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 June 30, 2012. Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission.

OVERVIEW

Fortune Industries, Inc. is a holding company of providers of full service human resources outsourcing services through co-employment relationships with the company's clients. The terms "we", "our", "us", "the Company", and "management" as used herein refers to Fortune Industries, Inc. and its subsidiaries unless the context otherwise requires.

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 accounting). Day-to-day operating decisions are made by subsidiary management teams. Our Corporate management team assists in operational decisions when deemed necessary, selects subsidiary management teams and handles capital allocation among our operations.

We were incorporated in the state of Delaware in 1988, restructured in 2000 and re-domesticated to the state of Indiana in May 2005.

On September 20, 2012, the Company announced that it has reached an agreement in principal to restructure its current merger agreement by planning to enter into an amended merger agreement with Ide Management Group, LLC ("Ide"), a skilled nursing facility management group headquartered in Greenfield, Indiana (the "Amended Agreement"). However, on December 28, 2012, the Company announced that it had entered into a Termination of Escrow Agreement with Ide whereby the Company determined not to go forward with the negotiations of a definitive agreement and agreed to terminate the Escrow Agreement entered into on September 19, 2012. The escrow funds deposited by Ide pursuant to the Escrow Agreement have been disbursed to Ide.

As a result of the termination of discussions with Ide, our board of directors has authorized the Company to resume the work necessary to complete the original merger transaction with CEP, Inc. and CEP Merger Sub, Inc.

Mr. Fortune has pledged his ownership holdings in the Company as collateral on certain personal debt obligations. Mr. Fortune passed away on August 25, 2012. If his estate were to default on these debt obligations and the collateral is called upon by the lending institution, it could result in a potential change in control of the Company if the default may not be cured by the majority shareholder through some other means.

CRITICAL ACCOUNTING POLICIES

The Company's accounting policies, which are in compliance with accounting principles generally accepted in the United States, require application of methodologies, estimates and judgments that have a significant impact on the results reported in the Company's financial statements. Those policies that, in the belief of management, are critical and require the use of complex judgment in their application, are disclosed on the Company's Form 10-K for the year ended June 30, 2012. Since June 30, 2012, there have been no material changes to the Company's critical accounting policies, except for the following:

New Accounting Pronouncements

In September 2011, the FASB issued ASU 2011-08, "Testing Goodwill for Impairment". The objective of this ASU is to simplify how an entity tests goodwill for impairment. The new guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if a public entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

In July 2012, the FASB issued ASU 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment". The objective of this ASU is to simplify how an entity tests indefinite-lived intangibles for impairment. The new guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative indefinite-lived intangible assets impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

Other new pronouncements issued but not effective until after December 31, 2012, are not expected to have a significant effect on the Company's consolidated financial statements.

Income Taxes

Deferred tax assets are recognized for taxable temporary differences, tax credit and net operating loss carry forwards. These assets are reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. For this purpose, management considered evidence, both positive and negative, regarding various uncertainties 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.

As of December 31, 2012, management has determined that a 86% valuation allowance against the Company's $3.8 million component of deferred tax assets generated by the net operating loss carry forward of $9.5 million is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. This represents a decrease from the prior fiscal year's 87% allowance as the Company experienced positive taxable earnings in the current fiscal year for the third time in seven years. As a result, management elected to limit the valuation allowance release to 14% as the Company has not established a significant historical trend of taxable earnings. As of December 31, 2012, management has also determined that a $1.5 million valuation allowance against the Company's $3.8 million of deferred tax assets generated by book versus tax differences of certain assets and liabilities is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. This 40% valuation allowance represents a decrease from the prior fiscal year's 42% due to the aforementioned earnings trend. The Company released $0.5 million of the valuation allowance in fiscal 2013 due to the positive earnings in the Company's operations and projected earnings for the remainder of fiscal 2013 and 2014.

As of June 30, 2012, management had determined that a 87% valuation allowance against the Company's $4.3 million component of deferred tax assets generated by the net operating loss carry forward of $10.8 million was necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. This represented a decrease from the prior fiscal year's 90% allowance as the Company experienced positive taxable earnings in the 2012 fiscal year for the second time in six years. As a result, management elected to limit the valuation allowance release to 13% as the Company had not established a significant historical trend of taxable earnings. As of June 30, 2012, management had also determined that a $1.6 million valuation allowance against the Company's $3.8 million of deferred tax assets generated by book versus tax differences of certain assets and liabilities was necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. This 42% valuation allowance represented a decrease from the prior fiscal year's 43% due to the aforementioned earnings trend. The Company released $0.9 million of the valuation allowance in fiscal 2012 due to the positive earnings in the Company's operations and projected earnings for 2013 and 2014.

