UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)


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





For the
quarterly period ended September 30, 2009





or





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





Commission
file number: 000-51426







FORTRESS
INTERNATIONAL GROUP, INC.


(Exact name of registrant as specified in its charter)





Delaware
            
            20-2027651(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer Identification No.)7226
      Lee DeForest Drive, Suite 203
              Columbia,
      Maryland
            
            21046(Address
      of principal executive offices)
            
            (Zip
      Code)





(410)
423-7438


(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 Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x No o


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).  ̈ Yes No  ̈


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x




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




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Common
Stock, par value $0.0001 per share, as of November 6,
2009 12,676,767













FORTRESS
INTERNATIONAL GROUP, INC.


Table
of Contents





PagePART
      I - FINANCIAL INFORMATIONItem
      1.     Financial Statements
      (Unaudited)Condensed
      Consolidated Balance Sheets as of September 30, 2009 and as of December
      31, 2008
                  
                  1Condensed
      Consolidated Statements of Operations for the three and nine months ended
      September 30, 2009 and 2008
                  
                  2Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2009 and 2008
                  
                  3Notes
      to Condensed Consolidated Financial Statements
                  
                  4Item
      2.      Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
                  
                  12Item
      3.      Quantitative and Qualitative Disclosures
      about Market Risk
                  
                  21Item
      4T.   Controls and Procedures
                  
                  21PART
      II - OTHER INFORMATIONItem
      1.      Legal Proceedings
                  
                  22Item
      1A.   Risk Factors
                  
                  22Item
      2.      Unregistered Sales of Equity Securities
      and Use of Proceeds
                  
                  24Item
      3.      Defaults upon Senior
      Securities
                  
                  24Item
      4.      Submission of Matters to a Vote of
      Security Holders
                  
                  24Item
      5.      Other Information
                  
                  24Item
      6.      Exhibits
                  
                  24SIGNATURES
                  
                  25








PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements





FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





(Unaudited)September 30,
                  
                  
                  December 31,2009
                  
                  
                  2008Current
      AssetsCash
      and cash equivalents
                  
                  $
                  2,364,992
                  
                  
                  $
                  12,448,157Contract
      and other receivables, net
                  
                  
                  11,479,504
                  
                  
                  
                  21,288,660Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                  
                  
                  2,865,426
                  
                  
                  
                  3,742,530Prepaid
      expenses and other current assets
                  
                  
                  531,410
                  
                  
                  
                  539,124Total
      current assets
                  
                  
                  17,241,332
                  
                  
                  
                  38,018,471Property
      and equipment, net
                  
                  
                  627,191
                  
                  
                  
                  824,487Goodwill
                  
                  
                  4,474,563
                  
                  
                  
                  4,811,000Other
      intangible assets, net
                  
                  
                  117,930
                  
                  
                  
                  13,559,234Other
      assets
                  
                  
                  280,036
                  
                  
                  
                  225,853Total
      assets
                  
                  $
                  22,741,052
                  
                  
                  $
                  57,439,045Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesNotes
      payable, current portion
                  
                  $
                  482,572
                  
                  
                  $
                  1,688,845Convertible
      note, current portion
                  
                  
                  2,000,000
                  
                  
                  
                  -Accounts
      payable and accrued expenses
                  
                  
                  10,709,344
                  
                  
                  
                  24,394,990Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                  
                  
                  2,825,020
                  
                  
                  
                  6,047,765Total
      current liabilities
                  
                  
                  16,016,936
                  
                  
                  
                  32,131,600Notes
      payable, less current portion
                  
                  
                  228,187
                  
                  
                  
                  311,709Convertible
      notes, less current portion
                  
                  
                  2,000,000
                  
                  
                  
                  4,000,000Other
      liabilities
                  
                  
                  57,536
                  
                  
                  
                  137,198Total
      liabilities
                  
                  
                  18,302,659
                  
                  
                  
                  36,580,507Commitments
      and Contingencies
                  
                  
                  -
                  
                  
                  
                  -Stockholders’
      EquityPreferred
      stock- $.0001 par value; 1,000,000 shares authorized; no shares issued or
      outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock- $.0001 par value, 100,000,000 shares authorized; 12,902,960 and
      12,797,296 issued; 12,676,767 and 12,621,716 outstanding at September 30,
      2009 and December 31, 2008, respectively
                  
                  
                  1,290
                  
                  
                  
                  1,279Additional
      paid-in capital
                  
                  
                  62,655,305
                  
                  
                  
                  61,262,218Treasury
      stock 226,193 and 175,580 shares at cost at September 30, 2009 and
      December 31, 2008, respectively
                  
                  
                  (918,099
                  )
                  
                  
                  (869,381
                  )Accumulated
      deficit
                  
                  
                  (57,300,103
                  )
                  
                  
                  (39,535,578
                  )Total
      stockholders' equity
                  
                  
                  4,438,393
                  
                  
                  
                  20,858,538Total
      liabilities and stockholders’ equity
                  
                  $
                  22,741,052
                  
                  
                  $
                  57,439,045




The
accompanying notes are an integral part of these condensed consolidated
financial statements.


1




FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





(Unaudited)
                  
                  
                  (Unaudited)For the Three Months Ended
                  
                  
                  For the Nine Months EndedSeptember 30, 2009
                  
                  
                  September 30, 2008
                  
                  
                  September 30, 2009
                  
                  
                  Septemer 30, 2008Results
      of Operations:Revenue
                  
                  $
                  16,005,741
                  
                  
                  $
                  25,781,523
                  
                  
                  $
                  61,016,490
                  
                  
                  $
                  65,363,481Cost
      of revenue
                  
                  
                  12,595,265
                  
                  
                  
                  20,660,103
                  
                  
                  
                  52,157,345
                  
                  
                  
                  54,719,170Gross
      profit
                  
                  
                  3,410,476
                  
                  
                  
                  5,121,420
                  
                  
                  
                  8,859,145
                  
                  
                  
                  10,644,311Operating
      expenses:Selling,
      general and administrative
                  
                  
                  3,140,715
                  
                  
                  
                  4,838,291
                  
                  
                  
                  11,632,284
                  
                  
                  
                  15,275,116Depreciation
      and amortization
                  
                  
                  101,474
                  
                  
                  
                  125,716
                  
                  
                  
                  309,934
                  
                  
                  
                  355,810Amortization
      of intangibles
                  
                  
                  93,211
                  
                  
                  
                  702,569
                  
                  
                  
                  1,476,171
                  
                  
                  
                  2,104,067Impairment
      loss on goodwill and other intangibles
                  
                  
                  -
                  
                  
                  
                  2,973,000
                  
                  
                  
                  13,062,133
                  
                  
                  
                  4,190,000Total
      operating costs
                  
                  
                  3,335,400
                  
                  
                  
                  8,639,576
                  
                  
                  
                  26,480,522
                  
                  
                  
                  21,924,993Operating
      loss
                  
                  
                  75,076
                  
                  
                  
                  (3,518,156
                  )
                  
                  
                  (17,621,377
                  )
                  
                  
                  (11,280,682
                  )Interest
      income (expense), net
                  
                  
                  (55,321
                  )
                  
                  
                  (49,653
                  )
                  
                  
                  (143,140
                  )
                  
                  
                  (194,661
                  )Loss
      from operations before income taxes
                  
                  
                  19,755
                  
                  
                  
                  (3,567,809
                  )
                  
                  
                  (17,764,517
                  )
                  
                  
                  (11,475,343
                  )Income
      tax expense (benefit)
                  
                  
                  -
                  
                  
                  
                  (349,898
                  )
                  
                  
                  -
                  
                  
                  
                  37,102Net
      income (loss)
                  
                  $
                  19,755
                  
                  
                  $
                  (3,217,911
                  )
                  
                  $
                  (17,764,517
                  )
                  
                  $
                  (11,512,445
                  )Per
      Common Share (Basic and Diluted):Basic
      and diluted net income (loss)
                  
                  $
                  0.00
                  
                  
                  $
                  (0.26
                  )
                  
                  $
                  (1.40
                  )
                  
                  $
                  (0.95
                  )Weighted
      average common shares outstanding-basic and diluted
                  
                  
                  12,675,630
                  
                  
                  
                  12,326,397
                  
                  
                  
                  12,665,242
                  
                  
                  
                  12,164,454





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


2





FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS





(Unaudited)For the Nine Months EndedSeptember 30, 2009
                            
                            
                            September 30, 2008Cash
      Flows from Operating Activities:Net
      loss
                            
                            $
                            (17,764,517
                            )
                            
                            $
                            (11,512,445
                            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                            
                            
                            309,934
                            
                            
                            
                            355,810Amortization
      of intangibles
                            
                            
                            1,476,171
                            
                            
                            
                            2,491,477Impairment
      loss on goodwill and other intangibles
                            
                            
                            13,062,133
                            
                            
                            
                            4,190,000Provision
      for doubtful accounts
                            
                            
                            1,025,083
                            
                            
                            
                            119,728Stock
      and warrant-based compensation
                            
                            
                            1,393,098
                            
                            
                            
                            1,469,252Extinguishment
      of contract liabilities
                            
                            
                            (269,217
                            )
                            
                            
                            -Other
      non-cash income, net
                            
                            
                            2,935
                            
                            
                            
                            15,312Changes
      in operating assets and liabilities, net of the effects from
      acquisitions:Contracts
      and other receivables
                            
                            
                            8,784,073
                            
                            
                            
                            (2,315,446
                            )Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                            
                            
                            877,104
                            
                            
                            
                            (3,399,324
                            )Prepaid
      expenses and other current assets
                            
                            
                            7,714
                            
                            
                            
                            (197,902
                            )Other
      assets
                            
                            
                            (54,190
                            )
                            
                            
                            256,571Accounts
      payable and accrued expenses
                            
                            
                            (12,573,806
                            )
                            
                            
                            (124,199
                            )Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                            
                            
                            (3,222,745
                            )
                            
                            
                            6,755,014Other
      liabilities
                            
                            
                            (82,597
                            )
                            
                            
                            -Net
      cash used in operating activities
                            
                            
                            (7,028,827
                            )
                            
                            
                            (1,896,152
                            )Cash
      Flows from Investing Activities:Purchase
      of property and equipment
                            
                            
                            (112,638
                            )
                            
                            
                            (214,935
                            )Purchase
      of SMLB, net of cash acquired
                            
                            
                            -
                            
                            
                            
                            (2,094,561
                            )Payment
      of earnout in connection with the acquisition of Rubicon
                            
