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<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><b>NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</b></font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><b>General</b></font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Basis of Presentation: </i>The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2012 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 consolidated balance sheet at June 30, 2012 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by accounting principles generally accepted in the United States for complete financial statements. The Company’s consolidated balance sheet at September 30, 2012 and the consolidated statements of operations, cash flows and shareholders’ equity for the period ended September 30, 2012 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 Company has evaluated subsequent events through the time these financial statements in the Form 10-Q report were filed with the Securities and Exchange Commission. The operating results for the three month period ended September 30, 2012 are not necessarily indicative of the operating results to be expected for the full fiscal year.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">Nature of Business: Fortune Industries, Inc. is an Indiana corporation comprised of Professional Employer Organizations (PEOs) which provide full-service human resources outsourcing services through co-employment relationships with its clients.  Wholly owned subsidiaries operating in this industry include Professional Staff Management, Inc. and related entities (“PSM”); CSM, Inc. and related subsidiaries (“CSM”); and Employer Solutions Group, Inc. and related subsidiaries (“ESG”).</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">The Company bills its clients under Professional Services Agreements as licensed PEOs.  The billing includes amounts for the client’s gross wages, payroll taxes, employee benefits, workers’ compensation insurance and an administration fee.  The administration fee charged by the Company is typically a percentage of the gross payroll and is sufficient to allow the Company to provide payroll administration services, human resources consulting services, worksite safety training, and employment regulatory compliance.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">The component of the administration fee related to administration varies, in part, according to the size of the client, the amount and frequency of payroll payments and the delivery method of such payments.  The component of the administration 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.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">Through the co-employment contractual relationship, the Company becomes the employer of record for all payroll related taxes and, as such, all payroll-related taxes are filed on the Company’s federal, state, and local tax identification numbers with the exception of states that require client identification for state unemployment taxes.  The clients are not required to file any payroll related taxes on their own behalf.  The calculations of amounts the Company owes and pays the various government and employment insurance vendors are based on the experience levels and activity of the Company and its clients.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Restricted Cash:</i> Restricted cash includes certificates of deposits for letters of credit issued to collateralize the Company’s obligations under its various workers’ compensation programs and certain general insurance coverage. At September 30, 2012, the Company had $2,395 in total restricted cash. Of this amount, $2,125 is restricted for its various workers’ compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credit in accordance with various state regulations.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Goodwill and Other Indefinite-Lived Intangible Assets: </i>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.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">The Company has elected to perform the annual impairment assessment of recorded goodwill and other indefinite-lived intangible assets as of the end of its fiscal year. Management has assessed qualitative factors, to determine whether it is necessary to perform the two-step quantitative impairment test, and determined it is more likely than not that its fair value exceeds the carrying amount.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<div style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Workers’ Compensation: </i>The Company's PSM, CSM and ESG subsidiaries maintain fully funded, high deductible 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 $2,000. Under the insurance policy established at ESG, the deductible liability is limited to $350 per incident, with no aggregate liability limit.</font></div>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><b>NOTE 4- INCOME TAXES</b></font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">ASC 740 requires a valuation allowance to reduce the deferred tax assets reported, if at September 30, 2012, the Company had federal tax operating losses 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.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">This evidence includes consideration of various uncertainties that management has identified as risk factors to the Company. Recent events, including significant turmoil within the domestic and foreign financial markets, healthcare legislation and increasing unemployment tax rates and taxable wage thresholds, more than likely are expected to contribute to atypical customer attrition and decreased gross profits. Additionally, since the divesture of certain segments in fiscal 2009 unrelated to the Company’s current focus of full service human resources, the Company has had positive results for the last five fiscal periods for financial reporting purposes including the current period. However, the Company has not evidenced a similar trend for income tax reporting purposes, experiencing net operating losses in four of prior seven fiscal periods, with the current, 2012 and 2011 fiscal years as the exception. These taxable losses are primarily the result of permanent timing differences related to the amortization of certain intangible assets for income tax purposes through 2022. The Company’s deferred tax assets and liabilities are susceptible to erratic changes due to the inherent unpredictable nature of the Company’s insurance claim liabilities and sensitivity to unemployment and wage volatility. Changes in the economy and federal and state legislature, both favorable and unfavorable, will impact management’s assumptions and estimates in future periods.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">After consideration of the evidence, both positive and negative, management has determined that a $5.0 million and $5.3 million valuation allowance at September 30, 2012 and June 30, 2012, respectively, 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 is $0.3 million for the three months ended September 30, 2012. The Company has federal net operating loss carry forwards of approximately $10.2 million and $10.8 million at September 30, 2012 and June 30, 2012, respectively, which expire between 2021 and 2030. The Company has state net operating loss carry forwards of approximately $10.3 million and $11.0 million at September 30, 2012 and June 30, 2012, respectively.