Fortune Industries (FFI) 10-Q/A 2007 Q4 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2007

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-19049

FORTUNE INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

INDIANA	20-2803889
(State or other jurisdiction of	(IRS 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 o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(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 July 16, 2007, 10,822,607 shares of the Company’s $0.10 per share par value common stock were outstanding.

Explanatory Note

The purpose of Amendment No. 1 to the Company’s Quarterly Report for the quarter ended May 31, 2007 is to reclassify long term debt from our credit facility loan to current debt as a result of covenant violations, revise our statement of cash flows for our variable interest entity activity, reclassify our temporary equity component related to the ESG acquisition to liabilities, reclassify our investments in Marketable Equity Securities of our variable interest entity to treasury stock, and disclose put options related to our ESG acquisition.

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

• Part I, Item 1. Consolidated Balance Sheets, Consolidated Statement of Cash Flows, Consolidated Statement of changes in Shareholders’ Equity, and Notes to the Consolidated Financial Statements, and

• Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The financial statements and other disclosures in the amended Quarterly Report on Form 10-Q/A do not reflect any events that have occurred after the Quarterly Report on Form 10-Q was initially filed on July 16, 2007. The following table sets forth the effects of the restatement on previously reported consolidated financial statements as of, and for the nine months ended, May 31, 2007:

	May 31, 2007
	As Previously Reported		Restated
Consolidated Balance Sheet Data:
Marketable Equity Securities (Note 3)	$	1,594	$	79
Total Current Assets	$	46,813	$	45,298
Total Assets	$	87,626	$	86,111
Short-term debt and current maturities of long-term debt (Note 8)	$	2,252	$	18,919
Line of Credit (Note 8)	$	-	$	12,931
Total Current Liabilities	$	32,621	$	62,219
Line of Credit (Note 8)	$	12,931	$	-
Long-Term Debt, less current maturities (Note 8)	$	16,935	$	268
Other long-term liabilities	$	215	$	1,029
Total Long-Term Liabilities	$	38,851	$	10,067
Treasury Stock, 384,500 shares of common stock	$	-	$	(1,515	)
Total Shareholder’s Equity	$	15,314	$	12,985
Total Liabilities and Shareholders Equity	$	87,626	$	86,111
Consolidated Statement of Changes in Shareholders’ Equity:
Variable interest entity investment in 384,500 shares of common stock of the Company	$	-	$	(1,515	)
	Nine Months Ended May 31, 2007
	As Previously Reported		Restated
Consolidated Statements of Cash Flows:
Minority interest in variable interest entity income	$	-	$	473
Net Cash Provided by Operating Activities	$	7,302	$	7,775
Proceeds from variable interest entity member contributions	$	-	$	88
Variable interest entity payments on long-term debt	$	-	$	(297	)
Distributions to variable interest entity members	$	-	$	(239	)
Net Cash Provided by Financing Activities	$	6,154	$	5,706
Consolidation of variable interest entity cash	$	25	$	-

2

FORTUNE INDUSTRIES, INC.

FORM 10-Q/A

For The Quarterly Period Ended May 31, 2007

INDEX

			Page
PART  I.    Financial Information
	ITEM 1.  Financial Statements
		Consolidated Balance Sheets as of May 31, 2007 (unaudited, restated) and August 31, 2006	4
		Consolidated Statements of Operations for the three and nine month periods ended May 31, 2007 and 2006 (unaudited)	6
		Consolidated Statement of Changes in Shareholders’ Equity for the nine month period ended May 31, 2007 (unaudited, restated)	7
		Consolidated Statements of Cash Flows for the nine month periods ended May 31, 2007 (restated) and 2006 (unaudited)	8
		Notes to the Consolidated Financial Statements (restated)	10
	ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations		30
	ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk		40
	ITEM 4.  Controls and Procedures		41
PART II.    Other Information
	ITEM 1.    Legal Proceedings		41
	ITEM 1A. Risk Factors		41
	ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds		41
	ITEM 3.    Defaults Upon Senior Securities		41
	ITEM 4.    Submission of Matters to a Vote of Security Holders		41
	ITEM 5.    Other Information		41
	ITEM 6.    Exhibits		41
Signatures			42

3

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements.

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

	May 31, 2007 (Unaudited, Restated)		August 31, 2006 (Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents	$	9,085	$	3,632
Restricted cash		4,612		3,462
Marketable equity securities (Note 3)		79		1,281
Accounts receivable, net (Note 4)		19,218		25,731
Costs and estimated earnings in excess of billings on uncompleted contracts (Note 5)		2,335		4,500
Inventory, net		6,855		6,761
Deferred tax asset (Note 9)		1,535		1,535
Prepaid expenses and other current assets		1,579		1,922
Total Current Assets		45,298		48,824
OTHER ASSETS
Property, plant & equipment, net (Note 6)		12,465		6,323
Long-term accounts receivable (Note 4)		872		1,276
Goodwill (Note 7)		18,596		11,984
Other intangible assets, net (Note 7)		7,751		4,299
Other long-term assets		1,129		1,579
Total Other Assets		40,813		25,461
TOTAL ASSETS	$	86,111	$	74,285

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

4

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(DOLLARS IN THOUSANDS)

	May 31, 2007 (Unaudited, Restated)			August 31, 2006 (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current maturities of long-term debt (Note 8)	$	18,919		$	2,124
Line of credit (Note 8)		12,931			-
Current maturities of convertible term note (Note 8)		1,818			1,364
Variable interest entity line of credit (Note 8)		2,200			-
Variable interest entity current maturities of long-term debt (Note 8)		504			-
Accounts payable		6,112			9,324
Health and workers' compensation reserves		6,450			3,363
Accrued expenses		8,611			5,449
Billings in excess of costs and estimated earnings on uncompleted contracts (Note 5)		1,753			1,968
Other current liabilities		2,922			1,849
Total Current Liabilities		62,220			25,441
LONG-TERM LIABILITIES
Line of credit (Note 8)		-			3,330
Long-term debt, less current maturities (Note 8)		268			18,213
Convertible term note (Note 8)		4,086			6,136
Variable interest entity long-term debt, less current maturities (Note 8)		4,684			-
Other long-term liabilities		1,029			215
Total Long-Term Liabilities		10,067			27,894
Total Liabilities		72,287			53,335
MINORITY INTEREST IN VARIABLE INTEREST ENTITY		840			-
SHAREHOLDERS' EQUITY
Common stock, $0.10 par value; 150,000,000 authorized; 10,822,607 and 10,522,722 issued and outstanding at May 31, 2007 and August 31, 2006, respectively		1,120			1,053
Preferred stock, $0.10 par value; 1,000,000 authorized; 66,180 issued and outstanding at May 31, 2007 and August 31, 2006		6,618			6,618
Additional paid-in capital and warrants outstanding		19,419			17,633
Accumulated deficit		(12,902	)		(4,518	)
Accumulated other comprehensive income		244			164
		14,499			20,950
Less: Treasury stock, 384,500 and 0 shares of common stock outstanding at May 31, 2007 and August 31, 2006, respectively		(1,515	)		-
Total Shareholders' Equity		12,984			20,950
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	86,111		$	74,285

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

5

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

	Three Month Period Ended						Nine Month Period Ended
	May 31, 2007			May 31, 2006			May 31, 2007			May 31, 2006
REVENUES
Service revenues	$	24,727		$	13,558		$	55,372		$	41,979
Product revenues		17,559			25,910			59,837			67,288
TOTAL REVENUES		42,286			39,468			115,209			109,267
COST OF REVENUES
Service cost of revenues		20,341			10,794			44,629			30,927
Product cost of revenues		13,916			21,104			49,248			55,998
TOTAL COST OF REVENUES		34,257			31,898			93,877			86,925
GROSS PROFIT		8,029			7,570			21,332			22,342
OPERATING EXPENSES
Selling, general and administrative expenses		7,702			6,182			21,815			17,721
Depreciation and amortization		613			596			2,415			1,620
Impairment (Note 1)		-			-			2,027			-
Total Operating Expenses		8,315			6,778			26,257			19,341
OPERATING INCOME (LOSS)		(286	)		792			(4,925	)		3,001
OTHER INCOME (EXPENSE)
Interest income		115			116			302			258
Interest expense		(843	)		(649	)		(2,498	)		(1,791	)
Gain (loss) on investments in marketable securities, net (Note 3)		(25	)		3			(8	)		8
Gain (loss) on disposal of assets		40			-			(371	)		-
Exchange rate gain		20			15			11			12
Other income		82			13			94			69
Total Other Income (Expense)		(611	)		(502	)		(2,470	)		(1,444	)
INCOME (LOSS) BEFORE MINORITY INTEREST IN VARIABLE INTEREST ENTITY		(897	)		290			(7,395	)		1,557
Minority Interest in Variable Interest Entity (Note 12)		309			-			473			-
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		(1,206	)		290			(7,868	)		1,557
Provision for income taxes (Note 9)		25			23			144			44
NET INCOME (LOSS)		(1,231	)		267			(8,012	)		1,513
Preferred stock dividends		124			124			372			207
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	(1,355	)	$	143		$	(8,384	)	$	1,306
BASIC INCOME (LOSS) PER COMMON SHARE	$	(0.12	)	$	0.01		$	(0.78	)	$	0.12
Basic weighted average shares outstanding		11,417,748			10,549,953			10,810,765			10,556,546
DILUTED INCOME (LOSS) PER COMMON SHARE	$	(0.10	)	$	0.01		$	(0.67	)	$	0.11
Diluted weighted average shares outstanding		13,221,883			12,218,422			12,463,326			11,725,290

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

6

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(DOLLARS IN THOUSANDS)

(UNAUDITED, RESTATED)

	Common Stock		Treasury Stock (Restated)			Preferred Stock		Additional Paid-in Capital and Warrants Outstanding		Accumulated Deficit			Accumulated Other Comprehensive Income		Total Shareholders’ Equity (Restated)			Comprehensive Income (Loss)
BALANCE AT AUGUST 31, 2006	$	1,053	$	-		$	6,618	$	17,633	$	(4,518	)	$	164	$	20,950
Net loss		-		-			-		-		(8,012	)		-		(8,012	)		(8,012	)
Issuance of 665,883 shares of common stock for acquisitions		66		-			-		1,738		-			-		1,804		$	-
Issuance of 10,000 shares of common stock for compensation		1		-			-		48		-			-		49		$	-
Preferred Stock Dividends		-		-			-		-		(372	)		-		(372	)		-
Foreign currency translation adjustments, net of tax		-		-			-		-		-			49		49			49
Unrealized gains on investments, net of tax		-		-			-		-		-			23		23			23
Reclassification adjustments for realized gains & losses included in net income, net of tax		-		-			-		-		-			8		8			8
Variable interest entity investment in 384,500 shares of common stock of the Company		-		(1,515	)		-		-		-			-		(1,515	)		-
Total comprehensive income (loss)		-		-			-		-		-			-		-		$	(7,932	)
BALANCE AT MAY 31, 2007	$	1,120	$	(1,515	)	$	6,618	$	19,419	$	(12,902	)	$	244	$	12,984

