure		Technologies		Integration		Total
As of August 31, 2008 (Audited)
Current Assets
Cash and equivalents	$	2,055	$	230	$	1,029	$	527	$	48	$	3,889
Restricted cash		5,370		-		-		-		-		5,370
Accounts receivable, net		3,093		2,760		8,147		1,859		1,442		17,301
Costs and estimated earnings in excess
of billings on uncompleted contracts		-		192		2,593		-		-		2,785
Inventory, net		17		39		2,312		1,646		353		4,367
Deferred tax asset		922		-		613		-		-		1,535
Prepaid expenses and
other current assets		1,263		233		361		302		65		2,224
Total Current Assets		12,720		3,454		15,055		4,334		1,908		37,471

Other Assets
Property, plant & equipment, net		641		306		1,418		1,916		42		4,323
Accounts receivable - long term		-		6		859		-		-		865
Goodwill		12,339		-		152		-		-		12,491
Other intangible assets, net		3,602		-		-		-		-		3,602
Other long term assets		23		-		-		13		-		36
Total Other Assets		16,605		312		2,429		1,929		42		21,317

Total Assets	$	29,325	$	3,766	$	17,484	$	6,263	$	1,950	$	58,788

	Holding			Consolidated			Segment
	Company			VIE			Totals
As of August 31, 2008 (Audited)
Current Assets
Cash and equivalents	$	831		$	20		$	4,740
Restricted cash		-			-			5,370
Accounts receivable, net		(96	)		-			17,205
Costs and estimated earnings in excess of billings on uncompleted contracts		-			-			2,785
Inventory, net		-			-			4,367
Deferred tax asset		-			-			1,535
Prepaid expenses and								-
other current assets		114			(75	)		2,263
Total Current Assets		849			(55	)		38,265

Other Assets
Property, plant & equipment, net		424			6,002			10,749
Accounts receivable - long term		-			-			865
Goodwill		-			-			12,491
Other intangible assets, net		-			-			3,602
Other long term assets		103			1			140
Total Other Assets		527			6,003			27,847

Total Assets	$	1,376		$	5,948		$	66,112

NOTE 23 – GOING CONCERN

The accompanying consolidated financials statements have been prepared assuming that the Company will continue as a going concern. The Company had cash flow provided by operations of $1,824 for the three months ended November 30, 2008. As described in Note 2, by selling the subsidiaries in four segments that overall have been underperforming and require a higher level of working capital investment, management believes they will be able to start generating positive cash flows immediately. The conversion of the outstanding debt to preferred stock by the Company’s majority shareholder will also result in a significant decrease in the debt service requirements in 2009. With the Company’s human capital and financial resources all focusing on the profitability of a segment that historically has generated operating income and strong cash flows from operations, management believes the Company will have adequate cash to fund anticipated needs through August 31, 2009. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

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

Actual events and results involve risks and uncertainties and may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Factors that might cause or contribute to such differences, include, but are not limited to, the risks and uncertainties that are discussed under the heading “Risk Factors” disclosed within Form 10-K for the year ended August 31, 2008. Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission.

OVERVIEW

Fortune Industries is a holding company of various product and service entities which operate in diverse market segments. The terms "we," "our," "us," "the Company," and "management" as used herein refer to Fortune Industries, Inc. and its subsidiaries unless the context otherwise requires. We provide a variety of services and products for selected market segments, which are classified under five operating segments: Business Solutions; Wireless Infrastructure; Transportation Infrastructure; Ultraviolet Technologies; and Electronics Integration.

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

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

Recent Developments

Effective November 30, 2008, the Company completed a transaction to sell all of the outstanding shares of common stock of the following wholly-owned subsidiaries: James H Drew Corporation, Nor-Cote International, Inc., Fortune Wireless, Inc. and Commercial Solutions, Inc. The subsidiaries were sold to related parties entities owned by the Company’s majority shareholders in exchange for a $10,000,000 reduction in the outstanding balance of the term loan note due to the majority shareholder and a three-year term note in the amount of $3,240,000. The transaction also included the conversion of the remaining term loan note balance to Preferred Stock and the issuance of additional warrants. For further discussion of this transaction, see Note 2 – Disposition of Assets in the Notes to the Consolidated Financial Statements.