                            
                            (700,000
                            )
                            
                            
                            -Payment
      of earnout in connection with the acquisition of
Innovative
                            
                            
                            (353,187
                            )
                            
                            
                            -Deferred
      acquisition costs
                            
                            
                            -
                            
                            
                            
                            (21,785
                            )Net
      cash used in investing activities
                            
                            
                            (1,165,825
                            )
                            
                            
                            (2,331,281
                            )Cash
      Flows from Financing Activities:Payments
      on notes payable
                            
                            
                            (31,288
                            )
                            
                            
                            (84,065
                            )Payment
      on seller notes
                            
                            
                            (1,808,507
                            )
                            
                            
                            (1,956,994
                            )Purchase
      of treasury stock
                            
                            
                            (48,718
                            )
                            
                            
                            (47,465
                            )Net
      cash used in financing activities
                            
                            
                            (1,888,513
                            )
                            
                            
                            (2,088,524
                            )Net
      decrease in cash
                            
                            
                            (10,083,165
                            )
                            
                            
                            (6,315,957
                            )Cash,
      beginning of period
                            
                            
                            12,448,157
                            
                            
                            
                            13,172,210Cash,
      end of period
                            
                            $
                            2,364,992
                            
                            
                            $
                            6,856,253Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                            
                            $
                            139,834
                            
                            
                            $
                            377,196Cash
      paid for taxes
                            
                            
                            70,111
                            
                            
                            
                            24,602Supplemental
      disclosure of non-cash investing activities:Issuance
      of common stock in connection with the acquisition of SMLB
                            
                            $
                            -
                            
                            
                            $
                            500,000Promissory
      notes payable issued in connection with the acquisition of
      SMLB
                            
                            
                            -
                            
                            
                            
                            15,248Promissory
      notes payable issued in connection with the acquistion of
      Rubicon
                            
                            
                            550,000
                            
                            
                            
                            439,241Supplemental
      disclosure of non-cash financing activities:Promissory
      notes payable issued to officers converted to common stock
                            
                            
                            -
                            
                            
                            
                            3,500,000




The
accompanying notes are an integral part of these condensed consolidated
financial statements.


3




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(1)
            Basis of
      Presentation




The
unaudited condensed consolidated financial statements are for the three and
nine months ended September 30, 2009 and 2008 for Fortress International
Group, Inc. (“Fortress” or the “Company”).  The results of operations
attributable to each of the Company’s acquisitions are included in the condensed
consolidated financial statements from the date of acquisition.




The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and note disclosures normally included
in the annual financial statements, prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”), have
been condensed or omitted pursuant to those rules and regulations. We recommend
that you read these unaudited condensed consolidated financial statements in
conjunction with the audited consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, previously filed with the SEC. We believe that the
unaudited condensed consolidated financial statements in this Quarterly Report
on Form 10-Q reflect all adjustments (consisting of normal and recurring
adjustments) that are necessary to fairly present the financial position,
results of operations and cash flows for the interim periods presented. The
results of operations for such interim periods are not necessarily indicative of
the results that can be expected for the full year.





Nature
of Business and Organization




The
Company provides a single source solution for highly technical mission-critical
facilities such as data centers, operations centers, network facilities, server
rooms, security operations centers, communications facilities and the
infrastructure systems that are critical to their function. The Company’s
services consist of technology consulting, design and engineering, construction
management, systems installations and facilities management.





The
Company experienced a significant and unexpected decrease in its
revenues, caused by delays in starting projects or cancellations thereof during
the nine months ended September 30, 2009 resulting in a significant loss and
negative cash flows from operations.  The Company has taken and is
taking several actions, as elaborated below, to address the liquidity concerns
this has caused us.





The
Company had $2.4 million and $12.4 million of cash at September 30,
2009 and December 31, 2008, respectively.  While the Company is
taking actions to contain costs, until we fully align our expenses with our
anticipated revenue stream, we expect to continue to need to use our available
cash to fund operations.  The Company has no current funds available
under a bank line of credit or other financing vehicles.





The
Company revised its financial forecast during the second quarter of 2009 to try
and better match costs with its anticipated revenues and have initiated selling,
general and administrative cost reduction measures in an attempt to achieve
positive cash flows from operations.  The Company is also
evaluating additional measures to reduce benefit costs, professional fees and
public company costs, including the possibility of deregistering its securities
under the Exchange Act, thereby terminating its regulatory reporting
requirements and delisting its stock.





The
Company’s cash on hand and projected cash from operations over the next twelve
months may not be sufficient to meet its current operating plans, and will not
allow the Company to meet its currently scheduled debt maturities over the next
twelve months.  The Company is working with its debt holders,
including with one of its officers, to restructure the amounts due and existing
current maturities of indebtedness totaling $2.5 million at September 30,
2009.





The
consolidated financial statements included herein have been prepared on a going
concern basis, which contemplates continuity of operations and the realization
of assets and repayment of liabilities in the ordinary course of business. The
Company believes that its existing cash resources, combined with projected cash
flows from operations, may not be sufficient to execute its business plan and
continue operations into the future.  The Company has taken steps to
reduce its operating expenses such as payroll and related personnel costs
through headcount reductions and furloughs of certain departments, professional
and marketing to eliminate discretionary fees, and continues to implement
changes in its strategic direction aimed at achieving profitability and positive
cash flow.  Although the Company has been able to fund its operations
to date, there is no assurance that cash flow from its operations or capital
raising efforts will be sufficient to attract the additional capital or other
funds needed to sustain its operations. In order to preserve the Company’s
limited financial resources, it may determine to voluntarily delist its
securities from trading on NASDAQ, deregister its securities under the Exchange
Act and cease its reporting obligations with the SEC.  In addition,
the Company continues to explore various strategic alternatives, including
business combinations, private placements of debt or equity securities and sale
of a division or divisions or sale of some or all or the assets or sale of the
entire company.  If the Company is unable to obtain additional funding
for its operations, it may not be able to continue operations as proposed,
requiring it to modify its business plan, curtail various aspects of its
operations or cease operations entirely. In such event, investors may lose a
portion or all of their investment.


4




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





In an
effort to meet working capital requirements and scheduled maturities of
indebtedness absent restructuring, the Company engaged an investment banking
firm to assist it with either raising additional capital, or the marketing for
sale of a division or divisions or some or all of its assets or the entire
company.  On July 9, 2009, our Board of Directors formed a Special
Committee of independent directors whose exclusive purpose is to consider,
evaluate, review and negotiate and advise on any proposed transaction, including
any potential transactions with related parties, and to determine whether any
proposed transaction is fair to and in the best interest of its
stakeholders.  The Special Committee retained independent legal
counsel and has the authority to retain and compensate any advisor in the
fulfillment of its duties.  The Special Committee is currently
considering the following alternatives:





·
            Raising additional capital in the
      form of either debt, equity, or combination
  thereof.





·
            Marketing of the Company with
      focus on the sale of non-cash flowing components of the business, as well
      as, any of the Company’s divisions or the entire
      Company.





This
process is ongoing.  However, the Company may not be successful in
executing a sale of a division or divisions or some or all of its assets or a
sale of the entire company or in obtaining additional financing on acceptable
terms, on a timely basis, or at all, in which case, the Company may be forced to
further curtail operations, or cease operations entirely.  In
addition, if funds are available, the issuance of equity securities or
securities convertible into equity could dilute the value of shares of the
Company’s common stock and cause the market price to fall, and the issuance of
debt securities could impose restrictive covenants that could impair its ability
to engage in certain business transactions.





If the
Company is not able to achieve these operational and financial objectives, it
will not have sufficient financial resources to meet its financial obligations
and the Company could be forced to seek reorganization under the U.S. Bankruptcy
Code.





Recently
Issued Accounting Pronouncements





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R)” (FAS 167). FAS 167 amends ASC 810
(formerly FIN 46(R)), to require an enterprise to perform an analysis to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a variable interest entity. This statement is
effective for both interim and annual periods as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, and we are currently evaluating its impact on our financial position and
results of operations.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
“Accounting for Transfers of Financial Assets – an amendment of FASB Statement
No. 140” (FAS 166). FAS 166 amends ASC 860 (formerly FAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”) removing the concept of a qualifying special-purpose entity, and
removing the exception from applying ASC 810 to qualifying special-purpose
entities. This statement is effective for both interim and annual periods as of
the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, and its impact will vary with each future
transfer of financial assets.





In May
2009, the FASB issued ASC 855 (formerly SFAS No. 165, “Subsequent Events”). ASC
855 establishes general standards of accounting for and disclosing events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This statement is effective for interim and annual
periods ending after June 15, 2009. In preparing the accompanying unaudited
consolidated financial statements, the Company has reviewed, as determined
necessary by the Company’s management, events that have occurred after September
30, 2009, up until the issuance of the financial statements, which occurred on
November 16, 2009.





In April
2009, the FASB issued ASC 825 (formerly FASB Staff Position (“FSP”) 107-1 and
Accounting Principles Board Opinion (“APB”) No. 28-1, Interim Disclosures about
Fair Value of Financial Instruments). ASC 825 amends SFAS 107, Disclosures about
Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. ASC 825 also amends ASC 270 (formerly
APB 28, Interim Financial Reporting), to require these disclosures in summarized
interim periods. The Company adopted the provisions of ASC 825 as of June 30,
2009. The adoption of ASC 825 did not affect the amount of any of the Company’s
financial statement line items.




ASC Topic
825-10-65 requires disclosure about the fair value of financial
instruments.  The Company believes the carrying values of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses and
other current liabilities approximate their estimated fair values at September
30, 2009 due to their short maturities.  The Company believes carrying
value of our loans payable approximate the estimated fair value for debt with
similar terms, interest rates, and remaining maturities at September 30,
2009.  As of September 30, 2009, the carrying value and estimated fair
value of our long-term debt was $2.2 million.
 
 5




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(2)           Accounts
Receivable, net





The
Company had accounts receivable allowances for doubtful accounts of $1.2
million and $0.2 million at September 30, 2009 and December 31, 2008,
respectively.





Bad debt
expense for the nine months ended September 30, 2009 was approximately $1.0
million compared to $0.1 million for the nine months ended September 30, 2008.
The increase bad debt expense is associated with a single customer note
receivable that was fully reserved during the nine months ended September 30,
2009 as more fully described below.