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements

7

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

(UNAUDITED)

	Nine Month Period Ended
	May 31, 2007 (Restated)			May 31, 2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	(8,012	)	$	1,513
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,415			1,620
Provision for losses on accounts receivable		342			(120	)
(Gain) loss on sale of investments		8			(8	)
Loss on disposal of assets		506			-
Stock based compensation		49			-
Minority interest in variable interest entity income		473			-
Impairment on intangible assets		2,027			-
Changes in certain operating assets and liabilities:
Restricted cash		(1,150	)		(138	)
Accounts receivable		7,472			861
Costs and estimated earnings in excess of billings on uncompleted contracts		2,165			(3,462	)
Inventory, net		(94	)		616
Prepaid assets and other current assets		2,779			286
Other long-term assets		435			(274	)
Accounts payable		(3,784	)		1,000
Health and workers' compensation reserves		1,242			(753	)
Accrued expenses and other current liabilities		1,117			(2,337	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(215	)		198
Net Cash Provided by (Used in) Operating Activities		7,775			(998	)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(905	)		(2,139	)
Sale (purchase) of marketable securities, net		1,225			(24	)
Acquisition of productive assets and businesses, net of cash received		(8,397	)		(262	)
Net Cash Used in Investing Activities		(8,077	)		(2,425	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line of credit		9,601			(1,387	)
Payments on short and long-term debt		(1,479	)		(2,089	)
Variable interest entity payments on long-term debt		(297	)		-
Borrowings (payments) from convertible debentures		(1,596	)		6,808
Dividends on preferred stock		(372	)		(207	)
Proceeds from variable interest entity member contributions		88			-
Distributions to variable interest entity members		(239	)		-
Net Cash Provided by Financing Activities		5,706			3,125
Effect of exchange rate changes on cash		49			66
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS		5,453			(232	)
CASH AND EQUIVALENTS
Beginning of Period		3,632			3,787
End of Period	$	9,085		$	3,555

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.

8

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(DOLLARS IN THOUSANDS)

(UNAUDITED)

	Nine Month Period Ended
	May 31, 2007 (Restated)			May 31, 2006
SUPPLEMENTAL DISCLOSURES
Interest paid	$	1,921		$	1,679
Income taxes paid	$	134		$	44
Unrealized net gain (loss) on marketable equity securities	$	23		$	(149	)
Acquisition of Employer Solutions Group, Inc.
Fair value of assets acquired	$	11,524
Common stock consideration		2,424
Cash paid	$	9,100
Acquisition of Precision Employee Management, LLC
Fair value of assets acquired	$	2,376
Common stock consideration		1,276
Cash paid	$	1,100
Consolidation of Variable Interest Entity
Cash	$	25
Prepaid expenses		10
Property, plant and equipment		6,675
Other long-term assets		3
Total Assets	$	6,713
Line of credit	$	2,200
Current maturities of long-term debt		504
Long-term debt		4,684
Minority interest		840
Less: Treasury Stock		(1,515	)
Total Liabilities and Minority Interest	$	6,713
Non-cash investing and financing activities:
Issuance of preferred stock for debt extinguishment				$	6,618
Issuance of warrants in connection with loan refinancing					266
				$	6,884
Acquisition of Audio Video Revolution, Inc.
Fair value of assets acquired				$	262
Cash paid					262
Liabilities recorded				$	-

See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.

9

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED,

EXCEPT PER SHARE DATA)

(UNAUDITED)

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

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 2006 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 and nine month periods ended May 31, 2007 are not necessarily indicative of the operating results to be expected for the full fiscal year.

Nature of Business: Fortune Industries, Inc. is an Indiana corporation, originally incorporated in Delaware in 1988. The Company provides a variety of services and products for selected market segments, which are classified under five operating segments, Wireless Infrastructure, Business Solutions, Transportation Infrastructure, Ultraviolet Technologies and Electronics Integration. As a holding company of various products and services, the Company has historically invested in businesses that are undervalued, underperforming, or in operations that are poised for significant growth. Management’s strategic focus is to support the revenue and earnings growth of its operations by creating synergies that can be leveraged to enhance the performance of the Company’s entities and by investing capital to fund expansion. Additionally, management continually seeks and evaluates strategic acquisitions that expand core offerings and drive incremental revenue and earnings growth.

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Fortune Industries, Inc. and its wholly-owned subsidiaries, and a variable interest entity (“VIE”), where the Company is deemed to be the primary beneficiary. Nor-Cote International, Inc. (“Nor-Cote”), a wholly-owned subsidiary, contains foreign subsidiaries from the United Kingdom, China and Singapore, which have been eliminated in consolidation at the Nor-Cote subsidiary level. All significant inter-company accounts and transactions of the Company have been eliminated.

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

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

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

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

Revenue and Cost Recognition: In the Wireless Infrastructure segment, the Company 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 the Company agrees to do the work for units of work performed. The Company also performs services on a cost-plus or time and materials basis. The Company completes most projects within twelve months. The Company generally recognizes revenue utilizing output measures, such as when services are performed, units are delivered or when contract milestones are reached. The Company’s construction services recognize revenue using the percentage of completion method on contracts in process. Under this method, the portion of the contract price recognized as revenue is based on the ratio of costs incurred to the total estimated cost of the contract. The estimated total cost of a contract is based upon management’s best estimate of the remaining costs that will be required to complete a project. The actual costs required to complete a project and, therefore, the profit eventually realized, could differ materially in the near term. Costs and estimated earnings in excess of billings on uncompleted contracts are shown as a current asset. Billings in excess of costs and estimated earnings on uncompleted contracts are shown as a current liability. Anticipated losses on contracts, if any, are recognized when they become evident.

10

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”).

In the Business Solutions segment, the Company bills clients under Professional Services Agreements as licensed Professional Employer Organizations (“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 Company’s federal, state, and local or vendor identification numbers. No identification or recognition is given to the client when these monies are remitted or calculations are reported. Most calculations or amounts the Company owes the government and its employment insurance vendors are based on the experience levels and activity of the Company with no consideration to client detail. The Company bills 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 Company are invoiced along with each periodic payroll delivered to the client.

The Company’s Business Solutions segment reports revenue in accordance with Emerging Issues Task Force ("EITF") No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. The Company reports revenue on a gross basis, the total amount billed to clients for service fees which includes health and welfare benefit plan fees, workers’ compensation insurance, unemployment insurance fees, and employment-related taxes. The Company reports revenue on a gross basis for such fees because the Company is the primary obligor and deemed to be the principal in these transactions under EITF No. 99-19. The Company reports 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 Company’s Business Solutions segment accounts for their revenue using the accrual method of accounting. Under the accrual method of accounting, revenue is recognized in the period in which the worksite employee performs work. The Company accrues revenue 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 Company accrues 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, within the Company’s Business Solutions segment, 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.

Business Solutions services are performed by Professional Staff Management, Inc. and its affiliated entities (“PSM”), CSM, Inc. and its affiliated entities (“CSM”), Employer Solutions Group, LLC and its affiliated entities (“ESG”) and Precision Employee Management, LLC and its affiliated entities (“Precision”).

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

11

Transportation Infrastructure products and services are performed by the James H. Drew Corp. and subsidiaries (“JH Drew”).

In the Ultraviolet Technologies segment, revenue from the sale of products is recognized according to the terms of the sales arrangement, which is generally upon shipment. Revenue is recognized, net of estimated costs of returns, allowances and sales incentives, title and principal ownership transfers to the customer, which is generally when products are shipped to customers. Products are generally sold on open account under credit terms customary to the geographic region of distribution. Ongoing credit evaluations are performed on customers and the Company does not generally require collateral to secure accounts receivable.

Ultraviolet Technologies products are manufactured by Nor-Cote and subsidiaries.

In the Electronics Integration segment, revenue from the sale of products within the Company’s commercial electronic sales unit 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 the Company does not generally require collateral to secure accounts receivable. The Company’s electronic installation unit 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 the Company agrees to do the work for units of work performed. The Company also performs services on a cost-plus or time and materials basis. The Company completes most projects within one month. The Company generally recognizes revenue utilizing output measures, such as when services are performed, units are delivered or when contract milestones are reached.

Subsidiaries operating in the Electronics Integration segment include Kingston Sales Corporation (“Kingston”), Commercial Solutions, Inc. (“Commercial Solutions”) and Audio-Video Revolution, Inc. (“AVR”) and its affiliated entities.

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 May 31, 2007, the Company had $4,612 in total restricted cash. Of this, $1,725 is restricted for employer contributions to various health and accident benefit programs established under third party actuarial analysis, $2,645 is restricted for various workers compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credits in accordance with various state regulations.

Marketable Equity Securities: Marketable equity securities include common stocks classified as available for sale investments in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The securities are carried at fair value based on current market quotations. Unrealized holding gains and losses, net of tax, are not included in "net income," but are accounted for as "other comprehensive income" and reflected as a separate component of the change in shareholders’ equity. The cost of securities used to compute realized gains and losses is based on specifically identified securities. The fair value of investment securities is determined by currently available market prices. Dividends on marketable equity securities are recognized in income when declared.

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.

12

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 40 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. The results of this annual impairment test indicated that the fair value of each of the reporting units as of August 31, 2006, exceeded the carrying, or book value, including goodwill, and therefore recorded goodwill and other indefinite-lived intangible assets were not subject to impairment. The Company determined that goodwill and certain intangible assets in its Wireless Infrastructure and Electronics Integration Segment were impaired as of February 28, 2007. Triggering events include (but not limited to) a) losses incurred within certain operating units b) downsizing of personnel c) disposal of fixed assets d) closing of regional offices and e) restructuring of management.

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. 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.

13

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 and Singapore income tax returns.

Research and Development Costs: Research and development costs are expensed as incurred and totaled $179 and $131 for the three month periods ended May 31, 2007 and 2006, respectively. Research and development costs totaled $468 and $372 for the nine month periods ended May 31, 2007 and 2006, respectively. Research and development expense is recorded in the Company’s Ultraviolet Technologies segment.

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 as of May 31, 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 $1,270.

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 $180 per employee, with an aggregate liability limit of approximately $13,410. The aggregate liability limits are adjusted monthly, based on the number of participants.

Workers’ Compensation: The Company’s PSM, CSM and ESG 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 $1,740 and ESG’s deductible liability is limited to $750 per incident, with no aggregate liability limit.

New Accounting Policies

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which allows companies to choose to measure certain financial instruments and other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect this statement to have a material impact on its financial position, results of operations or cash flows.