Effective November 30, 2008, the Company will no longer be operating in the Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies and Electronics Integration Segments.

Effective December 1, 2008, the Company will devote substantially all its resources on the growth and profitability of the Business Solutions segment.

Business Solutions Segment

The Business Solutions segment is comprised of Professional Employer Organizations (PEOs) which provide full-service human resources outsourcing services through co-employment relationships with their clients. Companies operating in the Business Solutions Segment include Professional Staff Management, Inc. and subsidiaries (“PSM”); CSM, Inc. and subsidiaries and related entities (“CSM”); Precision Employee Management, LLC (“PEM”); and Employer Solutions Group, Inc. and related entities (“ESG”). Our PEOs provide services typically managed by a company’s internal human resources and accounting departments, including payroll and tax processing and management, worker’s compensation and risk management, benefits administration, unemployment administration, human resource compliance services, 401k and retirement plan administration and employee assessments. Clients represent a wide variety of industries from healthcare, professional services, software development, manufacturing logistics, telemarketing and construction. Combined, these organizations provide co-employment services to approximately 16,200 employees in all 50 states.

Wireless Infrastructure Segment

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

Effective November 30, 2008, the Company sold its subsidiaries operating in the Wireless Infrastructure segment.

Site Acquisition

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

Engineering, Architecture and Design

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

Construction/Technical Services

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

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

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

Transportation Infrastructure Segment

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

Effective November 30, 2008, the Company sold its subsidiaries operating in the Transportation Infrastructure segment.

Ultraviolet Technologies Segment

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

Effective November 30, 2008, the Company sold its subsidiaries operating in the Ultraviolet Technologies segment.

Electronics Integration Segment

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

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

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

Effective November 30, 2008, the Company sold its subsidiary Commercial Solutions and discontinued operations of its subsidiaries Kingston and TTC d/b/a AVR in its Electronics Integration segment.

CRITICAL ACCOUNTING POLICIES

The Company’s accounting policies, which are in compliance with accounting principles generally accepted in the United States, require application of methodologies, estimates and judgments that have a significant impact on the results reported in the Company’s financial statements. Those policies that, in the belief of management, are critical and require the use of complex judgment in their application, are disclosed on the Company’s Form 10-K for the year ended August 31, 2008. Since August 31, 2008, there have been no material changes to the Company’s critical accounting policies.

RESULTS OF OPERATIONS: COMPARISON OF THE THREE MONTH PERIODS ENDED NOVEMBER 30, 2008 AND NOVEMBER 30, 2007

Executive Overview of Financial Results

Results of operations for the three-month period ended November 30, 2008 and 2007 are as follows:

	Revenue for the					Operating income (loss) for the
	3-months ended November 30,					3-months ended November 30,
	2008		2007			2008			2007
	(Dollars in thousands)
Business Solutions	$	16,741	$	20,369		$	72		$	375
Wireless Infrastructure		3,312		5,527			193			565
Transportation Infrastructure		12,090		11,580			557			503
Ultraviolet Technologies		2,771		3,266			(204	)		13
Electronics Integration		1,251		3,013			100			(37	)
Holding Company		-		-			(351	)		(532	)
Variable Interest Entity		-		433			-			367
Variable Interest Entity Elimination		-		(431	)		-			-
Segment Totals	$	36,165	$	43,757		$	367		$	1,254

Net Income Available to Common Shareholders						$	44		$	10

Net income available to common stock shareholders was $0.04 million or $0.00 per diluted share on revenue of $36.2 million for the three month period ended November 30, 2008 compared with net income available to common stock shareholders of $0.01 million or $0.00 per diluted share on revenue of $43.8 million for the three month period ended November 30, 2007. This represents a 17% decrease in revenue and a 340% percent increase in net income.