·
            The accounts receivable of $1.0
      million, for which we provided a reserve during the nine months ended
      September 30, 2009 is due from a customer that had previously entered into
      a promissory note with us for $1.0 million.  This note bears
      interest at 8% per annum with payments of interest only due
      monthly.  The balance of the note was due in full on June
      15, 2009 and extended to September 30, 2009; however, the customer did not
      pay and indicated its inability to satisfy the note
      balance.  The Company continues with its efforts to collect or
      otherwise monetize the receivable through either alternative financing
      solutions or legal recourse, including the potential pursuit of the
      building owners’ personal guarantees for the amount due.  The
      customer remains current on all other trade accounts and interest on the
      note.





Associated
with this customer, we have open purchase commitments totaling $3.4 million, of
which approximately $3.2 million is associated with equipment originally
scheduled for delivery in October 2009 and has associated payment terms of paid
when paid.  With the customer’s inability to pay the note due on June
15, 2009, the Company’s instructed the supplier to defer delivery of the
equipment until further notice due to funding constraints of our
customer.





·
            Also, during the first quarter of
      2009, the Company executed a promissory note receivable with another
      customer for $0.8 million.  This note has a six-month repayment
      schedule and does not bear interest given its short term
      nature.  At September 30, 2009, the balance on this note was
      $0.3 million which is past due.  The payments have been deferred
      as the customer recapitalizes and raises additional funds at which point,
      the Company anticipates to collect the outstanding amount due in
      full.





During
the nine months ended September 30, 2008, the Company recognized a $0.7 million
loss on a customer contract due to concerns as to whether the amounts due from
this customer were collectible. During the nine months ended September 30, 2009,
the Company finalized the extinguishment of approximately $0.3 million due to
two vendors’ as a result of contract assignment. Pursuant to the contract
assignment these two vendors have relieved the Company of its obligation due to
these vendors which had been previously recorded by the Company. These vendors
will pursue collection remedy independently and without recourse to the Company
pursuant to the terms of the contract assignment. The Company recorded the
extinguishment of liabilities for the amount due to these two vendors as a
reduction to accounts payable and a reduction to cost of sales of $0.3 million
during the nine months ended September 30, 2009.





As of
September 30, 2009 and December 31, 2008, we had accounts receivable, net
totaling $0.3 million and $1.0 million, respectively, due from customers to whom
the Company offered extended payment terms, as described above.  In
addition, accounts receivable, net included retainage associated with
construction projects totaling $0.7 million and $0.4 million at September 30,
2009 and December 31, 2008, respectively.


6




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(3)           Acquisitions





On
November 30, 2007, the Company acquired 100% of the membership interests of
Rubicon. The purchase agreement executed in connection with the
Rubicon transaction contains earn-out provisions that may require the
Company to make an additional payment to be calculated based on excess
profits during the applicable earn-out periods. Under the Rubicon earn-out
arrangement at December 31, 2008, the Company recorded approximately $0.5
million for the 2008 earn-out period which began December 1, 2007 and continued
through December 31, 2008 (2008 Rubicon Earn-out).  Per the terms of
the purchase agreement on March 31, 2009 the Company delivered the 2008 Rubicon
Earn-out calculation and the Rubicon sellers have separately responded with
a calculation of $1.7 million, based on varying interpretations of the
purchase agreement. On June 2, 2009, the Company and sellers finalized the 2008
Rubicon Earn-out which totaled $1.3 million, or an increase of $0.8 million from
December 31, 2008.  Consideration was issued in the form of a cash
payment of $0.7 million and a seller note for $0.6 (See Note 10).





During
the nine months ended September 30, 2009, the increase in cash paid for the
Rubicon and Innovative acquisitions totaled $0.7 million and $0.4 million,
respectively, and was attributable for achievement of certain profitability
targets during 2008, as stipulated in the respective purchase
agreements.





(4)        Property and Equipment,
net




Major
classes of property and equipment are summarized as follows:


September 30,
                          
                          
                          December 31,2009
                          
                          
                          2008Vehicles
                          
                          $
                          164,576
                          
                          
                          $
                          164,576Trade
      equipment
                          
                          
                          144,391
                          
                          
                          
                          139,143Leasehold
      improvements
                          
                          
                          535,968
                          
                          
                          
                          500,040Furniture
      and fixtures
                          
                          
                          38,694
                          
                          
                          
                          38,694Computer
      equipment and software
                          
                          
                          923,958
                          
                          
                          
                          852,5451,807,587
                          
                          
                          
                          1,694,998Less
      accumulated
    depreciation
                          
                          
                          (1,180,396
                          )
                          
                          
                          (870,511
                          )Property
      and equipment, net
                          
                          $
                          627,191
                          
                          
                          $
                          824,487





Depreciation
and leasehold amortization expense totaled $0.1 million and $0.1 million, and
$0.3 million and $0.4 million for the three- and nine- month periods ended
September 30, 2009 and 2008, respectively.





(5)           Goodwill
and Other Intangibles, net





The
Company recognized goodwill associated with its five acquisitions beginning in
2007 through 2008.  The following table sets forth the gross carrying
value of our goodwill and any adjustments, other than impairment related, during
the nine months ended September 30, 2009 for each respective
transaction.





December 31, 2008
                            
                            
                            Additions
                            
                            
                            September 30, 2009TSS/Vortech
                            
                            $
                            15,739,472
                            
                            
                            $
                            -
                            
                            
                            $
                            15,739,472Commsite
                            
                            
                            134,623
                            
                            
                            
                            -
                            
                            
                            
                            134,623Innovative
                            
                            
                            1,351,786
                            
                            
                            
                            -
                            
                            
                            
                            1,351,786Rubicon
                            
                            
                            5,606,153
                            
                            
                            
                            760,563
                            
                            
                            
                            6,366,716SMLB,
      Ltd.
                            
                            
                            2,542,909
                            
                            
                            
                            -
                            
                            
                            
                            2,542,909Total
                            
                            $
                            25,374,943
                            
                            
                            $
                            760,563
                            
                            
                            $
                            26,135,506





During
the nine months ended September 30, 2009, the Company finalized the Rubicon 2008
earn-out resulting in the additional consideration of approximately $0.8 million
(See Note 3).


7





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Goodwill Impairment





The
Company has not realized the anticipated revenue from customers acquired in its
acquisitions and had experienced continued operating losses during the nine
months ended September 30, 2009.  Based on the recurring operating
losses, lower than anticipated bookings and revisions to the Company’s forecast,
the Company performed an impairment analysis of the intangible assets acquired
pursuant to SFAS 142 to identify any impairment in the carrying value of the
goodwill related to the business in the second quarter of 2009. The
analyses of the business used both an income and market approach to
determine that the carrying value exceeded the current fair value of the
business at each referenced quarter, resulting in goodwill impairment of $1.1
million during the second quarter of 2009.  At September 30, 2009 and
December 31, 2008, the adjusted carrying value of goodwill was $4.5 million and
$4.8 million, respectively.





September
      30,
                              
                              
                              December 31,2009
                              
                              
                              2008Gross
      carrying amount of goodwill
                              
                              $
                              26,135,506
                              
                              
                              $
                              25,374,943Impairment
      loss on goodwill
                              
                              
                              (21,660,943
                              )
                              
                              
                              (20,563,943
                              )Net
      goodwill
                              
                              $
                              4,474,563
                              
                              
                              $
                              4,811,000





Other
Intangibles, net





Other
intangible assets, net consisted of the following:


September
      30, 2009
                                      
                                      
                                      December
      31, 2008Accumulated
                                      
                                      
                                      Loss
      on
                                      
                                      
                                      Net
      Carrying
                                      
                                      
                                      
                                      
                                      
                                      Accumulated
                                      
                                      
                                      Net
      CarryingCarrying
      Amount
                                      
                                      
                                      Amortization
                                      
                                      
                                      Impairment
                                      
                                      
                                      Amount
                                      
                                      
                                      Carrying
      Amount
                                      
                                      
                                      Amortization
                                      
                                      
                                      AmountFinite
      Lived-Intangible assets:Customer
      relationships
                                      
                                      $
                                      17,630,000
                                      
                                      
                                      $
                                      (5,664,860
                                      )
                                      
                                      $
                                      (11,965,140
                                      )
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      17,630,000
                                      
                                      
                                      $
                                      (4,469,474
                                      )
                                      
                                      $
                                      13,160,526Non
      competition agreement
                                      
                                      
                                      740,600
                                      
                                      
                                      
                                      (682,670
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      57,930
                                      
                                      
                                      
                                      740,600
                                      
                                      
                                      
                                      (401,892
                                      )
                                      
                                      
                                      338,708Total
                                      
                                      
                                      18,370,600
                                      
                                      
                                      
                                      (6,347,530
                                      )
                                      
                                      
                                      (11,965,140
                                      )
                                      
                                      
                                      57,930
                                      
                                      
                                      
                                      18,370,600
                                      
                                      
                                      
                                      (4,871,366
                                      )
                                      
                                      
                                      13,499,234Indefinite
      Lived-Intangible assets:Trade
      name
                                      
                                      
                                      60,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      60,000
                                      
                                      
                                      
                                      60,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      60,000Net
      other intangible assets
                                      
                                      $
                                      18,430,600
                                      
                                      
                                      $
                                      (6,347,530
                                      )
                                      
                                      $
                                      (11,965,140
                                      )
                                      
                                      $
                                      117,930
                                      
                                      
                                      $
                                      18,430,600
                                      
                                      
                                      $
                                      (4,871,366
                                      )
                                      
                                      $
                                      13,559,234





Based on
the lack of new contracts and revision in anticipated revenue from customers and
general condition of the Company, the Company evaluated long-lived customer
relationship intangible assets and determined the carrying value exceeded the
undiscounted cash flows at June 30, 2009.  Accordingly, the Company
performed a fair value assessment based on discounted cash flows of June 30,
2009, resulting in an impairment loss of $12.0 million for the nine months ended
September 30, 2009.  The adjusted net carrying value of the aggregate
customer relationship intangibles was zero.





For the
three months ended September 30, 2009 and September 30, 2008, amortization
expense, excluding the impact of any impairment loss, totaling $0.1 million and
$0.8 million, respectively, has been included in the accompanying consolidated
statement of operations related to the above intangibles of which zero and $0.1
million, respectively, is included in cost of revenue.





For the
nine months ended September 30, 2009 and September 30, 2008, amortization
expense totaling $1.5 million and $2.5 million, respectively, has been
included in the accompanying consolidated statement of operations related to the
above intangibles of which zero and $0.4 million, respectively, has been
included in cost of revenue.