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements”, which provides guidance for using fair value to measure assets and liabilities. SFAS 157 only applies when other standards require or permit the fair value measurement of assets and liabilities and does not expand the use of fair value to new circumstances. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect this statement to have a material impact on its financial position, results of operations or cash flows.

NOTE 2 - ACQUISITIONS AND PRO FORMA RESULTS

Acquisitions

Employer Solutions Group, LLC.

The Company acquired all membership units of ESG and acquired certain assets and assumed certain liabilities through a unit purchase agreement entered into effective March 1, 2007 by and among ESG, a Utah company, Craig Allred, Dee Henderson, Garth Allred, David Dyches, Kurt Robinson and Kira Reisch, the Company, Carter Fortune and John Fisbeck. The Company’s acquisition of ESG enabled the Company to expand its geographic presence in the professional employment organization (“PEO”) marketplace. The purchase price of approximately $11,520 includes cash paid by the Company of $9,100 and issuance of 577,143 shares of the Company’s common stock valued at the closing price of the Company’s stock on the date of purchase at $4.20 per share. Of the 577,143 total shares issued; 217,143 shares were issued to the sellers at closing and 360,000 contingent shares are held in escrow and may be earned based on the EBITDA schedule below. The Company entered into an agreement in which the sellers may put (put option) the 217,143 shares issued at closing to the

14

Company during the thirty (30) day period that begins on March 1, 2010. The Company recorded $814 related to the put option on the 217,143 shares as other long term liabilities, since the Company is not able to control whether such options can be put to the Company during the required time period. The contingent shares are earned based on the table below:

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

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

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

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

Assets
Cash	$	2,502
Restricted cash		1,223
Accounts receivable		1,250
Prepaids and other current assets		1,199
Property, plant and equipment, net		386
Goodwill		6,781
Intangible assets		3,640
Total Assets		16,981
Liabilities
Accounts payable		557
Health and workers compensation reserves		1,708
Accrued expenses and other liabilities		2,903
Debt		289
Total Liabilities		5,457
Net Assets	$	11,524
Cash consideration	$	9,100
Fair value of common stock consideration		2,424
	$	11,524

Precision Employee Management, LLC

The Company acquired all membership units of Precision and acquired certain assets and assumed certain liabilities through a unit purchase agreement entered into as of February 1, 2007 by and among Precision, an Arizona company, Tom Lickliter, Larry Bailliere, Charmaine Hayes, the Company, Carter Fortune and John Fisbeck. The Company’s acquisition of Precision 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.

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

Assets
Cash	$	381
Accounts receivable		51
Prepaids and other current assets		15
Property, plant and equipment, net		35
Goodwill		1,539
Intangible assets		770
Total Assets		2,791
Liabilities
Accounts payable		15
Accrued expenses and other liabilities		359
Debt		41
Total Liabilities		415
Net Assets	$	2,376
Cash consideration	$	1,100
Fair value of common stock consideration		1,276
	$	2,376

15

Pro Forma Results

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

	Three Month Period Ended					Nine month Period Ended
	May 31,			May 31,		May 31,			May 31,
	2007			2006		2007			2006
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Net revenue	$	42,286		$	48,359	$	135,117		$	123,749
Operating income (loss)	$	(286	)	$	979	$	(5,743	)	$	3,507
Net income (loss) available to common shareholders	$	(1,355	)	$	332	$	(9,075	)	$	1,827
Basic income (loss) per common share	$	(0.12	)	$	0.03	$	(0.84	)	$	0.17
Diluted income (loss) per common share	$	(0.10	)	$	0.03	$	(0.73	)	$	0.16

NOTE 3 - INVESTMENTS IN MARKETABLE EQUITY SECURITIES

The amortized cost and approximate fair values of marketable equity securities held are summarized as follows:

	May 31, 2007 (Unaudited, Restated)		August 31, 2006 (Audited)
Amortized cost	$	79	$	1,297
Net unrealized loss		-		(16	)
Estimated fair value	$	79	$	1,281

The net tax effect of the unrealized gain (loss) after consideration of the valuation allowance is insignificant and is not included in deferred tax asset or accumulated other comprehensive income. There was ($25) and $3 of realized gains and losses from the sale of marketable securities for the three month period ended May 31, 2007 and 2006, respectively. There was ($8) and $8 of realized gains and losses from the sale of marketable equity securities for the nine month period ended May 31, 2007 and 2006, respectively.

16

NOTE 4 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE

Accounts receivable and contracts receivable are summarized as follows:

	May 31,			August 31,
	2007			2006
	(Unaudited)			(Audited)
Amounts currently due	$	12,453		$	13,856
Contracts in process
Progress billing		7,166			11,683
Retainages		1,355			1,606
		20,974			27,145
Less allowance for doubtful accounts and sales returns		(1,756	)		(1,414	)
	$	19,218		$	25,731
Long-term accounts receivable	$	872		$	1,276

NOTE 5 – CONTRACTS IN PROGRESS

Information related to contracts in progress is summarized as follows:

	May 31,			August 31,
	2007			2006
	(Unaudited)			(Audited)
Costs incurred on uncompleted contracts	$	22,648		$	36,700
Estimated earnings recognized to date on uncompleted contracts		5,808			7,416
		28,456			44,116
Less billings on uncompleted contracts		(27,874	)		(41,584	)
	$	582		$	2,532

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

	May 31,		August 31,
	2007		2006
	(Unaudited)		(Audited)
Costs and estimated earnings in excess of billings on uncompleted contracts	$	2,335	$	4,500
Billings in excess of costs and estimated earnings on uncompleted contracts		1,753		1,968
	$	582	$	2,532

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

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

	May 31, 2007 (Unaudited)			August 31, 2006 (Audited)
Land	$	1,496		$	351
Building		7,830			1,540
Machinery and equipment		6,944			6,934
Research equipment		423			389
Office equipment		5,301			4,857
Vehicles		3,480			3,633
Leasehold improvements		339			316
		25,813			18,020
Less accumulated depreciation		(13,347	)		(11,697	)
	$	12,465		$	6,323

17

The provision for depreciation amounted to $516, of which $290 is included in cost of revenues for the three month period ended May 31, 2007 and $434 for the three month period ended May 31, 2006. The provision for depreciation amounted to $1,643, of which $290 is included in cost of revenues for the nine month period ended May 31, 2007 and $1,138 for the nine month period ended May 31, 2006. Gains and losses on disposal of assets totaling $40 and ($371) was recorded for the three and nine month periods ended May 31, 2007, respectively, related to various office equipment and vehicle disposals. A total of $6,675 net of $595 of accumulated amortization is included in the property, plant and equipment at May 31, 2007 related to a consolidated variable interest entity.

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

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

	Wireless Infrastructure			Business Solutions		Transportation Infrastructure		Ultraviolet Technologies		Electronics Integration			Segment Totals
Goodwill at August 31, 2006	$	1,497		$	4,153	$	152	$	4,694	$	1,488		$	11,984
Goodwill acquired		-			8,321		-		-		-			8,321
Goodwill adjustment		(1,497	)		-		-		-		(212	)		(1,709	)
Goodwill at May 31, 2007 (unaudited)	$	-		$	12,474	$	152	$	4,694	$	1,276		$	18,596

The total amount of goodwill that is deductible for tax purposes is $9,597 and $1,969 at May 31, 2007 and August 31, 2006, respectively. The Company recognized impairment on certain goodwill in its Wireless Infrastructure segment of $1,497 and its Electronics Integration segment of $212 in the nine months ended May 31, 2007.

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

	May 31, 2007 (Unaudited)
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Weighted Average Amortization Period (in years)
Customer relationships	$	6,037	$	962	$	5,075		10
Non-compete		200		53		147		10
Non-compete		930		47		884		8.5
Non-compete		1,742		686		1,056		5
Total		8,909		1,748		7,161		8
Tradename (not subject to amortization)		590		-		590
Total	$	9,499	$	1,748	$	7,751

18

	August 31, 2006 (Audited)
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Weighted Average Amortization Period (in years)
Customer relationships	$	3,342	$	675	$	2,667		10
Non-compete		200		38		162		10
Non-compete		1,229		468		761		5
Non-compete		200		81		119		3
Total		4,971		1,262		3,709		8
Tradename (not subject to amortization)		590		-		590
Total	$	5,561	$	1,262	$	4,299

Intangible asset amortization expense is $387 and $162 for the three month periods ended May 31, 2007 and 2006, respectively, which includes $83 and $3 of amortization related to loan origination fees, respectively. Intangible asset amortization expense is $1,062 and $482 for the nine month periods ended May 31, 2007 and 2006, respectively, which includes $422 and $16 of amortization related to loan origination fees, respectively. The Company recognized impairment on certain intangible assets in its Wireless Infrastructure segment of $308 in the nine month period ended May 31, 2007. Management determined the assets were impaired based upon changes in management and evaluations of customer contracts resulting from incurred losses.

Amortization expense on intangible assets currently owned by the Company at May 31, 2007 for each of the next five fiscal years is as follows:

2007	$	297
2008		1,195
2009		1,205
2010		942
2011		942
2012 and thereafter		2,580
Total	$	7,161

NOTE 8 - DEBT ARRANGEMENTS

The Company’s debt liabilities consisted of the following:

	May 31,			August 31, 2006 (Audited)
	2007
	(Unaudited, Restated)
Notes payable:
Revolving line of credit promissory note due August 31, 2008. Interest at LIBOR plus 1.75% or 1.50% upon achievement of certain financial performance criteria. The loan is secured by the business assets of the Company.	$	12,931		$	3,330
Term loan due in monthly installments of $167 plus interest at LIBOR plus 1.75% or 1.50% upon achievement of certain financial performance criteria through maturity date, August 31, 2011. The loan is secured by the business assets of the Company and personal guarantees of the Company’s two majority shareholders (the Chairman of the Board and the CEO of the Company).		18,667			20,000
Various term notes due in monthly installments of $13, including interest at ranges from 4.9% to 9.03% through April 2010. The loans are secured by vehicles and equipment.		364			173
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.		5,904			7,500
Debt with shareholder:
Term note due in monthly installments of $3 including interest at 4.0% through September 2008. The loan is secured by vehicles and equipment.		36			63
Variable Interest Entity
Revolving line of credit promissory note due September 30, 2007. Interest at LIBOR plus 1.6%. The loan is secured by real estate and personal guarantees of the Company’s two majority shareholders.		2,200			-
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.		5,188			-
Capital leases:
Various notes due in monthly installments of $6 including interest at ranges from 2.3% to 11.6% through June 2010. The loans are secured by computers and equipment.		120			101
Total debt		45,410			31,167
Less current maturities		(36,372	)		(3,488	)
Long-term portion of outstanding debt	$	9,038		$	27,679

19

Fiscal year principal payments due on long-term debt outstanding (including convertible term note) at May 31, 2007 are approximately as follows:

2007	$	32,474
2008		5,656
2009		6,439
2010		548
2011		293
2012 and thereafter		-
	$	45,410

20

Credit Facility Loan and Security Agreement

The Company maintains a $35,000 credit facility with Fifth Third Bank. The facility includes a $20,000 term loan evidenced by a term loan note, which matures on August 31, 2011 and a $15,000 revolving line of credit promissory note, which matures on August 31, 2008. Availability under the revolving line of credit is the lesser of $15,000 or the borrowing base amount, which is calculated monthly as a percentage of the Company's eligible assets. Interest is charged on the loans at LIBOR plus 1.75%, which may be reduced to LIBOR plus 1.5% if the Company meets certain performance criteria. The line of credit and term loan are secured by assets of the Company and the term loan is additionally secured by personal guarantees of the Company’s two majority shareholders (the Chairman of the Board of Directors and the CEO). Outstanding borrowings on the line of credit amounted to $12,931 and $3,330 at May 31, 2007 and August 31, 2006, respectively. Total unused borrowings under the line of credit amounted to $2,069 and $11,670 at May 31, 2007 and August 31, 2006, respectively.