The following factors primarily contributed to the decrease in revenue for the three-month period ended November 30, 2008:

·	The Business Solutions decreases are due to a decrease in the total number of worksite employees as a result of the overall downturn in economic conditions.

·	The Wireless Infrastructure decreases are due to downsizing operations, an overall industry slowdown, and the inclusion of one large construction contract in the three-month period ended November 30, 2007.

·	The Ultraviolet Technologies decreases are due to decreases in sales as a result of the overall downturn in economic conditions.

·	The Electronics Integration decreases are due to decreases in commercial sales as a result of the overall downturn in economic conditions.

The following factors primarily contributed to the decrease in segment operating income for the three-month period ended November 30, 2008:

·	The Business Solutions decreases are due to unfavorable claims related to health and workers’ compensation plans and a reduction in revenue due to the decrease in the total number of worksite employees as a result of the overall downturn in economic conditions.

·	The Wireless Infrastructure and Ultraviolet Technologies decreases are due to decreased revenue in each of the segments.

Results by segment are described in further detail as follows:

Business Solutions

Business Solutions segment operating results for three-month period ended November 30, 2008 and 2007 are as follows:

	Three Month Period Ended
	November 30, 2008				November 30, 2007
	(Dollars in thousands)
Revenues	$	16,741	100	%	$	20,369	100	%
Cost of revenues		13,340	79.7	%		16,255	79.8	%
Gross profit		3,401	20.3	%		4,114	20.2	%

Operating expenses
Selling, general and administrative		3,160	18.9	%		3,386	16.6	%
Depreciation and amortization		169	1.0	%		353	1.7	%
Total operating expenses		3,329	19.9	%		3,739	18.4	%

Segment operating income	$	72	0.4	%	$	375	1.8	%

Revenue

Revenue for the three-month period ended November 30, 2008 was $16.7 million, compared to $20.4 million for the three-month period ended November 30, 2007, a decrease of $3.6 million or 18%. Revenue decreased primarily due to attrition of customers and the impact of the economic slowdown on our customers.

Gross Profit

Gross profit for the three-month period ended November 30, 2008 was $3.4 million, representing 20% of revenue, compared to $4.1 million, representing 20% of revenue for the three month period ended November 30, 2007, a decrease of $0.7 million or 17%. Gross profit as a dollar amount decreased due to the reduction in revenue. Gross profit as a percentage of revenue did not change significantly.

Operating Income

Operating income for the three-month period, ended November 30, 2008 was $0.07 million, compared to $0.4 million for the three-month period ended November 30, 2007, a decrease of $0.3 million or 81%. Operating income decreased as a direct result of the overall decrease in revenues during the three-month period ended November 30, 2008.

Wireless Infrastructure

Wireless Infrastructure segment operating results for the three-month period ended November 30, 2008 and 2007 are as follows:

	Three Month Period Ended
	November 30, 2008				November 30, 2007
	(Dollars in thousands)
Revenues	$	3,312	100	%	$	5,527	100	%
Cost of revenues		2,458	74.2	%		3,841	69.5	%
Gross profit		854	25.8	%		1,686	30.5	%

Operating expenses
Selling, general and administrative		650	19.6	%		1,080	19.5	%
Depreciation and amortization		11	0.3	%		41	0.7	%
Total operating expenses		661	20.0	%		1,121	20.3	%

Segment operating income	$	193	5.8	%	$	565	10.2	%

Revenue

Revenue for the three-month period ended November 30, 2008 was $3.3 million compared to $5.5 million for the three-month period ended November 30, 2007, a decrease of $2.2 million or 40%. The decrease in revenues is primarily due downsizing operations, an overall industry slowdown, and the inclusion of one large construction contract in the three-month period ended November 30, 2007.