RESULTS OF OPERATIONS: COMPARISON OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 2012 AND DECEMBER 31, 2011

Executive Overview of Financial Results

Gross billings for the three month periods ended December 31, 2012 and December 31, 2011 were $129.7 million and $137.2 million, respectively.

Results of operations for the three and six month periods ended December 31, 2012 and December 31, 2011 are as follows:

                                                 Revenue for the                   Operating income for the
                                               Three Months Ended                     Three Months Ended
                                         December 31,       December 31,      December 31,          December 31,
                                             2012               2011              2012                  2011
                                                                 (Dollars in thousands)
Business Solutions                      $       13,739     $       14,836     $         534         $         424
Holding Company                                      -                  -                 -                     -
Segment Totals                          $       13,739     $       14,836     $         534         $         424

Net Income Available to Common
Shareholders                                                                  $         115         $          78




                                                 Revenue for the                  Operating income for the
                                                Six Months Ended                      Six Months Ended
                                         December 31,       December 31,      December 31,        December 31,
                                             2012               2011              2012                2011
                                                                (Dollars in thousands)
Business Solutions                      $       27,499     $       30,631     $       1,405       $       1,176
Holding Company                                      -                  -                 -                   -
Segment Totals                          $       27,499     $       30,631     $       1,405       $       1,176

Net Income Available to Common
Shareholders                                                                  $         516       $         469

Net income available to common stock shareholders was $0.12 million or $0.01 per diluted share on revenue of $13.7 million for the three month period ended December 31, 2012 compared with net income available to common stock shareholders of $0.08 million or $0.01 per diluted share on revenue of $14.8 million for the three month period ended December 31, 2011. This represents a $1.1 million or 7.4% decrease in revenue and a $0.04 million or 47.7% increase in net income.

The decrease in revenue for the three month period ended December 31, 2012 is primarily due to the loss of a major client at both CSM and ESG effective December 31, 2011. Both clients had been with CSM or ESG over ten years and had grown to the size that they could realize some material economies of scale by bringing the service in-house.

The increase in net income available to common shareholders for the three month period ended December 31, 2012 is due to an increase in gross profit from workers compensation, benefits and taxes which more than offset the increase in preferred dividends.

Net income available to common stock shareholders was $0.52 million or $0.04 per diluted share on revenue of $27.5 million for the six month period ended December 31, 2012 compared with net income available to common stock shareholders of $0.47 million or $0.04 per diluted share on revenue of $30.6 million for the six month period ended December 31, 2011. This represents a $3.1 million or 10.2% decrease in revenue and a $0.05 million or 10.0% increase in net income.

The decrease in revenue for the six month period ended December 31, 2012 is primarily due to the loss of a major client at both CSM and ESG effective December 31, 2011. Both clients had been with CSM or ESG over ten years and had grown to the size that they could realize some material economies of scale by bringing the service in-house.

The increase in net income available to common shareholders for the six month period ended December 31, 2012 is due to an increase in gross profit from workers compensation and benefits which more than offset the increase in preferred dividends.

Results are described in further detail as follows:

Operating results for three and six month periods ended December 31, 2012 and December 31, 2011 are as follows:

                                            Three Month Period Ended
                                  December 31, 2012          December 31, 2011
                                             (Dollars in thousands)
Revenues                        $   13,739       100.0 %   $   14,836       100.0 %
Cost of revenues                    10,551        76.8 %       11,726        79.0 %
Gross profit                         3,188        23.2 %        3,110        21.0 %

Operating expenses
Selling, general and admin           2,523        18.3 %        2,553        17.2 %
Depreciation and amortization          131         1.0 %          133         0.9 %
Total operating expenses             2,654        19.3 %        2,686        18.1 %

Segment operating income        $      534         3.9 %   $      424         2.9 %




                                             Six Month Period Ended
                                  December 31, 2012          December 31, 2011
                                             (Dollars in thousands)
Revenues                        $   27,499       100.0 %   $   30,631       100.0 %
Cost of revenues                    21,065        76.6 %       24,272        79.2 %
Gross profit                         6,434        23.4 %        6,359        20.8 %

Operating expenses
Selling, general and admin           4,768        17.3 %        4,916        16.0 %
Depreciation and amortization          261         1.0 %          267         0.9 %
Total operating expenses             5,029        18.3 %        5,183        16.9 %

Segment operating income        $    1,405         5.1 %   $    1,176         3.8 %

Revenue

Revenue for the three month period ended December 31, 2012 was $13.7 million, compared to $14.8 million for the three month period ended December 31, 2011, a decrease of $1.1 million or 7.4%. Revenue decreased primarily due to the loss of a major client at both CSM and ESG effective December 31, 2011. Total worksite employee count is down 1,047 employees or 7.2% from December 31, 2011. We continue to focus on growing in our target client size of 5-100 employees.