Covenant terms of the Company’s loan agreement require the maintenance of certain ratios including debt (not including subordinated debt) to EBITDA and fixed charge coverage. Additionally, the Company must maintain $1,000 in tangible net worth and the personal guarantor (the Company’s Chairman of the Board) of the agreement must meet certain liquidity tests.

As of May 31, 2007, the Company was not in compliance with certain covenants. The Company is currently in discussions with its bank to obtain a waiver related to these covenant violations. Under terms of the Agreement, the bank may call the loan if the Company is in violation of any restrictive covenants. In the absence of waivers from the bank and in accordance with FAS 78, the Company reclassified the related notes payable as current debt. This reclassification totaled $29,598 as of May 31, 2007.

Revolving Line of Credit – Variable Interest Entity

The VIE maintains a $2,200 revolving line of credit with Fifth Third Bank that matures on September 30, 2007. Interest is charged on the revolving line of credit at LIBOR plus 1.60%. The loan is secured by real estate assets and by personal guarantees of the Company’s two majority shareholders (the Chairman of the Board and the CEO of the Company). Outstanding borrowings amounted to $2,200 at May 31, 2007.

Convertible Term Note

The Company maintains 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 matures on November 26, 2008 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 of $227 are payable monthly. Interest is payable monthly in arrears at prime plus 3.0% subject to a floor of 9.5%, subject to various adjustments described in the Note. 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.

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 stated in the Note including that 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). If the 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 also has the option to postpone payment of any 12 principal payments due. As of May 31, 2007, the Company has postponed eight of the monthly principal payments. These deferred principal amounts will be due and payable, at the Company’s option, on any subsequent payment date or on the maturity date of the Note.

Laurus also has the option to convert all or a portion of the amount owed under 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 various limitations and adjustment described in the Note. The Note is currently convertible into 1,073,554 shares of the Company’s common stock, excluding the conversion of any accrued interest.

21

NOTE 9 - INCOME TAXES

The reconciliation for 2007 and 2006 of income tax expense (benefit) computed at the U.S. Federal statutory tax rate to the Company's effective income rate is as follows:

	May 31, 2007 (Unaudited)			August 31, 2006 (Audited)
Tax at U.S. Federal statutory rate		(34.0	)%		34.0	%
State and local taxes, net of federal benefit		(5.6	)		5.6
Other		-			-
Change in valuation allowance		39.6			(78.6	)
		0.0	%		(39.0	)%

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

	May 31, 2007 (Unaudited)			August 31, 2006 (Audited)
Current:
Federal	$	(2,616	)	$	755
State		(431	)		124
		(3,047	)		879
Deferred:
Federal		834			(328	)
State		138			(54	)
		972			(382	)
Change in valuation allowance		2,219			(920	)
Net income tax (benefit)	$	144		$	(423	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax asset are as follows:

	May 31, 2007 (Unaudited)			August 31, 2006 (Audited)
Deferred Tax Assets:
Current:
Allowances for doubtful accounts and inventory	$	808		$	596
Accrued liabilities and other		1,373			900
Noncurrent:
Amortization of covenants		270			(84	)
Depreciation		(301	)		(233	)
Net operating losses and other carryforwards		3,715			2,467
		5,865			3,646
Valuation allowance		(4,330	)		(2,111	)
	$	1,535		$	1,535

SFAS 109 requires a valuation allowance to reduce the deferred tax assets reported if, at May 31, 2007, the Company had federal tax operating loss based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a $4,330 valuation allowance at May 31, 2007 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current period is $2,075. At May 31, 2007 the Company has federal net operating loss carryforwards of approximately $12,200 which expire between 2020 and 2027. The state tax operating loss carryforwards are approximately $14,900. The difference between federal and state net operating loss carryforwards represents a change in business venue in a prior period. The Company's capital loss carryforward is approximately $900, which expires in the fiscal year ending August 31, 2007. The Company also incurred net operating losses related to European operations that can be carried forward indefinitely.

22

NOTE 10 - PER SHARE DATA

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

	Three Month Period Ended					Nine month Period Ended
	May 31, 2007 (Unaudited)			May 31, 2006 (Unaudited)		May 31, 2007 (Unaudited)			May 31, 2006 (Unaudited)
Net Income (Loss) Available to Common Shareholders	$	(1,355	)	$	143	$	(8,384	)	$	1,306
Basic Income (Loss) Per Common Share	$	(0.12	)	$	0.01	$	(0.78	)	$	0.12
Basic weighted average number of common shares outstanding		11,417,748			10,549,953		10,810,765			10,556,546
Diluted Income Per Common Share:	$	(0.10	)	$	0.01	$	(0.67	)	$	0.11
Diluted weighted average number of common shares outstanding		13,221,883			12,218,422		12,463,326			11,725,290

At May 31, 2007, diluted shares represent 15,000 shares of common stock that could potentially be issued under the terms of restricted share unit agreements entered into as part of the Company’s Employee Stock Plan, 1,073,554 shares that could be issued pursuant to the Laurus convertible term note and 301,090 shares that underlie the outstanding warrants and stock compensation.

NOTE 11 - RELATED PARTY TRANSACTIONS

The following is a summary of related party amounts included in the consolidated financial statements at May 31, 2007 and 2006, respectively.

The Company maintains a note receivable with a subsidiary employee in connection with the acquisition of the subsidiary. The note balance of $300 is secured by restricted stock and expires March 31, 2008.

The Company maintains an installment note payable for equipment and vehicle purchases by the Company’s Chairman of the Board. The loan balance of $36 is secured by the assets and expires no later than September 1, 2008. Interest expense is insignificant.

The Company had borrowings under a long-term unsecured line of credit with the Company’s majority shareholder that was canceled and converted to preferred stock on November 30, 2005. Interest expense on the line of credit of $115 was recognized for the nine month periods ended May 31, 2006.

Other Related Party Transactions

Shareholder Put / Call Agreements

As part of the merger agreements with PSM, the 1,350,000 shares of the Company’s common stock held by Harlan Schafir and certain PSM employees were subject to various option agreements that gave Mr. Schafir and the PSM employees the option to put any or all of the Company’s stock received by them to a group of individuals including the Company’s majority shareholder or to the Company, according to the terms of these option agreements. The put price was dependent on PSM’s cumulative operating performance from October 1, 2003 through September 30, 2006. The total value of the puts was approximately $8,500 as the shares achieved their maximum put value. During the Company’s first fiscal quarter Mr. Schafir and the PSM employees exercised their put sale rights and sold all of their Company shares to Carter Fortune and John Fisbeck. 1,250,000 of the shares were priced at $6.00 per share and 100,000 of the shares were priced at $10.00 per share.

23

As part of the merger agreements with Nor-Cote, the approximately 899,000 shares of the Company’s common stock held by Norman Wolcott, Jr. and the Norman G. Wolcott, Sr. and Lucile H. Wolcott Revocable Trust of 1995 “Wolcott Trusts” were subject to various option agreements. The agreements gave the holders the option to put some or all of the Company’s stock received by them to the Company’s majority shareholder and the Company’s majority shareholder the option to call some or all of the Company’s stock. The put / call price was dependent on Nor-Cote’s cumulative operating performance from July 1, 2003 through June 30, 2006. The total maximum value of the puts was approximately $2,742. On March 3, 2007 Mr. Fortune exercised his call rights from Mr. Wolcott and the Wolcott Trusts and pursuant to a related agreement Mr. Fisbeck purchased one-half of the shares. The approximately 899,000 shares were priced at $3.05 per share.

As part of the merger agreements with Magtech, the 28,450 shares of the Company’s common stock held by MGTS Corp. (“MGTS”) were subject to various option rights that gave MGTS the option to put any or all of the Company’s Stock received by them to the Company’s majority shareholder, according to the terms of the Magtech purchase agreement. The put price was dependent on Magtech’s cumulative operating performance from November 1, 2004 through October 31, 2006. The total value of the puts was approximately $250. On March 2, 2007 MGTS exercised their put sale rights and sold all of their Company shares to Carter Fortune and John Fisbeck. The 28,450 shares were priced at $10.00 per share.

Guarantees

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.

NOTE 12 – 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.

The Company leases a total of six facilities from a consolidated variable interest entity, a related-party referenced earlier whose primary purpose is to own and lease these properties to the Company. The VIE has ownership of 384,500 shares of the Company’s stock and is wholly-owned by the Company’s Chairman of the Board and its Chief Executive Officer. The VIE does not have any other significant assets. Although the Company does not have direct ownership interests in the VIE, it is considered the primary beneficiary as interpreted by FIN 46R due to implicit interests generated from personal guarantees from the Company’s majority shareholders on certain debt instruments and leasing arrangements of the VIE.

The real estate owned by the VIE consists of land, buildings and building improvements, which were subject to mortgages under which the lender has no recourse to the Company. The non-cash consolidation of the assets and liabilities of the variable interest entity at May 31, 2007, consisted of the following:

Assets
Cash	$	25
Prepaid expenses		10
Property, plant and equipment		6,675
Other assets		3
	$	6,713
Liabilities and Members Equity
Line of credit	$	2,200
Current maturities of long-term debt		504
Long-term debt, net of current maturities		4,684
		7,388
Members equity		840
Less: Treasury Stock		(1,515	)
		(675	)
	$	6,713

24

For the three month period ended May 31, 2007, the consolidation of the VIE included income of $309 comprised of $470 in rental income, offset by a $103 charge to interest expense, a $50 charge to depreciation expense, and $8 in administrative and other miscellaneous expenses. For the nine month period ended May 31, 2007, the consolidation of the VIE included income of $473 comprised of $1,054 in rental income, offset by a $382 charge to interest expense, a $148 charge to depreciation expense, and $51 in administrative and other miscellaneous expenses.