Gross Profit

Gross profit for the three-month period ended November 30, 2008 was $0.9 million, representing 26% of revenue, compared to $1.7 million representing 31% of revenue for the three-month period ended November 30, 2007, a decrease of $0.8 million or 49%. Gross profit as for the three-month period ended November 30, 2008 decreased as a result of decreased revenues due to the inclusion of a large construction contract included in the three-month period ended November 30, 2007 and an overall increase in competition due to the industry slow down in the current period.

Operating Income

Operating income for the three-month period, ended November 30, 2008 was $0.2 million, compared to $0.6 million for the three-month period ended November 30, 2007, a decrease of $0.4 million or 66%. Operating income decreased for the three-month period ended November 30, 2008 resulting from the decrease in gross profit noted above.

Transportation Infrastructure

Transportation Infrastructure segment operating results for the three month period ended November 30, 2008 and 2007 are as follows:

	Three Month Period Ended
	November 30, 2008				November 30, 2007
	(Dollars in thousands)
Revenues	$	12,090	100	%	$	11,580	100	%
Cost of revenues		10,747	88.9	%		10,258	88.6	%
Gross profit		1,343	11.1	%		1,322	11.4	%

Operating expenses
Selling, general and administrative		781	6.5	%		815	7.0	%
Depreciation and amortization		5	0.0	%		4	0.0	%
Total operating expenses		786	6.5	%		819	7.1	%

Segment operating income	$	557	4.6	%	$	503	4.3	%

Revenue

Revenue for the three-month period ended November 30, 2008 was $12.1 million compared to $11.6 million for the three-month period ended November 30, 2007, an increase of $0.5 million or 4%. Revenue did not change significantly for the three-month period ended November 30, 2008.

Gross Profit

Gross profit for the three-month period ended November 30, 2008 was $1.3 million, representing 11% of revenue, compared to $1.3 million representing 11% of revenue for the three month period ended November 30, 2007, an increase of $0.02 million or 2%. Gross profit did not change significantly for the three-month period ended November 30, 2008.

Operating Income

Operating income for the three-month period ended November 30, 2008 was $0.6 million, compared to $0.5 million for the three-month period ended November 30, 2007, an increase of $0.05 million or 11%. Operating income did not change significantly for the three-month period ended November 30, 2008.

Ultraviolet Technologies

Ultraviolet Technologies segment operating results for the three-month period ended November 30, 2008 and 2007 are as follows:

	Three Month Period Ended
	November 30, 2008					November 30, 2007
	(Dollars in thousands)
Revenues	$	2,771		100	%	$	3,266	100	%
Cost of revenues		1,596		57.6	%		1,882	57.6	%
Gross profit		1,175		42.4	%		1,384	42.4	%

Operating expenses
Selling, general and administrative		1,320		47.6	%		1,301	39.8	%
Depreciation and amortization		59		2.1	%		70	2.1	%
Total operating expenses		1,379		49.8	%		1,371	42.0	%

Segment operating loss	$	(204	)	-7.4	%	$	13	0.4	%

Revenue

Revenue for the three-month period ended November 30, 2008 was $2.8 million compared to $3.3 million for the three-month period ended November 30, 2007, a decrease of $0.5 million or 15%. Revenue decreased primarily due to decreased sales worldwide as a result of the economic slowdown.

Gross Profit

Gross profit for the three-month period ended November 30, 2008 was $1.2 million representing 42% of revenue, compared to $1.4 million representing 42% of revenue for the three month period ended November 30, 2007, a decrease of $0.2 or 15%. Gross profit decreased as a result of the sales decreases noted above.

Operating Income

Operating loss for the three-month period ended November 30, 2008 was $0.2 million, compared to an operating income of $0.01 million for the three-month period ended November 30, 2007, a decrease of $0.2 million or 1667%. Operating income decreased primarily due to a decrease in sales without a corresponding decrease in operating expenses.