(6)
            Basic
      and Diluted Net Loss per Share





Basic and
diluted net loss per common share is computed as follows:





For the Three Months Ended September 30,
                                    
                                    
                                    For the Nine Months Ended September 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Net
      loss
                                    
                                    $
                                    19,755
                                    
                                    
                                    $
                                    (3,217,911
                                    )
                                    
                                    $
                                    (17,764,517
                                    )
                                    
                                    $
                                    (11,512,445
                                    )Basic
      and diluted weighted average common shares
                                    
                                    
                                    12,675,630
                                    
                                    
                                    
                                    12,326,397
                                    
                                    
                                    
                                    12,665,242
                                    
                                    
                                    
                                    12,164,454Net
      loss per share
                                    
                                    $
                                    0.00
                                    
                                    
                                    $
                                    (0.26
                                    )
                                    
                                    $
                                    (1.40
                                    )
                                    
                                    $
                                    (0.95
                                    )




As of
September 30, 2009, there were unvested restricted stock, options to purchase
units, and convertible unsecured promissory notes outstanding which were
convertible to purchase 1,120,601, 700,000, and 533,333 shares of common stock,
respectively. These were excluded in the computation of diluted net loss
per common share for the three and nine months ended September 30, 2009, as
their inclusion would be anti-dilutive. On July 13, 2009, outstanding warrants,
including those attached to the option to purchase units, totaling 17,110,300
expired.


8




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





As of
September 30, 2008, there were unvested restricted stock, options to purchase
units, convertible unsecured promissory notes, and warrants outstanding which
were convertible to purchase 355,334, 2,100,000, 533,333 and 15,710,300 shares
of common stock, respectively. These were excluded in the computation of
diluted net loss per common share for the three and nine months ended September
30, 2008, as their inclusion would be anti-dilutive.





(7)
            Employee
      Benefit Plans





For both
the three months ended September 30, 2009 and 2008, the Company recorded
non-cash compensation expense included in selling, general and administrative
expense associated with vesting awards of $0.4 million.  An additional
$0.1 million was included in cost of revenue. During the nine months ended
September 30, 2009, the Company issued 588,764 restricted shares with an
approximate weighted average grant date fair value of $0.77 and approximate two
year life.





For the
nine months ended September 30, 2009 and 2008, the Company recorded non-cash
compensation expense included in selling, general and administrative expense
associated with vesting awards of $1.1 million and $1.2 million,
respectively.  An additional $0.3 million and $0.3 million,
respectively, was included in cost of revenue.





(8)
            Options
      to Purchase Units and Warrants





At
September 30, 2009 and December 31, 2008, there were options to purchase units
and warrants outstanding to purchase a total of 700,000 and 17,810,300 of common
shares, respectively.  On July 13, 2009, outstanding warrants,
including those attached to the option to purchase units, totaling 17,110,300
expired.





In 2007,
the Company entered into a one year agreement with an advisor,pursuant to which
we were obligated to issue a warrant for the purchase of 125,000 shares of our
common stock, in exchange for consulting services. The fair value of these
warrants has been determined using the Black-Scholes model and is recognized
over the term of the agreement. For the three and nine months ended September
30, 2008, the computed Black-Scholes value of the warrant declined to zero and
$141,422, respectively, resulting in a reduction in selling, general and
administrative expense.





(9)
            Income
      Taxes




The
Company accounts for income taxes in accordance with ASC 740 (formerly SFAS No.
109, Accounting for Income Taxes). Deferred income taxes are provided for the
temporary differences between the financial reporting and tax basis of the
Company’s assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.





The
Company is in a net operating loss carryover position. The net operating losses
not utilized can be carried forward for 20 years to offset future taxable
income. As of September 30, 2009 and December 31, 2008, a full valuation
allowance has been recorded against the Company’s deferred tax assets, as the
Company has concluded that under relevant accounting standards; it is more
likely than not that the deferred tax assets will not be
realizable.





The
Company’s effective tax rate is based upon the rate expected to be applicable to
the full fiscal year.





The
Company files a consolidated federal tax return in states that allow it, and in
other states the Company files separate tax returns.





The
Company’s prior federal and state income tax filings since 2005 remain open
under statutes of limitation.  Innovative Power System Inc.’s statutes of
limitation are open from the 2005 tax year forward for both federal and
Commonwealth of Virginia purposes.  Quality Power Systems
Inc.’s statutes of limitation are open from the 2005 tax year forward for
both federal and Commonwealth of Virginia purposes. SMLB’s statutes of
limitation are open from the 2005 tax year forward for both federal and State of
Illinois purposes.


9




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(10)
            Notes
      Payable





September 30,
                              
                              
                              December 31,2009
                              
                              
                              2008Convertible,
      unsecured promissory note, due 2012 (6.0%)
                              
                              $
                              4,000,000
                              
                              
                              $
                              4,000,000Unsecured
      promissory note, due 2009 (6.0%)
                              
                              
                              -
                              
                              
                              
                              1,575,618Unsecured
      promissory note, due 2010 (6.0%)
                              
                              
                              120,572
                              
                              
                              
                              120,572Unsecured
      promissory note, due 2010 (6.0%)
                              
                              
                              353,571
                              
                              
                              
                              -Unsecured
      promissory note, due 2011 (6.0%)
                              
                              
                              228,766
                              
                              
                              
                              283,457Vehicle
      notes
                              
                              
                              7,850
                              
                              
                              
                              20,907Total
      debt
                              
                              
                              4,710,759
                              
                              
                              
                              6,000,554Less
      current portion
                              
                              
                              2,482,572
                              
                              
                              
                              1,688,845Total
      debt, less current portion
                              
                              $
                              2,228,187
                              
                              
                              $
                              4,311,709




In
connection with the Rubicon acquisition, on June 2, 2009 the Company issued
unsecured promissory notes totaling $0.6 million to the sellers of Rubicon based
on their achievement of certain earnings targets for the year ended December 31,
2008, (“the 2008 earn-out”) (see Note 3).  The note issued bears
interest at 6% per annum and scheduled principal repayment is over one year with
amortization of $39,286 per month and a final balloon payment of $78,571 due on
May 15, 2010.  The repayment of the note may be accelerated, as any
unpaid principal and interest is due immediately at closing if the Company sells
the Rubicon division.





We have
significant debt maturing during the remainder of 2009 and in 2010, including
$4.0 million due to one of our executive officers related to our acquisition of
Total Site Solution in 2007.  Based on our current level of liquidity,
we may not be able to make scheduled principal and interest payments on our
notes payable.




(11)
            Related
      Party Transactions





The
Company participates in transactions with the following entities affiliated
through common ownership and management. The Audit Committee in accordance with
its written charter reviews and approves in advance all related party
transactions greater than $25,000 and follows a pre-approved process for
contracts with related party for less than $25,000.





S3 Integration, LLC S3
Integration LLC (S3 Integration) is 15% owned by each of the Company’s Chief
Executive Officer and President.  S3 Integration provides commercial
security systems design and installation services as a subcontractor to the
Company.





Chesapeake Systems, LLC
(Chesapeake Systems) is 9% owned and significantly indebted to the Company’s
Chief Executive Officer. Chesapeake Systems is a manufacturers’ representative
and distributor of mechanical and electrical equipment.





Chesapeake Mission Critical,
LLC (Chesapeake MC) is 9% owned by each of the Company’s Chief Executive
Officer and its President. Additionally, it is significantly indebted to the
Company’s Chief Executive Officer. Chesapeake MC is a manufacturers’
representative and distributor of electrical equipment.





CTS Services, LLC (CTS) is 9%
owned by the Company’s Chief Executive Officer. CTS is a mechanical contractor
that acts as a subcontractor to the Company for certain projects. In addition,
CTS utilizes the Company as a subcontractor on projects as needed. On April 1,
2009, the Company’s Chief Executive Officer sold 46% of his interest
in CTS, reducing his ownership to 9%.




L.H. Cranston Acquisition Group,
Inc . L.H. Cranston Acquisition Group, Inc. (Cranston) was 25% owned by
the Company’s Chief Executive Officer until the sale of his interest on February
28, 2009. Cranston is a mechanical, electrical and plumbing contractor that
acts, directly or through its Subsidiary L.H. Cranston and Sons, Inc., as
subcontractor to the Company on a project-by-project basis.


10




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Telco P&C, LLC Telco
P&C, LLC is 55% owned by the Company’s Chief Executive Officer. Telco
P&C is a specialty electrical installation company that acts as a
subcontractor to the Company. The Company has also acted as a subcontractor to
Telco as needed.




TPR Group Re Three, LLC As of
November 1, 2006, TPR Group Re Three, LLC (TPR Group Re Three) is 50% owned by
each of the Company’s Chief Executive Officer and its President. TPR Group Re
Three leases office space to the Company under the terms of a real property
lease to TSS/Vortech. The Company had an independent valuation, which determined
the lease to be at fair value.





Chesapeake Tower Systems, LLC
As of September 30, 2009, Chesapeake Tower Systems, LLC (Chesapeake) is owned
100% by the Company’s Chief Executive Officer.  During the second
quarter 2009 and concurrent with an expiring leased facility, the Company
entered into a new lease for approximately 25,000 square feet of combined office
and warehouse space from Chesapeake.  The lease commitment is for five
years (Initial Term) with a two-year renewal option (Renewal
Term).  During the Initial Term, annual rent is $124,000, plus
operating expenses.  If the Company elects to extend the lease, annual
rent increases by  the greater of i) fair market rental as defined in
the agreement, or ii) 3% increase in each year of the Renewal
Term.  Additionally, Chesapeake provided $150,000 for tenant
improvements and relocation costs.  The Company completed an
independent appraisal, which determined the lease to be at fair
value.




The
following table sets forth transactions the Company has entered into with the
above related parties for the three and nine months ended September 30, 2009 and
2008.  It should be noted that revenue represents amounts earned on
contracts with related parties under which we provide services; and cost of
revenue represents costs incurred in connection with related parties which
provide services to us on contracts for our customers. As such a direct
relationship to the revenue and cost of revenue information below by Company
should not be expected.