NOTE 13 - 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, sales and distribution characteristics.

The operations of the Company are organized into the following segments; Wireless Infrastructure, Business Solutions, Transportation Infrastructure, Ultraviolet Technologies and Electronics Integration. The Holding Company is comprised of the corporate entity. These business segments are consistent with the Company’s management of these businesses and its financial reporting structure. Financial results by segment are as follows:

	Wireless Infrastructure			Business Solutions (1)		Transportation Infrastructure		Ultraviolet Technologies		Electronics Integration			Operating Total
3-Months Ended May 31, 2007
Revenue	$	5,100		$	22,012	$	8,882	$	3,378	$	2,912		$	42,284
Cost of revenue		3,621			18,590		7,664		1,950		2,432			34,257
Gross profit		1,479			3,422		1,218		1,428		480			8,027
Operating expenses
Selling, general and administrative		1,455			3,010		787		1,226		557			7,035
Depreciation and amortization		48			347		4		6		18			423
Impairment		-			-		-		-		-			-
Total operating expenses		1,503			3,357		791		1,232		575			7,458
Segment operating income (loss)	$	(24	)	$	65	$	427	$	196	$	(95	)	$	569

	Holding Company			Consolidated VIE		VIE Elimination			Segment Totals
3-Months Ended May 31, 2007 (continued)
Revenue	$	-		$	470	$	(468	)	$	42,286
Cost of revenue		-			-		-			34,257
Gross profit		-			470		(468	)		8,029
Operating expenses
Selling, general and administrative		1,127			8		(468	)		7,702
Depreciation and amortization		140			50		-			613
Impairment		-			-		-			-
Total operating expenses		1,267			58		(468	)		8,315
Segment operating income (loss)	$	(1,267	)	$	412	$	-		$	(286	)

(1) Gross billings of $156,933 less worksite employee payroll costs of $134,922. 

25

	Wireless Infrastructure			Business Solutions (1)		Transportation Infrastructure		Ultraviolet Technologies		Electronics Integration			Operating Total
3-Months Ended May 31, 2006 (restated)
Revenue	$	6,922		$	11,123	$	15,144	$	3,297	$	2,982		$	39,468
Cost of revenue		5,685			8,793		13,187		1,824		2,409			31,898
Gross profit		1,237			2,330		1,957		1,473		573			7,570
Operating expenses
Selling, general and administrative		1,555			1,533		811		1,103		789			5,791
Depreciation and amortization		113			158		128		98		21			518
Total operating expenses		1,668			1,691		939		1,201		810			6,309
Segment operating income (loss)	$	(431	)	$	639	$	1,018	$	272	$	(237	)	$	1,261

	Holding Company			Consolidated VIE		VIE Elimination		Segment Totals
3-Months Ended May 31, 2006 (continued, restated)
Revenue	$	-		$	-	$	-	$	39,468
Cost of revenue		-			-		-		31,898
Gross profit		-			-		-		7,570
Operating expenses
Selling, general and administrative		391			-		-		6,182
Depreciation and amortization		78			-		-		596
Total operating expenses		469			-		-		6,778
Segment operating income (loss)	$	(469	)	$	-	$	-	$	792

(1) Gross billings of $69,689 less worksite employee payroll costs of $58,566.

	Wireless Infrastructure			Business Solutions (1)		Transportation Infrastructure		Ultraviolet Technologies		Electronics Integration			Operating Total
9-Months Ended May 31, 2007
Revenue	$	18,790		$	47,103	$	29,514	$	9,340	$	10,454		$	115,201
Cost of revenue		14,870			38,968		25,596		5,511		8,932			93,877
Gross profit		3,920			8,135		3,918		3,829		1,522			21,324
Operating expenses
Selling, general and administrative		5,580			6,387		2,293		3,426		1,954			19,640
Depreciation and amortization		346			664		287		223		98			1,618
Impairment		1,815			-		-		-		212			2,027
Total operating expenses		7,741			7,051		2,580		3,649		2,264			23,285
Segment operating income (loss)	$	(3,821	)	$	1,084	$	1,338	$	180	$	(742	)	$	(1,961	)

	Holding Company			Consolidated VIE		VIE Elimination			Segment Totals
9-Months Ended May 31, 2007 (continued)
Revenue	$	-		$	1,054	$	(1,046	)	$	115,209
Cost of revenue		-			-		-			93,877
Gross profit		-			1,054		(1,046	)		21,332
Operating expenses
Selling, general and administrative		3,170			51		(1,046	)		21,815
Depreciation and amortization		649			148		-			2,415
Impairment		-			-		-			2,027
Total operating expenses		3,819			199		(1,046	)		26,257
Segment operating income (loss)	$	(3,819	)	$	855	$	-		$	(4,925	)

(1) Gross billings of $346,343 less worksite employee payroll costs of $299,240.

26

	Wireless Infrastructure		Business Solutions (1)		Transportation Infrastructure		Ultraviolet Technologies		Electronics Integration		Operating Total
9-Months Ended May 31, 2006 (restated)
Revenue	$	19,508	$	32,186	$	38,871	$	8,876	$	9,826	$	109,267
Cost of revenue		14,993		24,179		34,829		5,128		7,796		86,925
Gross profit		4,515		8,007		4,042		3,748		2,030		22,342
Operating expenses
Selling, general and administrative		3,901		4,568		2,291		3,113		1,770		15,643
Depreciation and amortization		271		469		334		288		103		1,465
Total operating expenses		4,172		5,037		2,625		3,401		1,873		17,108
Segment operating income (loss)	$	343	$	2,970	$	1,417	$	347	$	157	$	5,234

	Holding Company			Consolidated VIE		VIE Elimination		Segment Totals
9-Months Ended May 31, 2006 (continued, restated)
Revenue	$	-		$	-	$	-	$	109,267
Cost of revenue		-			-		-		86,925
Gross profit		-			-		-		22,342
Operating expenses
Selling, general and administrative		2,078			-		-		17,721
Depreciation and amortization		155			-		-		1,620
Total operating expenses		2,233			-		-		19,341
Segment operating income (loss)	$	(2,233	)	$	-	$	-	$	3,001

(1) Gross billings of $217,635 less worksite employee payroll costs of $185,449.

	Wireless Infrastructure		Business Solutions		Transportation Infrastructure		Ultraviolet Technologies		Electronics Integration			Operating Total
As of May 31, 2007 (Unaudited, Restated)
Current Assets
Cash and equivalents	$	42	$	8,309	$	256	$	619	$	(15	)	$	9,127
Restricted cash		-		4,612		-		-		-			4,612
Marketable equity securities		-		10		-		-		-			10
Accounts receivable, net		5,135		3,236		7,528		2,068		1,360			19,327
Costs and estimated earnings in excess of billings on uncompleted contracts		1,353		-		982		-		-			2,335
Inventory, net		78		24		3,551		1,794		1,408			6,855
Deferred tax asset		-		876		659		-		-			1,535
Prepaid expenses and other current assets		232		650		185		287		69			1,423
Total Current Assets		6,840		17,717		13,161		4,768		2,822			45,224
Other Assets
Property, plant & equipment, net		877		635		1,650		1,944		158			5,264
Accounts receivable – long term		-		-		872		-		-			872
Goodwill		-		12,473		152		4,695		1,276			18,596
Other intangible assets, net		-		7,167		-		584		-			7,751
Other long term assets		-		28		-		17		9			54
Total Other Assets		877		20,303		2,674		7,240		1,443			32,537
Total Assets	$	7,717	$	38,020	$	15,835	$	12,008	$	4,265		$	77,761

27

	Holding Company			Consolidated VIE		Segment Totals
As of May 31, 2007 (Unaudited, Restated)
Current Assets
Cash and equivalents	$	(67	)	$	25	$	9,085
Restricted cash		-			-		4,612
Marketable equity securities		69			-		79
Accounts receivable, net		(109	)		-		19,218
Costs and estimated earnings in excess of billings on uncompleted contracts		-			-		2,335
Inventory, net		-			-		6,855
Deferred tax asset		-			-		1,535
Prepaid expenses and other current assets		156			-		1,579
Total Current Assets		49			25		45,298
Other Assets
Property, plant & equipment, net		526			6,675		12,465
Accounts receivable – long term		-			-		872
Goodwill		-			-		18,596
Other intangible assets, net		-			-		7,751
Other long term assets		1,072			3		1,129
Total Other Assets		1,598			6,678		40,813
Total Assets	$	1,647		$	6,703	$	86,111

28

	Wireless Infrastructure			Business Solutions		Transportation Infrastructure		Ultraviolet Technologies		Electronics Integration			Operating Total
As of August 31, 2006 (Audited)
Current Assets
Cash and equivalents	$	(791	)	$	4,308	$	78	$	594	$	(187	)	$	4,002
Restricted cash		-			3,462		-		-		-			3,462
Marketable equity securities		-			1,246		-		-		-			1,246
Accounts receivable, net		9,632			1,858		10,701		1,884		2,260			26,335
Costs and estimated earnings in excess of billings on uncompleted contracts		2,269			-		2,231		-		-			4,500
Inventory, net		218			30		3,154		1,721		1,638			6,761
Deferred tax asset		-			876		659		-		-			1,535
Prepaid expenses and other current assets		255			623		424		286		22			1,610
Total Current Assets		11,583			12,403		17,247		4,485		3,733			49,451
Other Assets
Property, plant & equipment, net		1,311			448		1,686		1,997		299			5,741
Accounts receivable - long term		-			-		1,276		-		-			1,276
Goodwill		1,497			4,153		152		4,695		1,487			11,984
Other intangible assets, net		359			3,289		-		651		-			4,299
Other long term assets		-			28		-		14		87			129
Total Other Assets		3,167			7,918		3,114		7,357		1,873			23,429
Total Assets	$	14,750		$	20,321	$	20,361	$	11,842	$	5,606		$	72,880

	Holding Company			Consolidated VIE		Segment Totals
As of August 31, 2006 (continued, Audited)
Current Assets
Cash and equivalents	$	(370	)	$	-	$	3,632
Restricted cash		-			-		3,462
Marketable equity securities		35			-		1,281
Accounts receivable, net		(604	)		-		25,731
Costs and estimated earnings in excess
of billings on uncompleted contracts		-			-		4,500
Inventory, net		-			-		6,761
Deferred tax asset		-			-		1,535
Prepaid expenses and
other current assets		312			-		1,922
Total Current Assets		(627	)		-		48,824
Other Assets
Property, plant & equipment, net		582			-		6,323
Accounts receivable - long term		-			-		1,276
Goodwill		-			-		11,984
Other intangible assets, net		-			-		4,299
Other long term assets		1,450			-		1,579
Total Other Assets		2,032			-		25,461
Total Assets	$	1,405		$	-	$	74,285

29

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, 2006. Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission.