Electronics Integration

Electronics Integration segment operating results for the three month period ended November 30, 2008 and 2007 are as follows:

	Three Month Period Ended
	November 30, 2008				November 30, 2007
	(Dollars in thousands)
Revenues	$	1,251	100	%	$	3,013		100	%
Cost of revenues		912	72.9	%		2,611		86.7	%
Gross profit		339	27.1	%		402		13.3	%

Operating expenses
Selling, general and administrative		238	19.0	%		425		14.1	%
Depreciation and amortization		1	0.1	%		14		0.5	%
Total operating expenses		239	19.1	%		439		14.6	%

Segment operating income (loss)	$	100	8.0	%	$	(37	)	-1.2	%

Revenue

Revenue for the three-month period ended November 30, 2008 was $1.3 million compared to $3.0 million for the three-month period ended November 30, 2007, a decrease of $1.8 million or 59%. Revenue decreased for the three-month period ended November 30, 2008 primarily due to decreased sales volumes of television products, significant vendor supply chain backorders and decreased services work as a result of the economic downturn and the decision to discontinue operations within the segment.

Gross Profit

Gross profit for the three-month period ended November 30, 2008 was $0.3 million representing 27% of revenue, compared to $0.4 million representing 13% of revenue for the three month period ended November 30, 2007, a decrease of $0.1 million or 25%. Gross profit dollars decreased as a direct result of the overall sales decrease. Gross profit percentage increased as a result of discontinuing less profitable operations and overall expenditure reductions in the segment.

Operating Income

Operating income for the three month period ended November 30, 2008 was $0.1 million, compared to an operating loss of $0.04 million for the three month period ended November 30, 2007, an increase of $0.1 million or 370%. The increase in operating income is a direct result of expenditure decreases and operating efficiencies recognized in the three-month period ended November 30, 2008.

Holding Company

Operating Expense

The Holding Company does not have any income producing operating assets. As such, the operating loss was equal to operating expenses. Operating expenses consist primarily of employee compensation and benefits, legal, accounting and consulting fees. Operating expenses for the three-month period ended November 30, 2008 were $0.35 million, compared to $0.55 million for the three-month period ended November 30, 2007, a decrease of $0.2 million or 34%. Operating expense decreased as a result of expenditure reductions and allocating more overhead expenses to the subsidiaries.

Interest Expense

Interest expense was $0.1 million for the three-month period ended November 30, 2008, compared to $0.9 million for the three-month period ended November 30, 2007, a decrease of $0.8 million or 84%. The decrease was primarily due to eliminating the consolidation of the VIE, decreased interest rates and allocating more interest to the subsidiaries.

Income Taxes

The Company recorded a 100% valuation allowance on additions to deferred tax assets due to uncertainty regarding future profitability of the Company based on the last year’s loss. In addition, management is required to estimate taxable income for future years by taxing jurisdictions and to consider this when making its judgment to determine whether or not to record a valuation allowance for part or all of a deferred tax asset. A one percent change in the Company's overall statutory tax rate for 2009 would not have a material effect in the carrying value of the net deferred tax assets or liabilities.

Variable Interest Entity

The Company leases a total of five facilities from a consolidated variable interest entity, whose primary purpose is to own and lease these properties to the Company. Effective November 30, 2008, the Company terminated its lease agreement for its corporate headquarters and sold its James H. Drew and Norcote subsidiaries which leased facilities from the variable interest entity; therefore, the Company is no longer required to consolidate the variable interest entity because the Company is no longer the primary beneficiary as defined by FIN 46R. The VIE does not have any other significant assets. For the three month period ended November 30, 2007, the consolidation of the VIE comprised of $0.433 million in rental income, offset by a $0.126 million charge to interest expense, a $0.049 million charge to depreciation expense, $0.047 loss on disposal of building, $0.016 million in administrative and other miscellaneous expenses

As described in Note 3 of the accompanying consolidated financial statements, effective November 30, 2008 the Company is no longer considered the primary beneficiary of the variable interest entity and is not required to consolidate Fisbeck-Fortune Development as of this date.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity include cash and equivalents and proceeds from debt borrowings. We had cash and equivalents of $2.6 million at November 30, 2008 and $4.7 million at August 31, 2008.