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><b>NOTE 2– EQUITY INCENTIVE PLANS AND OTHER STOCK COMPENSATION</b></font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Restricted Share Units</i></font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">Effective April 13, 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan. Under terms of the 2006 Equity Incentive Plan, the Company may grant options, restricted share units and other stock-based awards to its management personnel as well as other individuals for up to 1.0 million shares of common stock. During the three month period ended September 30, 2012, no restricted share units were issued under this plan.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><b>NOTE 3- SHAREHOLDERS’ EQUITY</b></font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Common Stock</i></font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">The Company did not issue any shares of common stock during the three month period ended September 30, 2012.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Preferred Stock</i></font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">On September 25, 2009, the Company reached an agreement with the Chairman to amend the dividend rates on the Series C Preferred Stock with an effective date of July 1, 2009. From the effective date forward the Series C Preferred Stock will bear an annual dividend of $2 per share in the years ending June 30, 2010 and 2011, $5 per share in the year ending June 30, 2012, $6 per share in the year ending June 30, 2013 and $7 per share thereafter. All other items of the Series C Preferred Shares remained unchanged. Dividends of $407 and $339 were declared for the three months ended September 30, 2012 and September 30, 2011 respectively.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">Effective December 31, 2010, the Company revised its estimate regarding the collectability of its $2,500 term note receivable with a related party. Based on this change in estimate, the Company reclassified the note receivable as a reduction to its outstanding preferred stock as prescribed by a Security Agreement between the Company and the related party. Under terms of this Security Agreement and in the event of default of the term note receivable, the Company obtains the right to equal value of the preferred stock as defined including but not limited to title, interest and dividends. As of September 30, 2012 and the date of this filing, the Company has no intention to convert the note receivable in the foreseeable future.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Restricted Cash:</i> Restricted cash includes certificates of deposits for letters of credit issued to collateralize the Company’s obligations under its various workers’ compensation programs and certain general insurance coverage. At September 30, 2012, the Company had $2,395 in total restricted cash. Of this amount, $2,125 is restricted for its various workers’ compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credit in accordance with various state regulations.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Goodwill and Other Indefinite-Lived Intangible Assets: </i>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.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">The Company has elected to perform the annual impairment assessment of recorded goodwill and other indefinite-lived intangible assets as of the end of its fiscal year. Management has assessed qualitative factors, to determine whether it is necessary to perform the two-step quantitative impairment test, and determined it is more likely than not that its fair value exceeds the carrying amount.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Workers’ Compensation: </i>The Company's PSM, CSM and ESG subsidiaries maintain fully funded, high deductible 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 $2,000. Under the insurance policy established at ESG, the deductible liability is limited to $350 per incident, with no aggregate liability limit.</font></p>
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<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"><i>Basis of Presentation: </i>The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2012 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 consolidated balance sheet at June 30, 2012 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by accounting principles generally accepted in the United States for complete financial statements. The Company’s consolidated balance sheet at September 30, 2012 and the consolidated statements of operations, cash flows and shareholders’ equity for the period ended September 30, 2012 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 Company has evaluated subsequent events through the time these financial statements in the Form 10-Q report were filed with the Securities and Exchange Commission. The operating results for the three month period ended September 30, 2012 are not necessarily indicative of the operating results to be expected for the full fiscal year.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">Nature of Business: Fortune Industries, Inc. is an Indiana corporation comprised of Professional Employer Organizations (PEOs) which provide full-service human resources outsourcing services through co-employment relationships with its clients.  Wholly owned subsidiaries operating in this industry include Professional Staff Management, Inc. and related entities (“PSM”); CSM, Inc. and related subsidiaries (“CSM”); and Employer Solutions Group, Inc. and related subsidiaries (“ESG”).</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">The Company bills its clients under Professional Services Agreements as licensed PEOs.  The billing includes amounts for the client’s gross wages, payroll taxes, employee benefits, workers’ compensation insurance and an administration fee.  The administration fee charged by the Company is typically a percentage of the gross payroll and is sufficient to allow the Company to provide payroll administration services, human resources consulting services, worksite safety training, and employment regulatory compliance.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">The component of the administration fee related to administration varies, in part, according to the size of the client, the amount and frequency of payroll payments and the delivery method of such payments.  The component of the administration 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.</font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;"> </font></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="color: #000000;">Through the co-employment contractual relationship, the Company becomes the employer of record for all payroll related taxes and, as such, all payroll-related taxes are filed on the Company’s federal, state, and local tax identification numbers with the exception of states that require client identification for state unemployment taxes.  The clients are not required to file any payroll related taxes on their own behalf.  The calculations of amounts the Company owes and pays the various government and employment insurance vendors are based on the experience levels and activity of the Company and its clients.</font></p>
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