OVERVIEW

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

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

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

As reported on our Annual Report on Form 10-K, we classify our businesses under five operating segments, Wireless Infrastructure, Business Solutions, Transportation Infrastructure, Ultraviolet Technologies and Electronics Integration. We have restated segment information for previous year comparative periods in connection with the new reporting segments in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in this 10-Q report.

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, construction management, and technical consulting.

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.

30

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 Management

Construction management is performed for the telecommunications industry, primarily consisting of developing and upgrading wireless networks for wireless carriers. Services include program and construction management, electrical, foundation, tower installations, antennae and line installations.

Technical Consulting

Technical consulting 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.

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”).

Business Solutions Segment

The Business Solutions segment provides full-service human resource services through PEO relationships. Business Solutions services are performed by Professional Staff Management, Inc. and its affiliated entities (“PSM”), CSM, Inc. and its affiliated entities (“CSM”), Employer Solutions Group, LLC. and its affiliated entities (“ESG”) and Precision Employee Management, LLC (“Precision”) and its affiliated entities. PSM was acquired in October 2003, CSM was acquired in April 2005, Precision was acquired in February 2007 and ESG was acquired effective as of March 1, 2007. Our PEOs provide services typically managed by a company’s internal human resources and accounting departments, including payroll and tax processing and management, worker’s compensation and risk management, benefits administration, unemployment administration, human resource compliance services, 401k and retirement plan administration and employee assessments. Clients represent a wide variety of industries from healthcare, professional services, manufacturing logistics, telemarketing to blue collar services. Combined, these organizations provide co-employment services to approximately 16,000 employees in 44 states.

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 subsidiaries (“JH Drew”). JH Drew was acquired in April 2004 and has been operating for over fifty years servicing contractors and state departments of transportation throughout the Midwestern United States. JH Drew is a leading specialty contractor in the field of transportation infrastructure, including guardrail, electrical components, and the fabrication and installation of structural steel for commercial buildings.

Ultraviolet Technologies Segment

The Ultraviolet (“UV”) Technologies segment manufactures UV curable screen printing inks. UV Technologies products are manufactured by Nor-Cote International, Inc. and 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 and Singapore, with worldwide distributors located in South Africa, Australia, Canada, China, Colombia, Hong Kong, India, Indonesia, Italy, Japan, Korea, New Zealand, Poland, Spain, Taiwan, Thailand, Latin America and the United States.

31

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 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 lodging, healthcare, education, transportation and retail industries. Product offerings include the latest technology in TVs, sound systems, electronic locking devices, wire, cable and fiber optics, and intercom systems. Kingston was acquired in July 2002. Commercial Solutions began operations in December 2003.

AVR, acquired in November 2005, provides a wide range of design, engineering and installation of residential, commercial, and retail audio and video systems including video-conferencing, board-room, home-theater, surround sound audio and security systems, as well as design, engineering and installation of electrical wiring and structured cabling systems, digital satellite television and wireless and network high speed (broadband) internet.  

CRITICAL ACCOUNTING POLICIES

The Company’s accounting policies, which are in compliance with accounting principles generally accepted in the United States, require application of methodologies, estimates and judgments that have a significant impact on the results reported in the Company’s financial statements.  Those policies that, in the belief of management, are critical and require the use of complex judgment in their application, are disclosed on Form 10-K for the year ended August 31, 2006.  Since August 31, 2006, there have been no material changes to the Company’s critical accounting policies.

RESULTS OF OPERATIONS: COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED MAY 31, 2007 AND MAY 31, 2006

Executive Overview of Financial Results

Results of operations for the three month period ended May 31, 2007 and 2006 are as follows:

	Revenue for the					Operating income for the
	3-months ended May 31,					3-months ended May 31,
	2007			2006		2007			2006
	(Dollars in thousands)
Wireless Infrastructure	$	5,100		$	6,922	$	(24	)	$	(431	)
Business Solutions		22,012			11,123		65			639
Transportation Infrastructure		8,882			15,144		427			1,018
Ultraviolet Technologies		3,378			3,297		196			272
Electronics Integration		2,912			2,982		(95	)		(237	)
Holding Company		-			-		(1,267	)		(469	)
Variable Interest Entity		470			-		412			-
Variable Interest Entity Elimination		(468	)		-		-			-
Segment Totals	$	42,286		$	39,468	$	(286	)	$	792
Net Income (Loss) Available to Common Shareholders						$	(1,355	)	$	143

Net loss available to common stock shareholders was $1.355 million or ($0.10) per diluted share on revenue of $42.286 million for the three month period ended May 31, 2007 compared with net income available to common stock shareholders of $0.143 million or $0.01 per diluted share on revenue of $39.468 million for the three month period ended May 31, 2006. This represents a 7% increase in revenue and a 1,048% percent decrease in net income.

The following factors primarily contributed to the increase in revenue for the three month periods ended May 31, 2007:

· The acquisition of Precision on February 1, 2007 and ESG on March 1, 2007 within the Business Solutions segment; offset by

· The completion of several long-term contracts and the loss of a maintenance contract to a competitor in one of the geographic areas where the Company operates within the Transportation Infrastructure segment, and reduced volumes of work associated with Wireless Infrastructure operational changes enacted at February 28, 2007.

32

The following factors primarily contributed to the decrease in net income available to common stock shareholders for the three month period ended May 31, 2007:

· Reduced volume of work within the Transportation Infrastructure segment;

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

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

Results of operations for the nine month period ended May 31, 2007 and 2006 are as follows:

	Revenue for the					Operating income for the
	9-months ended May 31,					9-months ended May 31,
	2007			2006		2007			2006
	(Dollars in thousands)
Wireless Infrastructure	$	18,790		$	19,508	$	(3,821	)	$	343
Business Solutions		47,103			32,186		1,084			2,970
Transportation Infrastructure		29,514			38,871		1,338			1,417
Ultraviolet Technologies		9,340			8,876		180			347
Electronics Integration		10,454			9,826		(742	)		157
Holding Company		-			-		(3,819	)		(2,233	)
Variable Interest Entity		1,054			-		855			-
Variable Interest Entity Elimination		(1,046	)		-		-			-
Segment Totals	$	115,209		$	109,267	$	(4,925	)	$	3,001
Net Income (Loss) Available to Common Shareholders						$	(8,384	)	$	1,306

Net loss available to common stock shareholders was $8.384 million or ($0.67) per diluted share on revenue of $115.209 million for the nine month period ended May 31, 2007 compared with net income available to common stock shareholders of $1.306 million or $0.11 per diluted share on revenue of $109.267 million for the nine month period ended May 31, 2006. This represents a 5% increase in revenue and a 742% percent decrease in net income.

The following factors primarily contributed to the increase in revenue for the nine month periods ended May 31, 2007:

· The acquisition of Precision on February 1, 2007 and ESG on March 1, 2007 within the Business Solutions segment; offset by

· The completion of several long-term contracts and the loss of a maintenance contract to a competitor in one of the geographic areas where the Company operates within the Transportation Infrastructure segment, and reduced volumes of work associated with Wireless Infrastructure operational changes enacted at February 28, 2007.

The following factors primarily contributed to the decrease in net income available to common stock shareholders for the nine month period ended May 31, 2007:

· Operating losses in the Wireless Infrastructure segment were due to a delay in the release of new work from our customers;

§ Management has taken the following steps to improve operating performance in this segment: i) initiated management team changes; ii) aligned asset and labor base with market conditions; and iii) evaluated geographic footprint and customer contracts;

· Operating losses in the Electronics Integration segment were due to labor and inventory cost overages, within one operating unit;

§ Management has taken the following steps to improve operating performance in this segment: i) initiated management team changes; ii) aligned asset and labor base in line with market conditions; iii) evaluated and adjusted ongoing customer contract negotiations and purchasing procedures;

· Additional charges incurred by the Company related to the disposal of fixed assets, write down of inventory to fair market value and impairment of goodwill and other intangible assets as a result of the management changes and losses incurred within the Wireless Infrastructure and Electronics Integration segments;

· Reduced volume of work within the Transportation Infrastructure segment;

33

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

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

Results by segment are described in further details as follows:

Wireless Infrastructure

Wireless Infrastructure segment operating results for the three and nine month periods ended May 31, 2007 and 2006 are as follows:

	Three Month Period Ended										Nine Month Period Ended
	May 31, 2007					May 31, 2006					May 31, 2007					May 31, 2006
	(Dollars in thousands)										(Dollars in thousands)
Revenues	$	5,100		100	%	$	6,922		100	%	$	18,790		100	%	$	19,508	100	%
Cost of revenues		3,621		71.0	%		5,685		82.1	%		14,870		79.1	%		14,993	76.9	%
Gross profit (loss)		1,479		29.0	%		1,237		17.9	%		3,920		20.9	%		4,515	23.1	%
Operating expenses
Selling, general and administrative		1,455		28.5	%		1,555		22.5	%		5,580		29.7	%		3,901	20.0	%
Depreciation and amortization		48		0.9	%		113		1.6	%		346		1.8	%		271	1.4	%
Impairment		-		0.0	%		-		0.0	%		1,815		9.7	%		-	0.0	%
Total operating expenses		1,503		29.5	%		1,668		24.1	%		7,741		41.2	%		4,172	21.4	%
Segment operating income (loss)	$	(24	)	-0.5	%	$	(431	)	-6.2	%	$	(3,821	)	-20.3	%	$	343	1.8	%

Revenue

Revenue for the three month period ended May 31, 2007 was $5.100 million compared to $6.922 million for the three month period ended May 31, 2006, a decrease of $1.822 million or 26%. Revenue for the nine month period ended May 31, 2007 was $18.790 million compared to $19.508 million for the nine month period ended May 31, 2006, a decrease of $0.718 million or 4%. The decrease in revenue was due primarily to a slow-down in additional work procured from existing customers within the site acquisition, construction and technical services divisions. The decrease in revenue was offset somewhat by additional work procured from existing customers, price increases, geographic expansion and new customer contracts in the site acquisition and engineering divisions.

Gross Profit

Gross profit for the three month period ended May 31, 2007 was $1.479 million, representing 29% of revenue, compared to $1.237 million representing 18% of revenue for the three month period ended May 31, 2006, an increase of $0.242 million or 20%. Gross profit increased for the three month period ended May 31, 2007 primarily due to management team changes, an alignment of asset and labor base with market conditions, and refocus of geographic footprint and customer contracts. Gross profit for the nine month period ended May 31, 2007 was $3.920 million, representing 21% of revenue, compared to $4.515 million representing 23% of revenue for the nine month period ended May 31, 2006, a decrease of $0.595 million or 13%. Gross profit and gross profit as a percentage of revenue decreased for the nine month period ended May 31, 2007 due primarily to slow management reaction to the industry slow-down in release of work in the Company’s second fiscal quarter, resulting in excess labor costs.