We had working capital of ($1.0) million at November 30, 2008 compared with $3.7 million at August 31, 2008. The decrease in working capital was primarily due to the disposition of four of our five operating segments at November 30, 2008. Current assets are primarily comprised of cash and equivalents, net accounts receivable, and prepaid expenses. Current liabilities are primarily comprised of accounts payable and accrued expenses.

Total debt at November 30, 2008 was $0.07 million. Total debt at August 31, 2008 was $45.4 million including a $3.4 million convertible term note, $3.6 million in bank debt, $32.0 million in debt to a related party, and $6.4 million in the variable interest entity’s debt. Total unused borrowings under the line of credit were $2.8 million at August 31, 2008. 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, we must meet certain financial ratios. Total capital expenditures were approximately $0.1 million and $0.5 million for the three-month period ended November 30, 2008 and 2007, respectively. Sources of funds for these expenditures have primarily been from available cash flow.

Cash Flows

Cash flows provided by (used in) operations for the three month period ended November 30, 2008 and 2007 were $1.8 million and ($1.9) million, respectively. This increase in operating cash flows was due primarily to the improved management and oversight of working capital assets and the disposition of capital-intensive construction assets as described in Note 2.

Net cash flow used in investing activities was $0.1 million for the three month period ended November 30, 2008 compared to $0.04 million for the three month period ended November 30, 2007. The decrease was primarily due to the fact that no fixed assets were disposed of for cash during the three month period ending November 30, 2008.

Net cash flow used in financing activities was $3.9 million for the three month period ended November 30, 2008 compared to $2.1 million for the three month period ended November 30, 2007. The decrease was primarily the result of making our final balloon payment for the Laurus convertible debt.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table summarizes our contractual obligations as of November 30, 2008:

	Payments due by
Contractual obligation	Total		Less than 1 year		1-2 years		3-5 years		More than 5 years

Debt and capital lease obligations	$	65	$	38	$	21	$	6	$	-
Operating lease (1)		2,240		658		568		1,014		-
Total	$	2,305	$	696	$	589	$	1,020	$	-

(1)

Operating leases represent the total future minimum lease payments.

OFF BALANCE SHEET ARRANGEMENTS

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

Transactions with Related Parties

We have entered into various acquisition agreements over the past three years which contain option agreements or rights between the sellers of the acquired entities and our majority shareholders, Mr. Carter Fortune and Mr. John Fisbeck, related to the Company’s stock provided as consideration under the acquisitions. As more fully described in Note 18, the option agreements provide for put/ call options on the Company’s common stock held by the sellers of the acquired companies. Total estimated cash outlays by the Company’s majority shareholders, subsequent to November 30, 2008, for these options are estimated at $1.0 million and are expected to be exercised over the next six months.

We lease a total of five facilities from a VIE as described earlier in this filing. The VIE’s primary purpose is to own and lease these properties to the Company. The VIE does not have any other significant assets. Effective November 30, 2008, the Company terminated its lease agreement for its corporate headquarters and sold its James H. Drew and Norcote subsidiaries which leased facilities from the variable interest entity; therefore, the Company is no longer required to consolidate the variable interest entity because the Company is no longer the primary beneficiary as defined by FIN 46R.

Guarantees

A significant portion of our debt and surety bonds are personally guaranteed by the Company’s Chairman of the Board and Chief Executive Officer. Future changes to these guarantees would affect financing capacity of the Company. During the fiscal year ended August 31, 2008, the Board approved the payment of certain guarantee fees to the Chief Executive Officer. The Company paid guarantee fees of $0.2 million for the three months ending November 30, 2008.