Three
      Months
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        Three
      Months
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        Nine
      Months
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        Nine
      MonthsEnded
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        Ended
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        Ended
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        EndedSeptember 30, 2009
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        September 30, 2008
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        September 30, 2009
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        September 30, 2008RevenueCTS
      Services, LLC
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        51,298
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        2,000
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        163,576Chesapeake
      Mission Critical, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        20,660
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        12,562
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        177,318
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        65,565Telco
      P&C, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        84,395
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        153,660
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -Chesapeake
      Systems, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        2,410
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        2,410CS
      Technology, Inc.
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        40,752
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        116,673S3
      Integration, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        7,667
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        7,667Total
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        105,055
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        114,689
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        332,978
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        355,891Cost
      of RevenueCTS
      Services, LLC
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        380,975
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        1,309,845
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        1,881,913
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        2,102,864Chesapeake
      Systems, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        147,931Chesapeake
      Mission Critical, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        240,261
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        65,082
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        298,541
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        118,399S3
      Integration, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        37,377
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        111,630
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        375,974
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        149,145LH
      Cranston & Sons, Inc.
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        269,749
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        7,500Telco
      P&C, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        325,089
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        72,556
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        335,158Total
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        658,613
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        1,811,646
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        2,898,733
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        2,860,997Selling,
      general and administrative
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -Office
      rent paid to TPR Group Re Three, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        93,642
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        98,131
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        295,496
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        293,513Office
      rent paid to Chesapeake Tower Systems, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        30,999
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        58,072
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        177,870
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        176,406Total
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        124,641
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        156,203
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        473,366
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        469,919September
      30,
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        December
      31,2009
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        2008Accounts
      receivable/(payable):CTS
      Services, LLC
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        10,512
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        50,437CTS
      Services, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        (83,540
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        (584,460
                                                                                                                                        )Chesapeake
      Mission Critical, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        15,900Chesapeake
      Mission Critical, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -Telco
      P&C, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        63,735
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -Telco
      P&C, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        (21,154
                                                                                                                                        )LH
      Cranston & Sons, Inc.
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        (67,455
                                                                                                                                        )S3
      Integration, LLC
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        (159,581
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        (53,630
                                                                                                                                        )Total
      accounts receivable
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        74,247
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        66,337Total
      accounts (payable)
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        (243,121
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        (726,699
                                                                                                                                        )


11





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





The
following discussion should be read in conjunction with our Financial Statements
and related Notes thereto included elsewhere in this report.




The terms
“we” and “our” as used throughout this Quarterly Report on Form 10-Q refer to
Fortress International Group, Inc. and its consolidated subsidiaries, unless
otherwise indicated.





Business
Formation and Overview




We
were incorporated in Delaware on December 20, 2004 as a special
purpose acquisition company under the name “Fortress America Acquisition
Corporation” for the purpose of acquiring an operating business that performs
services in the homeland security industry.  On July 20,
2005, we closed our initial public offering of 7,800,000 units (including
underwriters exercise of an over-allotment option), resulting in proceeds net of
fees to us of approximately $43.2 million.




On
January 19, 2007, we acquired all of the outstanding membership interests
of each of VTC, L.L.C., doing business as “Total Site Solutions” (“TSS”), and
Vortech, L.L.C. (“Vortech” and, together with TSS, “TSS/Vortech”) and
simultaneously changed our name to “Fortress International Group, Inc.”
 The acquisition fundamentally transformed the Company from a special
purpose acquisition corporation to an operating business.




Building
on the TSS/Vortech business, management continued an acquisition strategy to
expand our geographical footprint, add complementary services, and diversify and
expand our customer base. After acquiring TSS/Vortech, the Company continued its
expansion through the acquisitions of Comm Site of South Florida, Inc. on May 7,
2007 (“Comm Site”), Innovative Power Systems, Inc. and Quality Power Systems,
Inc. (collectively, “Innovative”) on September 24, 2007, Rubicon Integration,
LLC (“Rubicon”) on November 30, 2007 and SMLB Ltd. (“SMLB”) on January 2,
2008.





With the
acquired companies, we provide comprehensive services for the planning, design,
and development of mission-critical facilities and information infrastructure.
We also provide a single source solution for highly technical mission-critical
facilities such as data centers, operation centers, network facilities, server
rooms, security operations centers, communications facilities and the
infrastructure systems that are critical to their function. Our services include
technology consulting, engineering and design management, construction
management, system installations, operations management, and facilities
management and maintenance.





Competition
in Current Economic Environment





Our
industry has been and may be further adversely impacted by the current economic
environment and tight credit conditions.  We have seen larger
competitors seek to expand their services offerings including a focus in the
mission-critical market.  These larger competitors have an
infrastructure and support greater than ours and accordingly, we have begun
to experience some price pressure as some companies are willing to take on
projects at lower margins. With certain customers, we have experienced a
delay in spending, or deferral of projects to an indefinite commencement date
due to the economic uncertainty or lack of access to capital.  This
type of delay was demonstrated by our largest customer, which led us to
significantly reduce our backlog by $144.9 million to $63.2 million at
December 31, 2008 and to $39.9 million at September 30, 2009, although a formal
cancellation of contracted amounts has not been received.


12




We
believe there are high barriers to entry into our sector for new competitors due
to our specialized technology service offerings which we deliver to our
customers, our top secret clearances, and our turnkey suite of deliverables
offered. We compete for business based upon our reputation, past experience, and
our technical engineering knowledge of mission-critical facilities and their
infrastructure. We are developing and creating long term relationships with our
customers because of our excellent reputation in the industry and will continue
to create facility management relationships with our customers that we expect
will provide us with steadier revenue streams to improve the value of our
business.  Finally, we seek to further expand our energy services that
focus on operational cost savings that may be used to either fund the project or
increase returns to the facility operator.  We believe these barriers
and our technical capabilities and experience will differentiate us to compete
with new entrants into the market or pricing pressures.




Although
we will closely monitor our proposal pricing and the volume of the work, we
cannot be certain that our current margins will be
sustained.  Furthermore, given the environment, and that the volume of
our contracts further decreased, we are taking additional measures to reduce our
operating costs through additional reductions in general, administrative and
marketing cost, reductions in personnel and related costs, including the
possibility of terminating our regulatory reporting requirement and delisting of
our stock. For further information see “Liquidity and Capital
Resources ” below.





Contract
Backlog





We
believe an indicator of our future performance is our backlog of
uncompleted projects in process or recently awarded. Our backlog represents our
estimate of anticipated revenue from executed and awarded contracts that have
not been completed and that we expect will be recognized as revenues over the
life of the contracts. We have broken our backlog into the following three
categories: (i) technology consulting consisting of services related to
consulting and/or engineering design contracts, (ii) construction management,
and (iii) facility management.





Backlog
is not a measure defined in generally accepted accounting principles, and our
methodology for determining backlog may not be comparable to the methodology of
other companies in determining their backlog. Our backlog is generally
recognized under two categories: (1) contracts for which work authorizations
have been or are expected to be received on a fixed-price basis, guaranteed
maximum price basis and time and materials basis, and (2) contracts awarded to
us where some, but not all, of the work have not yet been authorized. At
September 30, 2009, we had authorizations to proceed with work for approximately
$24.5 million, or 61% of our total backlog of $39.9 million. At December 31,
2008, we had authorizations to proceed with work for approximately $51.6
million, or 82% of our total backlog of $63.1 million. Additionally,
approximately $24.4 million, or 61% of our backlog, relates to two customers at
September 30, 2009 and $36.0 million, or 57%, to one customer
at December 31, 2008.




As of
September 30, 2009, our backlog was approximately $39.9 million, compared to
approximately $63.2 million at December 31, 2008. We believe that approximately
38% of the backlog at September 30, 2009 will be recognized during the remainder
of the year. The following table reflects the value of our backlog in the above
three categories as of September 30, 2009 and December 31, 2008,
respectively.





(In
millions)




September 30,
                        
                        
                        December 31,2009
                        
                        
                        2008Technology
      consulting
                        
                        $
                        2.0
                        
                        
                        $
                        4.0Construction
      management
                        
                        
                        27.3
                        
                        
                        
                        48.7Facilities
      management
                        
                        
                        10.6
                        
                        
                        
                        10.5Total
                        
                        $
                        39.9
                        
                        
                        $
                        63.2


13





Critical
Accounting Policies and Estimates





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. The
preparation of the financial statements included elsewhere in
this Quarterly Report on Form 10-Q requires that management make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ significantly from those
estimates.




We
believe the following critical accounting policies affect the more significant
estimates and judgments used in the preparation of our financial
statements.




Revenue Recognition




We
recognize revenue when pervasive evidence of an arrangement exists, the
contract price is fixed or determinable, services have been rendered or goods
delivered, and collectability is reasonably assured. Our revenue is derived
from the following types of contractual arrangements: fixed-price contracts,
time-and-materials contracts and cost-plus-fee contracts (including guaranteed
maximum price contracts). Revenue from fixed-price contracts is
accounted for under the application of ASC 605 (formerly Statement of Position
(SOP) 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts), recognizing revenue on the percentage-of-completion
method using costs incurred in relation to total estimated project costs. The
cost to total cost method is used because management considers cost incurred and
costs to complete to be the best available measure of progress in the contracts.
Contract costs include all direct materials, subcontract and labor costs and
those indirect costs related to contract performance, such as indirect labor,
payroll taxes, employee benefits and supplies.




Revenue
on time-and-material contracts is recognized based on the actual labor hours
performed at the contracted billable rates, and costs incurred on behalf of the
customer. Revenue on cost-plus-fee contracts is recognized to the extent of
costs incurred, plus an estimate of the applicable fees earned. Fixed fees under
cost-plus-fee contracts are recorded as earned in proportion to the allowable
costs incurred in performance of the contract.





Contract
revenue recognition inherently involves estimation. Examples of estimates
include the contemplated level of effort to accomplish the tasks under the
contract, the costs of the effort and an ongoing assessment of the Company’s
progress toward completing the contract. From time to time, as part of our
standard management process, facts develop that require us to revise our
estimated total costs on revenue. To the extent that a revised estimate affects
contract profit or revenue previously recognized, we record the
cumulative effect of the revision in the period in which the revisions become
known. The full amount of an anticipated loss on any type of contract is
recognized in the period in which it becomes probable and can reasonably be
estimated.




Under
certain circumstances, we may elect to work at risk prior to receiving an
executed contract document. We have a formal procedure for authorizing any such
at risk work to be incurred. Revenue, however, is deferred until a contract
modification or vehicle is provided by the customer.


14




Allowance
for Doubtful Accounts





The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We determine the
allowance based on an analysis of our historical experience with bad debt
write-offs and an aging of the accounts receivable balance. Unanticipated
changes in the financial condition of clients, or significant changes in the
economy could impact the reserves required.  Account balances are
charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.