Operating Income

Operating loss for the three month period ended May 31, 2007 was $0.024 million, compared to $0.431 million for the three month period ended May 31, 2006, an increase of $0.407 million or 94%. Operating income increased for the three month period ended May 31, 2007 due to management team changes, an alignment of asset and labor base with market conditions, and refocus of geographic footprint and customer contracts. Operating loss for the nine month period ended May 31, 2007 was $3.821 million, compared to operating income of $0.343 million for the nine month period ended May 31, 2006, a decrease of $4.164 million or 1,214%. Operating income decreased for the nine month period ended May 31, 2007 due to slow management reaction to the industry slow-down in release of work, resulting in excess overhead costs and the impairment of certain receivables, inventory, fixed assets, goodwill and other intangible assets.

34

Business Solutions

Business Solutions segment operating results for the three and nine month periods ended May 31, 2007 and 2006 are as follows:

	Three Month Period Ended								Nine Month Period Ended
	May 31, 2007				May 31, 2006				May 31, 2007				May 31, 2006
	(Dollars in thousands)								(Dollars in thousands)
Revenues	$	22,012	100	%	$	11,123	100	%	$	47,103	100	%	$	32,186	100	%
Cost of revenues		18,590	84.5	%		8,793	79.1	%		38,968	82.7	%		24,179	75.1	%
Gross profit		3,422	15.5	%		2,330	20.9	%		8,135	17.3	%		8,007	24.9	%
Operating expenses
Selling, general and administrative		3,010	13.7	%		1,533	13.8	%		6,387	13.6	%		4,568	14.2	%
Depreciation and amortization		347	1.6	%		158	1.4	%		664	1.4	%		469	1.5	%
Total operating expenses		3,357	15.3	%		1,691	15.2	%		7,051	15.0	%		5,037	15.6	%
Segment operating income	$	65	0.3	%	$	639	5.7	%	$	1,084	2.3	%	$	2,970	9.2	%

Revenue

Revenue for the three month period ended May 31, 2007 was $22.012 million, compared to $11.123 million for the three month period ended May 31, 2006, an increase of $10.889 million or 98%. Revenue for the nine month period ended May 31, 2007 was $47.103 million, compared to $32.186 million for the nine month period ended May 31, 2006, an increase of $14.917 million or 46%. Revenue increased due primarily to the acquisitions of ESG and Precision. As such, administrative fees, workers compensation premiums, employee benefit premiums and income taxes collected have increased.

Gross Profit

Gross profit for the three month period ended May 31, 2007 was $3.422 million, representing 16% of revenue, compared to $2.330 million, representing 21% of revenue for the three month period ended May 31, 2006, an increase of $1.092 million or 47%. Gross profit for the nine month period ended May 31, 2007 was $8.135 million, representing 17% of revenue, compared to $8.007 million, representing 25% of revenue for the nine month period ended May 31, 2006, an increase of $0.128 million or 2%. Gross profit increased due to the acquisitions of ESG and Precision offset by higher health and workers compensation claims related to our insurance programs. Gross profit as a percentage of revenue decreased as a result of higher health and workers compensation claims. The Company's self-funded liability within certain of these programs is limited to $0.180 in health insurance and $0.250 or $0.750 in workers compensation insurance.

Operating Income

Operating income for the three month period ended May 31, 2007 was $0.065 million, compared to $0.639 million for the three month period ended May 31, 2006, a decrease of $0.574 million or 90%. Operating income for the nine month period ended May 31, 2007 was $1.084 million, compared to $2.970 million for the nine month period ended May 31, 2006, a decrease of $1.886 million or 64%. Operating income decreased due to the decrease in gross profits discussed above. Operating expenses increased due to the acquisitions of ESG and Precision.

Transportation Infrastructure

Transportation Infrastructure segment operating results for the three and nine month periods ended May 31, 2007 and 2006 are as follows:

	Three Month Period Ended								Nine Month Period Ended
	May 31, 2007				May 31, 2006				May 31, 2007				May 31, 2006
	(Dollars in thousands)								(Dollars in thousands)
Revenues	$	8,882	100	%	$	15,144	100	%	$	29,514	100	%	$	38,871	100	%
Cost of revenues		7,664	86.3	%		13,187	87.1	%		25,596	86.7	%		34,829	89.6	%
Gross profit		1,218	13.7	%		1,957	12.9	%		3,918	13.3	%		4,042	10.4	%
Operating expenses
Selling, general and administrative		787	8.9	%		811	5.4	%		2,293	7.8	%		2,291	5.9	%
Depreciation and amortization		4	0.0	%		128	0.8	%		287	1.0	%		334	0.9	%
Total operating expenses		791	8.9	%		939	6.2	%		2,580	8.7	%		2,625	6.8	%
Segment operating income (loss)	$	427	4.8	%	$	1,018	6.7	%	$	1,338	4.5	%	$	1,417	3.6	%

Revenue

Revenue for the three month period ended May 31, 2007 was $8.882 million compared to $15.144 million for the three month period ended May 31, 2006, a decrease of $6.262 million or 41%. Revenue for the nine month period ended May 31, 2007 was $29.514 million compared to $38.871 million for the nine month period ended May 31, 2006, a decrease of $9.357 million or 24%. Revenue decreased due primarily to the completion of several long-term contracts and due to the loss of a maintenance contract to a competitor in one of the geographic areas where the Company operates.

35

Gross Profit

Gross profit for the three month period ended May 31, 2007 was $1.218 million, representing 14% of revenue, compared to $1.957 million representing 13% of revenue for the three month period ended May 31, 2006, a decrease of $0.739 million or 38%. Gross profit for the nine month period ended May 31, 2007 was $3.918 million, representing 13% of revenue, compared to $4.042 million representing 10% of revenue for the nine month period ended May 31, 2006, a decrease of $0.124 million or 3%. Gross profit decreased due primarily to the revenue decrease discussed above. Gross profit as a percentage of revenue increased primarily due to favorable job closings in one operating division.

Operating Income

Operating income for the three month period ended May 31, 2007 was $0.427 million, compared to $1.018 million for the three month period ended May 31, 2006, a decrease of $0.591 million or 58%. Operating income for the nine month period ended May 31, 2007 was $1.338 million, compared to $1.417 million for the nine month period ended May 31, 2006, a decrease of $0.079 million or 6%. Operating income decreased due primarily to the gross profit decrease discussed above offset somewhat by depreciation associated with cost of sales recognized in gross profit effective on March 1, 2007.

Ultraviolet Technologies

Ultraviolet Technologies segment operating results for the three and nine month periods ended May 31, 2007 and 2006 are as follows:

	Three Month Period Ended								Nine Month Period Ended
	May 31, 2007				May 31, 2006				May 31, 2007				May 31, 2006
	(Dollars in thousands)								(Dollars in thousands)
Revenues	$	3,378	100	%	$	3,297	100	%	$	9,340	100	%	$	8,876	100	%
Cost of revenues		1,950	57.7	%		1,824	55.3	%		5,511	59.0	%		5,128	57.8	%
Gross profit		1,428	42.3	%		1,473	44.7	%		3,829	41.0	%		3,748	42.2	%
Operating expenses
Selling, general and administrative		1,226	36.3	%		1,103	33.5	%		3,426	36.7	%		3,113	35.1	%
Depreciation and amortization		6	0.2	%		98	3.0	%		223	2.4	%		288	3.2	%
Total operating expenses		1,232	36.5	%		1,201	36.4	%		3,649	39.1	%		3,401	38.3	%
Segment operating income (loss)	$	196	5.8	%	$	272	8.2	%	$	180	1.9	%	$	347	3.9	%

Revenue

Revenue for the three month period ended May 31, 2007 were $3.378 million compared to $3.297 million for the three month period ended May 31, 2006, an increase of $0.081 million or 2%. Revenue for the nine month period ended May 31, 2007 were $9.340 million compared to $8.876 million for the nine month period ended May 31, 2006, an increase of $0.464 million or 5%. Revenue increased due primarily to increased domestic sales of nameplate inks and POP/ decal inks.

Gross Profit

Gross profit for the three month period ended May 31, 2007 was $1.428 million representing 42% of revenue, compared to $1.473 million representing 45% of revenue for the three month period ended May 31, 2006, a decrease of $0.045 or 3%. Gross profit decreased for the three month period ended May 31, 2007 due to higher sales of lower margin products and recognition of depreciation as a cost of revenue. Gross profit for the nine month period ended May 31, 2007 was $3.829 million representing 41% of revenue, compared to $3.748 million representing 42% of revenue for the nine month period ended May 31, 2006, an increase of $0.081 million or 2%. Gross profit increased for the nine month period ended May 31, 2007 due to revenue increases above.

Operating Income

Operating income for the three month period ended May 31, 2007 was $0.196 million, compared to $0.272 million for the three month period ended May 31, 2006, a decrease of $0.076 million or 28%. Operating income for the nine month period ended May 31, 2007 was $0.180 million, compared to $0.347 million for the nine month period ended May 31, 2006, a decrease of $0.167 million or 48%. Operating income decreased due primarily to an increase in research and development and product testing costs offset somewhat by depreciation associated with cost of revenue recognized in gross profit effective on March 1, 2007.

36

Electronics Integration

Electronics Integration segment operating results for the three and nine month periods ended May 31, 2007 and 2006 are as follows:

	Three Month Period Ended										Nine Month Period Ended
	May 31, 2007					May 31, 2006					May 31, 2007					May 31, 2006
	(Dollars in thousands)										(Dollars in thousands)
Revenues	$	2,912		100	%	$	2,982		100	%	$	10,454		100	%	$	9,826	100	%
Cost of revenues		2,432		83.5	%		2,409		80.8	%		8,932		85.4	%		7,796	79.3	%
Gross profit		480		16.5	%		573		19.2	%		1,522		14.6	%		2,030	20.7	%
Operating expenses
Selling, general and administrative		557		19.1	%		789		26.5	%		1,954		18.7	%		1,770	18.0	%
Depreciation and amortization		18		0.6	%		21		0.7	%		98		0.9	%		103	1.0	%
Impairment		-		0.0	%		-		0.0	%		212		2.0	%		-	0.0	%
Total operating expenses		575		19.7	%		810		27.2	%		2,264		21.7	%		1,873	19.1	%
Segment operating income (loss)	$	(95	)	-3.3	%	$	(237	)	-7.9	%	$	(742	)	-7.1	%	$	157	1.6	%

Revenue

Revenue for the three month period ended May 31, 2007 was $2.912 million compared to $2.982 million for the three month period ended May 31, 2006, a decrease of $0.070 million or 2%. Revenue decreased for the three month period ended May 31, 2007 due primarily to a lower volume of sales of television products. Revenue for the nine month period ended May 31, 2007 was $10.454 million compared to $9.826 million for the nine month period ended May 31, 2006, an increase of $0.628 million or 6%. Revenue increased for the nine month period ended May 31, 2007 due primarily to new customer sales in the Company’s first fiscal quarter.