Restricted Cash

Certain states and vendors require us to post letters of credit to ensure payment of taxes or payments to our vendors under health insurance and workers compensation contracts and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this situation were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement. We do not believe that it is likely that any claims will be made under a letter of credit in the foreseeable future. As of November 30, 2008, we had approximately $5.6 million in restricted cash primarily to secure obligations under our PEO contracts in the Business Solutions segment.

Payment and Performance Bonds

Within our Wireless Infrastructure and Transportation Infrastructure segments, certain customers, particularly in connection with new construction, require us to post payment or performance bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail to perform under a contract or fail to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs. Under our continuing indemnity and security agreement with the surety, we have posted letters of credit in the amount of $22.0 million in favor of the surety and, with the consent of our lender under our credit facility; we have granted security interests in certain of our assets to collateralize our obligations to the surety. To date, we have not been required to make any reimbursements to the surety for bond-related costs. We believe that it is unlikely that we will have to fund claims under our surety arrangements in the foreseeable future. As of November 30, 2008, an aggregate of approximately $3.0 million in original face amount of bonds issued by the surety were outstanding.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to certain market risks arising from adverse changes in interest rates, primarily due to the potential effect of such changes on its variable rate line of credit and convertible term note as described in Note 10 to the consolidated financial statements. All of the Company’s debt as of November 30, 2008 bears interest at fixed rates.

Cash and cash equivalents as of November 30, 2008 was $2.6 million and is primarily in subsidiary operating accounts. A hypothetical 10% adverse change in the average interest rate on the Company’s investments would not have had a material effect on net income for the three month period ended November 30, 2008. We do not currently utilize any derivative financial instruments to hedge interest rate risks.

We are exposed to foreign currency risks due to both transactions and translations between functional and reporting currencies in our European, Singapore, and Chinese foreign subsidiaries. A hypothetical 10% adverse change in the foreign currency translation would not have had a material effect on net income for the three month period ended November 30, 2008. We do not currently utilize any derivative financial instruments to hedge foreign currency risks.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company 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, Chief Financial Officer, and Chief Operating Officer as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, including the Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer 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, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired objectives.

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of November 30, 2008. Based on this evaluation, the Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer have concluded that, for the reasons more fully set forth below, the Company’s disclosure controls and procedures were not effective on November 30, 2008 in providing reasonable assurance that information required to be disclosed in the reports the Company file pursuant to the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

More specifically, the Company’s management has concluded that (i) additional accounting personnel were needed at certain subsidiaries at November 30, 2008 to ensure that certain disclosure controls and procedures were operating effectively; (ii) greater segregation of duties was needed in the accounting functions; and (iii) certain procedures should be documented to ensure that personnel turnover does not result in a failure of those procedures. The Company will continue to evaluate the need for additional staff at the parent and subsidiary levels, but given the size and location of the Company’s subsidiaries the Company believes it will continue to face challenges in attracting and retaining qualified personnel. Additionally, the Company is also in the process of evaluating ways in which the impact of personnel turnover on the implementation of disclosure controls and procedures can be reduced. Management continues to evaluate the effectiveness of this segregation and the need for additional enhancements, including, but not limited to, the addition of accounting personnel.

PART II--OTHER INFORMATION.

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors

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

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

None

Item 3. Defaults Upon Senior Securities.

None

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

None

Item 5. Other Information.

None

Item 6. Exhibits

The following exhibits are included herein:

31.1	Rule 15d-14(a) Certification of CEO
31.2	Rule 15d-14(a) Certification of CFO
32.1	Section 1350 Certification of CEO
32.2	Section 1350 Certification of CFO

SIGNATURES

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

	Fortune Industries, Inc.
	(Registrant)

Date: January 14, 2009	By: /s/ John F. Fisbeck
	John F. Fisbeck,
	Chief Executive Officer


Date: January 14. 2009	By: /s/ Garth A. Allred
	Garth A Allred,
	Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Fortune Industries (FFI) Inactive 10-Q2009 Q2 Quarterly report

Content analysis