Non-cash
Compensation




We apply
the expense recognition provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS No. 123”), therefore, the recognition of
the value of the instruments results in compensation or professional expenses
in our financial statements. The expense differs from other compensation
and professional expenses in that these charges are typically settled through
the issuance of common stock or stock purchase warrants, which would have a
dilutive effect upon earnings per share, if and when such warrants are exercised
or restricted stock vests. The determination of the estimated fair value used to
record the compensation or professional expenses associated with the equity or
liability instruments issued requires management to make a number of assumptions
and estimates that can change or fluctuate over time.




Goodwill
and Other Purchased Intangible Assets




Goodwill
represents the excess of costs over fair value of net assets of businesses
acquired. Other purchased intangible assets include the fair value of items such
as customer contracts, backlog and customer relationships. ASC 350 (formerly
SFAS No. 142, “
Goodwill and Other Intangible Assets),” establishes financial accounting and
reporting for acquired goodwill and other intangible assets. Goodwill and
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but rather tested for
impairment on an annual basis or triggering event. Purchased intangible assets
with a definite useful life are amortized on a straight-line basis over their
estimated useful lives.




The
estimated fair market value of identified intangible assets is amortized over
the estimated useful life of the related intangible asset. We have a process
pursuant to which we typically retain third-party valuation experts to assist us
in determining the fair market values and useful lives of identified intangible
assets. In interim periods, we evaluate these assets for impairment when events
occur that suggest a possible impairment. Through the second quarter 2009, we
continued to incur operating losses and revised our forecasted revenues as we
have seen customer delays, a lack of new contracts and executed contracts have
been at margins lower than historic levels.  As a result of the
decline in performance and continued customer delays, during the interim period
we evaluated the carrying value of goodwill and other long-lived intangible
assets for impairment.  Utilizing a third party firm we determined the
carrying value of goodwill was in excess of the fair value, resulting in an
aggregate impairment on goodwill of approximately $1.1 million during the nine
months ended September 30, 2009.  At September 30, 2009, the net
carrying value of goodwill was $4.5 million.





Long-Lived
Assets (Excluding Goodwill)




In
accordance with the provisions of SFAS No. 144 in accounting for long-lived
assets such as property, equipment and intangible assets subject to
amortization, we review the assets for impairment. Based on the general
business condition of the Company and the goodwill impairment analysis, we
evaluated the carrying value of the asset and determined both the carrying value
of exceeded both undiscounted and discounted cash flows. During the nine months
ended September 30, 2009, we recorded a permanent reduction in the carrying
value of $12.0 million, reducing the net carrying value of other intangible
assets to $0.2 million.


15




Income Taxes




Deferred
income taxes are provided for the differences between the basis of assets and
liabilities for financial reporting and income tax purposes. Deferred tax assets
and liabilities are measured using tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized.




We make
certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of
certain tax assets and liabilities, which principally arise from differences in
the timing of recognition of revenue and expense for tax and financial statement
purposes. We also must analyze income tax reserves, as well as determine the
likelihood of recoverability of deferred tax assets, and adjust any valuation
allowances accordingly. Considerations with respect to the recoverability of
deferred tax assets include the period of expiration of the tax asset, planned
use of the tax asset, and historical and projected taxable income, as well as
tax liabilities for the tax jurisdiction to which the tax asset relates.
Valuation allowances are evaluated periodically and will be subject to change in
each future reporting period as a result of changes in one or more of these
factors.




Effective
January 1, 2007, we were required to adopt ASC 740 (formerly FASB
Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes).  ASC 740 prescribes a more-likely-than-not threshold of
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on de-recognition of income tax assets and liabilities, classification of
current and deferred tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures. Since inception and through January 1,
2007, the adoption date of this standard, we were in essence a “blank
check” company with no substantive operations. Management has concluded that the
adoption of ASC 740 had no material effect on our financial position or
results of operations. As of September 30, 2009, we do not have any
material gross unrecognized tax benefit liabilities.




We
believe the following critical accounting policies affect the more significant
estimates and judgments used in the preparation of our financial
statements.




Recently
Issued Accounting Pronouncements





In
June 2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R)” (FAS 167). FAS 167 amends ASC 810
(formerly FIN 46(R)), to require an enterprise to perform an analysis to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a variable interest entity. This statement is
effective for both interim and annual periods as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, and we are currently evaluating its impact on our financial position and
results of operations.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
“Accounting for Transfers of Financial Assets – an amendment of FASB Statement
No. 140” (FAS 166). FAS 166 amends  ASC 860 (formerly FAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”), removing the concept of a qualifying special-purpose entity,
and removing the exception from applying ASC 810 to qualifying special-purpose
entities. This statement is effective for both interim and annual periods as of
the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, and its impact will vary with each future
transfer of financial assets.





In May
2009, the FASB issued ASC 855 (SFAS No. 165, “Subsequent
Events”).  ASC 165 establishes general standards of accounting for and
disclosing events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. This statement is effective
for interim and annual periods ending after June 15, 2009. In preparing the
accompanying unaudited consolidated financial statements, the Company has
reviewed, as determined necessary by the Company’s management, events that have
occurred after September 30, 2009, up until the issuance of the financial
statements, which occurred on November 16, 2009.




In April
2009, the FASB issued ASC 825 (formerly FASB Staff Position 107-1 and Accounting
Principles Board Opinion (“APB”) No. 28-1, Interim Disclosures about Fair Value
of Financial Instruments).  ASC 825 amends SFAS 107, Disclosures about
Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. ASC 825 also amends ASC 270 (formerly
APB 28, Interim Financial Reporting), to require these disclosures in summarized
interim periods. We adopted the provisions of ASC 825 as of June 30, 2009. The
adoption of AS 825 did not affect the amount of any of our financial statement
line items.


16




Results
of operations for the three months ended September 30, 2009 compared with
the three months ended September 30, 2008





Revenue. Revenue
decreased $9.8 million to $16.0 million for the three months ended September 30,
2009 from $25.8 million for the three months ended September 30, 2008. The
decrease is primarily driven by a $7.8 million decrease in construction
management services and an aggregate $2.0 million decrease in our technology
consulting and facilities management services.  This decline in
revenue resulted from both the delay in beginning projects and the cancellation
of other projects.





Cost of Revenue. Cost
of revenue decreased $8.1 million to $12.6 million for the three months ended
September 30, 2009 from $20.7 million for the three months ended September 30,
2008. The decrease is primarily driven by a $6.5 million decrease in
construction management and an aggregate decrease of $1.5 million in technology
consulting and facilities management services.




Gross Margin
Percentage.  Gross margin percentage increased 1.4% to 21.3% for the
three months ended September 30, 2009 compared to 19.9% for the three months
ended September 30, 2008.  The increase in gross margin was primarily
attributable to a single construction project that was near complete in the
third quarter 2009 and a change in the mix in which a larger portion of total
services were comprised of facilities management services.  We
anticipate margins will continue around 15% or potentially lower given the
current competitive environment.





Selling, general and administrative
expenses.  Selling, general and administrative expenses
decreased $1.7 million to $3.1 million for the three months ended September 30,
2009 from $4.8 million for the three months ended September 30, 2008. The
decrease is primarily driven by $0.7 million decrease in salaries and related
employee expenses due to a reduction in headcount and variable compensation,
$0.5 million decrease in acquisitions related costs, and $0.3 million decrease
in marketing efforts and professional fees.  We incurred no
acquisition related costs during the nine months ended September 30,
2009.





We have
continued to experience delays in the timing of revenues associated with certain
customers and contracted work is at lower margins than the prior
year.  Accordingly during the third quarter of 2009, the Company
instituted 10% reduction in salaries for employees and further reduced
headcount.  We continue to evaluate our selling, general and
administrative costs with the objective of achieving profitability based on our
revised forecasted business.





Depreciation.
Depreciation remained consistent at $0.1 million for the three months
ended September 30, 2009 compared to $0.1 million for the three months
ended September 30, 2008.




Amortization of intangible
assets. Amortization expense decreased $0.6 million to $0.1
million for the three months ended September 30, 2009 from $0.7 million for the
three months ended September 30, 2008.  The decrease in expense
correlates to the decrease in average amortizable carrying values of finite
lived intangibles, as the net amortizable carrying amount of finite lived
intangibles totaled $0.1 million and $14.4 million at September 30, 2009 and
September 30, 2008, respectively. The decrease in carrying value was primarily
attributable to an impairment loss of $12.0 million on finite lived customer
intangibles during the second quarter of 2009.  At September 30, 2009,
the adjusted net carrying value of other intangibles was $0.2
million.





Impairment loss on goodwill and
other intangibles, net. We did not record any
impairment losses during the three months ended September 30,
2009.  During the three months ended September 30, 2008, we had
experienced continued operating losses and a decline in market value and
accordingly conducted analyses of our operations in order to identify any
impairment in the carrying value of the goodwill and other intangibles related
to our business. Analyzing our business using both an income approach and a
market approach determined that the carrying value exceeded the current fair
value of our business, resulting in goodwill impairment of $3.0 million for the
three months ended September 30, 2008.





Interest income (expense),
net.  Our interest income (expense), net remained consistent at
($0.1 million) for the three months ended September 30, 2009 compared to ($0.1
million) for the three months ended September 30, 2008.





Income tax expense
(benefit).Income tax (benefit)
decreased to zero for the three months ended September 30, 2009 from ($0.4)
million for the three months ended September 30, 2008.  The prior year
tax benefit was associated with the decrease in our deferred tax liabilities
associated with our decrease in our tax deductible goodwill.  No such
decrease was recorded in 2009, nor was any benefit was recorded for the three
months ended September 30, 2009.


17


Results of operations for
the nine months ended September 30, 2009 compared with the nine months ended
September 30, 2008





Revenue. Revenue
decreased $4.4 million to $61.0 million for the nine months ended September 30,
2009 from $65.4 million for the nine months ended September 30, 2008. The
decrease is primarily driven by $3.4 million decrease in our facilities
management services and $1.4 million decrease in technology consulting services.
The decrease in facilities management services is attributable to lower volume
of federal government contracts and the fact that we had one significant project
that concluded in 2008.





Cost of Revenue.  Cost
of revenue decreased $2.5 million to $52.2 million for the nine months ended
September 30, 2009 from $54.7 million for the nine months ended September 30,
2008. The decrease is primarily driven by a $2.7 million decrease in facilities
management services and $0.7 million decrease in technology consulting;
partially offset by an increase construction management services.