Revenue for the six month period ended December 31, 2012 was $27.5 million, compared to $30.6 million for the six month period ended December 31, 2011, a decrease of $3.1 million or 10.2%. Revenue decreased primarily due to the loss of a major client at both CSM and ESG effective December 31, 2011.

Gross Profit

Gross profit for the three month period ended December 31, 2012 was $3.2 million, representing 23.2% of revenue, compared to $3.1 million, representing 21.0% of revenue for the three month period ended December 31, 2011. Despite a 7.4% decrease in revenue, gross profit dollars increased 2.5% due to lower claims in our workers compensation programs and an increase in margin in our benefits and tax services.

Gross profit for the six month period ended December 31, 2012 was $6.4 million, representing 23.4% of revenue, compared to $6.4 million, representing 20.8% of revenue for the six month period ended December 31, 2011. Despite a 10.2% decrease in revenue, our gross margin dollars have held constant due to lower claims in our workers compensation programs and an increase in margin in our benefits services.

Operating Income

Operating income for the three month period ended December 31, 2012 was $0.53 million, compared to operating income of $0.42 million for the three month period ended December 31, 2011, an increase of $0.11 million or 25.9% due to improved gross margin as discussed above.

Operating income for the six month period ended December 31, 2012 was $1.4 million, compared to operating income of $1.2 million for the six month period ended December 31, 2011, an increase of $0.2 million or 19.5% due to improved gross margin as discussed above.

Interest Expense

Interest expense was $0.001 million for the three and six month periods ended December 31, 2012, compared to $0.003 million and $0.007 million for the three and six month periods ended December 31, 2011 respectively. Our term loan was paid in full in April, 2012 so any current interest expense relates to short term vendor or government obligations.

Income Taxes

Income tax expense was $0.015 and $0.084 million for the three and six months ended December 31, 2012 compared to $0.006 and $0.039 for the three and six month periods ended December 31, 2011. The increase for both periods is due to increased profitability as compared to prior year.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity include cash and equivalents and proceeds from debt borrowings. We had cash and equivalents of $6.4 million at December 31, 2012 and $5.3 million at June 30, 2012. The increase is primarily due to net income available to common shareholders for the first six months of $0.52 million and the reduction in restricted cash of $0.27 million which was transferred to our operating cash. Due to a reduction in projected claims in the PSM and CSM workers compensation programs, Liberty Mutual decreased the amount of collateral required to fund the programs which reduced our restricted cash requirements.

We had working capital of $4.8 million at December 31, 2012 compared with $4.1 million at June 30, 2012. The increase in working capital was a direct result of the first six months net income available to shareholders of $0.52 million. Current assets are primarily comprised of cash and equivalents and net accounts receivable. Current liabilities are primarily comprised of accounts payable, workers compensation reserves and accrued expenses.

The Company is required to collateralize its obligations under its workers' compensation and state compliance requirements. The Company uses its cash and cash equivalents to collateralize these obligations. Restricted cash was approximately $2.1 million and $2.4 million at December 31, 2012 and June 30, 2012, respectively.

Cash Flows

Cash flows provided by operations for the six month periods ended December 31, 2012 and December 31, 2011 were $2.0 million and $1.1 million, respectively. The increase is primarily due to an increase in net income of $1.3 million.

Cash flows used in investing activities for the six month periods ended December 31, 2012 and December 31, 2011 were $0.091 million and $0.007 million, respectively. The increase is due to additional expenditures to strengthen our infrastructure and communication between subsidiaries and to prepare for the CSM conversion to the same operating platform as PSM and ESG during the fourth quarter. Once this conversion is completed, all subsidiaries will be on the same operating platform which will allow greater sharing of information and more efficiency between locations.

Cash flows used in financing activities was $0.81 million for the six month period ended December 31, 2012 compared to $0.93 million for the six month period ended December 31, 2011. The decrease is due to the payoff of the term debt in April, 2012 which saved $0.25 million which offset the increase in dividend expense of $0.14 million.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

There have been no material changes to the Company's contractual obligations from those disclosed in the Form 10-K for the year ended June 30, 2012 under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".

OFF BALANCE SHEET ARRANGEMENTS

As is common in the industry 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 liabilities associated with guarantees and letter of credit obligations.

Guarantees

Significant portions of our letters of credit are personally guaranteed by the estate of the Company's former Chairman. Future changes to these guarantees would 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 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 December 31, 2012, we had approximately $2.7 million in restricted cash primarily to secure obligations under our PEO contracts.