Gross Profit

Gross profit for the three month period ended May 31, 2007 was $0.480 million representing 17% of revenue, compared to $0.573 million representing 19% of revenue for the three month period ended May 31, 2006, a decrease of $0.093 million or 16%. Gross profit for the nine month period ended May 31, 2007 was $1.522 million representing 15% of revenue, compared to $2.030 million representing 21% of revenue for the nine month period ended May 31, 2006, a decrease of $0.508 million or 25%. Gross profit decreased primarily due to labor and inventory cost overages, primarily on a large commercial contract within one operating unit. The Company initiated management changes within this operating unit at the end of its second fiscal quarter, aligned asset and labor base with market conditions, and has evaluated and adjusted ongoing customer contract negotiations and purchasing procedures.

Operating Income

Operating loss for the three month period ended May 31, 2007 was $0.095 million, compared to $0.237 million for the three month period ended May 31, 2006, an increase of $0.142 million or 60%. Operating loss for the nine month period ended May 31, 2007 was $0.742 million, compared to operating income of $0.157 million for the nine month period ended May 31, 2006, a decrease of $0.899 million or 573%. The decrease in operating income was due to the decreases in gross profit discussed above as well as an increase in estimates related to the allowance for bad debt and impairment of goodwill in the Company’s second fiscal quarter.

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 May 31, 2007 were $1.267 million, compared to $0.469 million for the three month period ended May 31, 2006, an increase of $0.798 million or 170%. Operating expenses for the nine month period ended May 31, 2007 were $3.819 million, compared to $2.233 million for the nine month period ended May 31, 2006, an increase of $1.586 million or 71%. The increase was due to an increase in executive level compensation, rent expense on the corporate building, depreciation expense related to capital expenditures, and accelerated amortization of debt services costs related to the Company’s convertible term note.

37

Interest Expense

Interest expense was $0.843 million for the three month period ended May 31, 2007, compared to $0.649 million for the three month period ended May 31, 2006, an increase of $0.194 million or 30%. Interest expense was $2.498 million for the nine month period ended May 31, 2007, compared to $1.791 million for the nine month period ended May 31, 2006, an increase of $0.707 million or 39%. The increase was primarily due to additional borrowing under the Company’s credit facility, interest on the Company’s convertible term note, and interest expense related to the VIE.

Income Taxes

The Company recorded a 100% valuation allowance on additions to deferred tax assets due to uncertainty regarding future profitability of the Company based on the current year 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 2007 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 six facilities from a consolidated variable interest entity, whose primary purpose is to own and lease these properties to the Company. The VIE has ownership of 384,500 shares of the Company’s stock and is wholly-owned by the Company’s Chairman of the Board of Directors and the Chief Executive Officer. The VIE does not have any other significant assets. For the three month period ended May 31, 2007, the consolidation of the VIE comprised of $0.470 million in rental income, offset by a $0.103 million charge to interest expense, a $0.050 million charge to depreciation expense, and $0.008 million in administrative and other miscellaneous expenses. For the nine month period ended May 31, 2007, the consolidation of the VIE comprised of $1.054 million in rental income, offset by a $0.382 million charge to interest expense, a $0.148 million charge to depreciation expense, and $0.051 million in administrative and other miscellaneous expenses.

Refer to Note 12 of the accompanying consolidated financial statements for detailed information regarding the variable interest entity.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity include cash and equivalents, marketable equity securities and proceeds from debt borrowings. We had cash and equivalents and marketable equity securities of $9.139 million (excluding $25 thousand variable interest entity cash) at May 31, 2007 and $4.913 million at August 31, 2006.

We had working capital of $(14.253) million (excluding variable interest entity working capital which includes current assets of $.025 million and current liabilities of $2.693 million) at May 31, 2007 compared with $23.383 million at August 31, 2006. The decrease in working capital was due primarily to the decrease in accounts receivable and to the reclassification of debt from long term to current. Current assets are comprised primarily of cash and equivalents, net accounts receivable, marketable equity securities, inventories, and costs & estimated earnings in excess of billings on uncompleted contracts.

Total debt at May 31, 2007 was $38.022 million (excluding debt borrowed under a variable interest entity of $7.388 million), which includes a $5.904 million convertible term note, $12.931 million borrowed under our line of credit, a $18.667 million term note, and various equipment loans. Total debt at August 31, 2006 was $31.167 million. Total unused borrowings under the line of credit were approximately $2.1 million and $11.7 million at May 31, 2007 and August 31, 2006, respectively. 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 $0.7 million for the three month period ended May 31, 2007 and 2006, respectively. Total capital expenditures were approximately $0.9 million and $2.1 million for the nine month period ended May 31, 2007 and 2006, respectively. Sources of funds for this expansion have primarily been from additional borrowings from the bank.

38

As of May 31, 2007, the Company was not in compliance with certain bank debt covenants. The Company is currently in discussions with its bank to obtain a waiver related to these covenant violations.  The Company has in place secondary financing options in the event a waiver is not obtained.

Cash Flows

Cash flows provided by operations for the nine month period ended May 31, 2007 were $7.775 million as compared to cash flow used in operations of $0.983 million for the nine month period ended May 31, 2006. This increase in operating cash flows was due primarily to increased collections of outstanding accounts receivable.

Net cash flow used in investing activities was $8.077 million for the nine month period ended May 31, 2007 compared to $2.425 million for the nine month period ended May 31, 2006. The increase was due primarily to the acquisition of Precision and ESG, the sale of marketable securities, and a decrease in capital expenditures primarily in our Wireless Infrastructure and Transportation Infrastructure segments.

Net cash flow provided by financing activities was $5.706 million for the nine month period ended May 31, 2007 compared to $3.125 million for the nine month period ended May 31, 2006. The increase was primarily the result of additional borrowing used to finance the acquisitions of Precision and ESG.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table summarizes our contractual obligations as of May 31, 2007:

	Payments Due By
Contractual obligation	Total		Less than 1 year		1-2 years		3-5 years		More than 5 years
	(Dollars in thousands)
Long-term debt and capital	$	38,022	$	34,563	$	3,444	$	15	$	-
Variable interest entity debt		7,388		2,703		4,271		414		-
Operating lease (1)		6,418		2,719		2,075		133		1,491
Total	$	51,828	$	39,985	$	9,790	$	562	$	1,491

(1) Operating leases represent the total future minimum lease payments, and are primarily comprised of lease obligations between the Company and the VIE. This operating lease expense is eliminated in the Company’s consolidated statement of operations.

OFF BALANCE SHEET ARRANGEMENTS

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

Transactions with Related Parties

We have entered into various acquisition agreements over the past three years which contain option agreements or rights between the sellers of the acquired entities and our majority shareholder, Mr. Carter Fortune, related to the Company’s stock provided as consideration under the acquisitions. The option agreements provide for put/ call options on the Company’s common stock held by the sellers of the acquired companies. As more fully described in Note 11 of the accompanying consolidated financial statements, Harlan Schafir, certain PSM employees and MGTS exercised their put sale rights to Carter Fortune and John Fisbeck during the three months ended May 31, 2007. Additionally, Carter Fortune exercised his call purchase rights and both he and John Fisbeck completed the purchase of shares of Company stock from Norman G. Wolcott, Jr. and The Wolcott Trusts on March 3, 2007.

39

We lease a total of six facilities from a VIE as described earlier in this filing. The VIE’s primary purpose is to own and lease these properties to the Company. The VIE does not have any other significant assets. Effective, September 1, 2006, the Company elected to consolidate the VIE through its evaluation of Financial Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R").

Guarantees

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

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 May 31, 2007, we had approximately $4.6 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 $5.0 million in favor of the surety and, with the consent of our lender under our credit facility; we have granted security interests in certain of our assets to collateralize our obligations to the surety. To date, we have not been required to make any reimbursements to the surety for bond-related costs. We believe that it is unlikely that we will have to fund claims under our surety arrangements in the foreseeable future. As of May 31, 2007, an aggregate of approximately $47.0 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 8 to the consolidated financial statements. Approximately 99% of the Company’s debt as of May 31, 2007 bears interest at variable rates. Based on amounts outstanding at May 31, 2007, if the interest rate on the Company’s variable debt were to increase by 1.0%, annual interest expense would increase by approximately $0.4 million.

Cash and cash equivalents as of May 31, 2007 was $9.085 million and is primarily in subsidiary operating accounts. A hypothetical 10% adverse change in the average interest rate on the Company’s investments would not have had a material effect on net income for the three or nine month periods ended May 31, 2007. We do not currently utilize any derivative financial instruments to hedge interest rate risks.

We are exposed to foreign currency risks due to both transactions and translations between functional and reporting currencies in our European, Singapore, and Chinese foreign subsidiaries. A hypothetical 10% adverse change in the foreign currency translation would not have had a material effect on net income for the three or nine month periods ended May 31, 2007. We do not currently utilize any derivative financial instruments to hedge foreign currency risks.

40

Item 4.  Controls and Procedures

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

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and acting Principal Financial Officer, the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of May 31, 2007. Based on this evaluation, the Chief Executive Officer and acting Principal Financial Officer have concluded that, for the reasons more fully set forth below, the Company’s disclosure controls and procedures were not effective on May 31, 2007 in providing reasonable assurance that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

More specifically, the Company’s management has concluded that (i) additional accounting personnel were needed both at the parent company level and at certain subsidiaries at May 31, 2007 to ensure that certain disclosure controls and procedures were operating effectively; (ii) greater segregation of duties was needed in the accounting functions; and (iii) certain procedures should be documented to ensure that personnel turnover does not result in a failure of those procedures. The Company will continue to evaluate the need for additional staff at the parent and subsidiary levels, but given the size and location of the Company’s subsidiaries the Company believes it will continue to face challenges in attracting and retaining qualified personnel. Additionally, the Company is also in the process of evaluating ways in which the impact of personnel turnover on the implementation of disclosure controls and procedures can be reduced. Management continues to evaluate the effectiveness of this segregation and the need for additional enhancements, including, but not limited to, the addition of accounting personnel.

PART II--OTHER INFORMATION.

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors

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

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

None

Item 3. Defaults Upon Senior Securities.

None

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

41

SIGNATURES

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

	Fortune Industries, Inc.
	(Registrant)
Date:  July 3, 2008	By: /s/ John F. Fisbeck
	John F. Fisbeck,
	Chief Executive Officer
Date:  July 3, 2008	By: /s/ John F. Fisbeck
	John F. Fisbeck,
	Principal Financial Officer (acting)

42