Gross Margin
Percentage. Gross margin percentage decreased 1.8% to 14.5%
for the nine months ended September 30, 2009 from 16.3% for the nine months
ended September 30, 2008.  The decline in gross margin is primarily
attributable to contraction in gross margin percentage in the construction
management services, which decreased by 1.9% to 11.3% for the nine months ended
September 30, 2009 from 13.2% for the nine months ended September 30,
2008.  The decline in gross margin for construction management
services is due to the competitive environment in which we contracted work at
lower than historic margins.  We anticipate margins will continue at
the current level or potentially lower given the environment.





Selling, general and administrative
expense.  Selling, general and administrative expenses
decreased $3.7 million to $11.6 million for the nine months ended September 30,
2009 from $15.3 million for the nine months ended September 30, 2008. The
decrease is primarily driven by $2.1 million decrease in salaries due to a
reduction in headcount and furloughs, $1.2 million decrease in acquisition
related costs, and $0.5 million decrease in professional fees and marketing
efforts.  We incurred no acquisition related costs in
2009.





We have
continued to experience delays in the timing of revenues associated with certain
customers and contracted work is at lower margins than the prior
year.  Accordingly, we continue to evaluate our selling, general and
administrative costs with the objective of achieving profitability based on our
revised forecasted business.




Depreciation.
  Depreciation remained consistent at $0.3 million for the nine
months ended September 30, 2009 compared to $0.4 million for the nine
months ended September 30, 2008.




Amortization of intangible
assets.   Amortization expense decreased $0.6 million to $1.5
million for the nine months ended September 30, 2009 from $2.1 million for the
nine months ended September 30, 2008.  The decrease in expense
correlates to the decrease in average amortizable carrying values of finite
lived intangibles, which was primarily attributable to an impairment loss of
$12.0 million associated with finite lived customer intangibles during the
second quarter of 2009.





Impairment loss on goodwill and
other intangibles, net. Impairment loss on goodwill and
other intangibles increased $8.9 million to $13.1 million for the nine months
ended September 30, 2009 from $4.2 million for the nine months ended September
30, 2008.  The increase in the expense is primarily attributable to
$12.0 million impairment of carrying values associated with finite lived
customer intangibles, offset partially by a decrease of $3.1 million in
impairment loss on goodwill.  We have not realized the anticipated
revenue from customers acquired in our acquisitions and have experienced
continued operating losses in the current year.





Based on
the lack of new contracts and revision in anticipated revenue from acquired
customers and our general operating condition, we evaluated long-lived customer
relationship intangible assets and determined that the carrying value exceeded
the undiscounted cash flows.  Accordingly, we performed a fair value
assessment based on discounted cash flows, resulting in an impairment loss of
$12.0 million for the nine months ended September 30, 2009.  At
September 30, 2009, the adjusted net carrying value of other intangibles was
$0.2 million. No impairment of customer relationship intangibles was recorded
for the nine months ended September 30, 2008.





We
conducted analyses of the operations in order to identify any impairment in the
carrying value of the goodwill and other intangibles related to our business.
Analyzing our business using both an income approach and a market approach
determined that the carrying value exceeded the current fair value of our
business, resulting in goodwill impairment of $1.1 million for the nine months
ended September 30, 2009. At September 30, 2009, the adjusted carrying value of
goodwill was $4.5 million.  Based on recurring operating losses,
revised forecast and a decline in our market value, we conducted similar
analyses of the operations in the prior year resulting in a loss on goodwill of
$4.2 million for the nine months ended September 30, 2008.





Interest income (expense),
net.  Our interest income (expense), net remained consistent at
($0.1 million) for the nine months ended September 30, 2009 compared to ($0.2
million) for the nine months ended September 30, 2008.


18




Financial
Condition, Liquidity and Capital Resources




For the Nine Months Ended September 30,2009
                            
                            
                            2008
                            
                            
                            ChangeNet
      loss
                            
                            $
                            (17,764,517
                            )
                            
                            $
                            (11,512,445
                            )
                            
                            $
                            (6,252,072
                            )Adjustments
      to reconcile net loss to net cashused
      in operations:Amortization
      of intangibles
                            
                            
                            1,476,171
                            
                            
                            
                            2,491,477
                            
                            
                            
                            (1,015,306
                            )Impairment
      loss on goodwill and other intangibles
                            
                            
                            13,062,133
                            
                            
                            
                            4,190,000
                            
                            
                            
                            8,872,133Stock
      and warrant-based compensation
                            
                            
                            1,393,098
                            
                            
                            
                            1,469,252
                            
                            
                            
                            (76,154
                            )Provision
      for doubtful accounts
                            
                            
                            1,025,083
                            
                            
                            
                            119,728
                            
                            
                            
                            905,355Other
      non-cash items
                            
                            
                            43,652
                            
                            
                            
                            371,122
                            
                            
                            
                            (327,470
                            )Net
      adjustments to reconcile net income for non-cash items
                            
                            
                            17,000,137
                            
                            
                            
                            8,641,579
                            
                            
                            
                            8,358,558Net
      change in working capital
                            
                            
                            (6,264,447
                            )
                            
                            
                            974,714
                            
                            
                            
                            (7,239,161
                            )Cash
      used in operations
                            
                            
                            (7,028,827
                            )
                            
                            
                            (1,896,152
                            )
                            
                            
                            (5,132,675
                            )Cash
      used in investing
                            
                            
                            (1,165,825
                            )
                            
                            
                            (2,331,281
                            )
                            
                            
                            1,165,456Cash
      used in financing
                            
                            
                            (1,888,513
                            )
                            
                            
                            (2,088,524
                            )
                            
                            
                            200,011Net
      decrease in cash
                            
                            
                            (10,083,165
                            )
                            
                            
                            (6,315,957
                            )
                            
                            
                            (3,767,208
                            )





Cash and
cash equivalents decreased $10.1 million to $2.4 million at September 30, 2009
from $12.4 million at December 31, 2008. The decrease was primarily attributable
to $7.0 million used in operating activities, $1.2 million for investing
activities, and $1.9 million used in the repayment of notes
payable.





Operating
Activity





Net cash
used in operations operating activities totaled $7.0 million for the nine months
ended September 30, 2009 compared to $1.9 million for the nine months ended
September 30, 2008. The decrease in operating cash flow was primarily
attributable to an increase in net loss of $6.3 million and a decrease in cash
provided from working capital of $6.3 million.  The decrease in net
loss was primarily driven by an increase in the non-cash items of approximately
$8.4 million due primarily to an increase in impairment loss on goodwill and
other intangibles.  The decrease in working capital was due to $7.1
million decrease in contract related working capital including contract accounts
payable and billings in excess of costs and estimated earnings,
partially offset by changes in contracts receivable and costs and
estimated earnings in excess of billings.





Investing
Activity





Net cash
used in investing activities decreased $1.1 million to $1.2 million for the nine
months ended September 30, 2009 from $2.3 million for the nine months ended
September 30, 2008.  The decrease was attributable to decreased
investing activity associated with acquired companies.  For the nine
months ended September 30, 2009, cash was used primarily for the payment of
contingent consideration associated with the Rubicon 2008 earn-out and
Innovative 2008 earn-out totaling $0.7 million and $0.4 million,
respectively.  For the nine months ended September 30, 2008, cash used
for acquisitions and related activity was $2.3 million due primarily to the SMLB
acquisition of $2.1 million.




Financing
Activity




Net cash
used in financing decreased $0.2 million to $1.9 million for the nine months
ended September 30, 2009 from $2.1 million for the nine months ended September
30, 2008.  For the nine months ended September 30, 2009 and 2008,
payments consisted almost entirely of seller note repayments and the increase
was associated with an increase in the scheduled amounts due for Rubicon
unsecured promissory notes issued to the sellers.





19




Non-Cash
Activity





During
the nine months ended September 30, 2009, in connection with the purchase of
Rubicon, we issued to the sellers $0.6 million of unsecured promissory notes
bearing interest at 6% per annum and repayable over a one-year
term.  The notes were issued in association with the achievement of
certain profit targets, as defined in the purchase agreement, for the year ended
December 31, 2008.  The repayment of the note may be accelerated, as
any unpaid principal and interest is due immediately at closing if we sell the
Rubicon division.  Additionally, during the nine months ended
September 30, 2008 in connection with the achievement of certain bookings
targets, we issued to the Rubicon sellers $0.4 million of unsecured promissory
notes.





During
the nine months ended September 30, 2008, our Chief Executive Officer and Chief
Operating Officer, both the selling members of TSS/Vortech, entered into an
agreement to convert at $7.50 per share an aggregate of $3.5 million of their
seller’s notes to 466,667 common shares.  The conversion was recorded
as an increase to additional paid in capital.





Liquidity
and Capital Resources





We had
$2.4 million and $12.4 million of unrestricted cash and cash
equivalents at September 30, 2009 and December 31, 2008, respectively.
During the nine months ended September 30, 2009, we have had no capital
transactions; as a result, during the nine months ended September 30, 2009, we
have financed our operations primarily with cash on hand as we experienced
negative cash flow from operations. While we are taking actions to contain
costs, until we fully align our expenses with our anticipated revenue stream, we
expect to continue to need to use our available cash to fund our
operations.





Based on
an unexpected lack of closed contracts and continued customer delays experienced
during the six months ended June 30, 2009, we revised our financial forecast
during the second quarter of 2009 to try and better match costs with expected
revenues.  During the third quarter of 2009, we initiated selling,
general and administrative cost reduction measures, which approximate annual
savings of $2.2 million.  In an effort to attempt to achieve positive
cash flows from operations and align costs with forecasted revenues in the
future, we are evaluating additional measures to reduce benefit costs,
professional fees and public company costs with the possibility of deregistering
our securities under the Exchange Act, thereby terminating our SEC reporting
requirements and delisting our stock from NASDAQ.





As
required cash on hand and projected cash from operations over the next twelve
months may not allow us to meet our current operating plans, and are not
anticipated to allow us to meet our scheduled debt maturities over the next
twelve months, we are working to restructure existing current maturities of
indebtedness totaling $2.0 million at September 30, 2009.  The current
maturities due are comprised of the following significant
components:




·
              Unsecured promissory note of $1.6
      million due March 31, 2010 - This note was issued on January 19, 2007 as
      consideration with the acquisition of Total Site Solutions.  The
      note was restructured in August 2008, resulting in the deferral until
      March 31, 2010 of all maturing principal and accruing interest
      payable.  Mr. Gallagher, our President, is the holder of the
      note.
 
 ·
              Unsecured promissory note of $0.5
      million due May 15, 2010 - This note includes monthly payments of
      approximately $39,000 plus interest at 5%.  This note was issued
      to the Rubicon sellers on June 2, 2009 as contingent consideration for the
      achievement of certain profit targets.  Three members of our
      current management hold approximately 46% of the notes, which corresponds
      to their prior ownership in the sold
  enterprise.




The
consolidated financial statements included herein have been prepared on a going
concern basis, which contemplates continuity of operations and the realization
of assets and repayment of liabilities in the ordinary course of business.
Management believes that our existing cash resources, combined with projected
cash flows from operations, may not be sufficient to execute our business plan
and continue operations into the future.  Management has taken
steps to reduce our operating expenses such as payroll and related personnel
costs through headcount reductions and furloughs of certain departments,
professional and marketing to eliminate discretionary fees, and we continue to
implement changes in our strategic direction aimed at achieving profitability
and positive cash flow.  Although we have been able to fund our
operations to date, there is no assurance that cash flow from our operations or
our capital raising efforts will be able to attract the additional capital or
other funds needed to sustain our operations. In order to preserve our limited
financial resources, we may determine to voluntarily delist our securities from
trading on NASDAQ and deregister our securities under the Exchange Act and cease
our reporting obligations with the SEC under the Exchange Act.  In
addition, management continues to explore various strategic alternatives,
including business combinations, private placements of debt or equity securities
and sales of a division or divisions or some or all of our assets or a sale of
the entire company.  If we are unable to obtain additional funding for
operations, we may not be able to continue operations as proposed, requiring us
to modify our business plan, curtail various aspects of our operations or cease
operations entirely. In such event, investors may lose a portion or all of their
investment.


20




In an
effort to meet our working capital requirements and scheduled maturities of
indebtedness absent restructuring, we engaged an investment banking firm in June
2009 to assist us with either raising additional capital, or the marketing for
sale of a division or divisions, or some or all of our assets or our entire
company.  On July 9, 2009, our Board of Directors formed a Special
Committee of independent directors whose exclusive purpose is to consider,
evaluate, review and negotiate and advise on any proposed transaction, including
any potential transactions with related parties, and to determine whether any
proposed transaction is fair to and in the best interest of our
stakeholders.  The Special Committee retained independent legal
counsel and has the authority to retain and compensate any advisor in the
fulfillment of its duties.  The Special Committee is comprised of Asa
Hutchinson, William L. Jews, and John Morton III (Chairman).  The
Special Committee is currently considering the following
alternatives:




·
              Raising additional capital in the
      form of debt, equity, or combination
  thereof.
 
 ·
              Marketing of the Company with
      focus on the sale of non-cash flowing components of the business, as well
      as, any of the Company’s divisions or the entire
      Company.




This
process is ongoing.  However, we may not be successful in executing a
sale of a division or divisions or some or all of our assets or a sale of our
entire company or in obtaining additional financing on acceptable terms, on a
timely basis, or at all, in which case, we may be forced to further curtail
operations, or cease operations entirely.  In addition, if funds are
available, the issuance of equity securities or securities convertible into
equity could dilute the value of shares of our common stock and cause the market
price to fall, and the issuance of debt securities could impose restrictive
covenants that could impair our ability to engage in certain business
transactions.





If we are
not able to achieve these operational and financial objectives, we will not have
sufficient financial resources to meet our financial obligations and we could be
forced to seek reorganization under the U.S. Bankruptcy Code.





Off Balance Sheet
Arrangements





As of
September 30, 2009, we do not have any off balance sheet
arrangements.





Item
3. Quantitative and Qualitative Disclosures about Market Risk.




The
information called for by this item is not required as we are a smaller
reporting company.




Item 4T. Controls and
Procedures.




Our
management performed an evaluation under the supervision and with the
participation of our Chief Executive Officer (principal executive
officer) and our Chief Financial Officer (principal financial officer)
of the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by the report. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that as
of September 30, 2009, our disclosure controls and procedures were
ineffective.





Changes in Internal Control over
Financial Reporting




There
were no changes in the Company’s internal control over financial reporting for
the third quarter of 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act
of 1934, as amended.


21




PART
II - OTHER INFORMATION





Item
1. Legal Proceedings.




We are
not a party to any material litigation in any court, and management is not aware
of any contemplated proceeding by any governmental authority against us. From
time to time, we are involved in various legal matters and proceedings
concerning matters arising in the ordinary course of business. We currently
believe that any ultimate liability arising out of these matters and proceedings
will not have a material adverse effect on our financial position, results of
operations or cash flows.




Item
1A. Risk Factors.





In
addition to the other information set forth in this Form 10-Q, you should
carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in
our Annual Report on Form 10-K for the year ended December 31, 2008 and any
subsequent Quarterly Reports on Form 10-Q, which could materially affect our
business, financial condition or future results. The risks described in our
Annual Report on Form 10-K and our subsequent Quarterly Reports on Form 10-Q are
not the only risks that we face. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating
results.





This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this Quarterly
Report on Form 10-Q. If any of the following risks actually occur, they could
materially adversely affect our business, financial condition, operating results
or prospects and the trading price of our securities. Additional risks and
uncertainties that we do not presently know or that we currently deem immaterial
may also impair our business, financial condition, operating results and
prospects and the trading price of our securities.





Risks
Related to our Key Employees





We
may be unable to hire and retain sufficient qualified personnel; the loss of any
of our key executive officers and key employees may adversely affect our
business.




We
believe that our future success will depend in large part on our ability to
attract and retain highly skilled, knowledgeable, sophisticated and qualified
managerial, professional and technical personnel. Based on our current financial
condition, salary reductions and additional furloughs, certain key executive
officers and key employees may decide to leave. Our failure to attract and
retain qualified personnel could increase our costs of performing our
contractual obligations, reduce our ability to efficiently satisfy our
customers’ needs, limit our ability to win new business and constrain our future
growth.


22




SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
Quarterly Report on Form 10-Q and, in particular, our Management’s Discussion
and Analysis of Financial Condition and Results of Operations set forth in Part
I—Item 2 contain or incorporate a number of forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act including statements regarding:




·
              deliver services and products
      that meet customer demands and generate acceptable
      margins;
 
 ·
              increase sales volume by
      attracting new customers, retaining existing customers and growing the
      overall number of customers to minimize a significant portion of our
      revenues being dependent on a limited number of
      customers;
 
 ·
              risks relating to revenues and
      backlog under customer contracts, many of which can be cancelled on short
      notice;
 
 ·
              our ability to manage and meet
      contractual terms of complex
projects;
 
 ·
              uncertainty related to current
      economic conditions;
 
 ·
              uncertainty related to demand for
      our services and products;
 
 ·
              our ability to raise additional
      funds to continue
operations;
 
 ·
              uncertainty related to our effort
      to meet our working capital requirements and scheduled maturities of
      indebtedness absent
restructuring;
 
 ·
              uncertainty related to our
      ability to implement a reduction in our
  expenses;
 
 ·
              uncertainty related to our
      ability to meet all of the terms and conditions of our debt
      obligations;
 
 ·
              our ability to continue as a
      going concern; and
 
 ·
              our
    liquidity.




Any or
all of our forward-looking statements in this Quarterly Report on Form 10-Q may
turn out to be wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors mentioned in
our discussion in this Quarterly Report on Form 10-Q will be important in
determining future results. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially.


23




Without
limiting the foregoing, the words “believes,” “anticipates,” ”plans,” “expects”
and similar expressions are intended to identify forward-looking statements.
There are a number of factors that could cause actual events or results to
differ materially from those indicated by such forward-looking statements, many
of which are beyond our control, including the factors set forth under “Item 1A.
Risk Factors” of our 2008 Annual Report on Form 10-K, as updated or supplemented
by our Quarterly Reports on Form 10-Q. In addition, the forward-looking
statements contained herein represent our estimate only as of the date of this
filing and should not be relied upon as representing our estimate as of any
subsequent date. While we may elect to update these forward-looking statements
at some point in the future, we specifically disclaim any obligation to do so to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.





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




The table
set for below shows all repurchases of securities by us during the quarter ended
September 30, 2009:





Total
      Shares
                      
                      
                      Approximate
      DollarAverage
                      
                      
                      Purchased
      as Part of
                      
                      
                      Amount
      of Shares YetMonthly
      Period During the Three
                      
                      Total
      Shares
                      
                      
                      Price
      Paid
                      
                      
                      Publically
      Announced
                      
                      
                      To
      Be Purchased UnderMonths
      Ended September 30, 2009
                      
                      Purchased
                      
                      
                      per
      Share
                      
                      
                      Plans
                      
                      
                      PlansJuly
      1, 2009- July 31, 2009
                      
                      
                      43,936
                      
                      
                      $
                      1.01
                      
                      
                      
                      -
                      
                      
                      
                      -August
      1, 2009- August 31, 2009
                      
                      
                      5,905
                      
                      
                      
                      0.64
                      
                      
                      
                      -
                      
                      
                      
                      -September
      1, 2009-September 30, 2009
                      
                      
                      772
                      
                      
                      
                      0.58
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      50,613
                      
                      
                      $
                      0.96
                      
                      
                      
                      -
                      
                      
                      
                      -





The
Company repurchased 50,613 shares for employee taxes associated with net
issuance of vesting restricted stock.





Item
3. Defaults upon Senior Securities.





Not
applicable.





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




Not
applicable.





Item
5. Other Information.




On
November 11, 2009, the Board of Directors (the “Board”) of the Company, upon the
recommendation of the Compensation Committee, approved a monthly cash
compensation of $5,000 to John Morton, III, for his services as the Chairman of
the Board and Chairman of the Special Committee of the Board, effective December
1, 2009.





Item
6. Exhibits.




31.1*
            Certification
      of Fortress International Group, Inc. Chief Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
            Certification
      of Fortress International Group, Inc. Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32.1‡
            Certification
      of Fortress International Group, Inc. Chief Executive Officer and Chief
      Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.







* Filed
herewith.


‡
Furnished herewith.


24




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.




FORTRESS INTERNATIONAL GROUP, INC.Date:
      November 16, 2009
                By:
                /s/
      Thomas P. RosatoThomas
      P. RosatoChief
      Executive Officer (Principal Executive Office)




Date:
      November 16, 2009
                  By:
                  /s/
      Timothy C. DecTimothy
      C. DecChief
      Financial Officer (Principal Financial Officer)




25