**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-Q**





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





For
      the
      quarterly period ended March 31, 2008





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.)**9841
                Broken Land Parkway**
              **Columbia,
                Maryland 21046**
            
            **21046**(Address
                of principal executive offices)
            
            (Zip
                Code)





**(410)
      312-9988**


(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 is a large accelerated filer, an
        accelerated filer, or 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 filero
              Accelerated
                  fileroNon-accelerated
                  filero(Do not check if a smaller reporting company)
              Smaller
                  reporting companyx


Indicated
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x




I ndicate
        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 April 30,
        2008                12,089,221**







**FORTRESS
      INTERNATIONAL GROUP, INC.**


**Table
      of Contents**





**Page****PART
                I - FINANCIAL INFORMATION****Item
                1.     Financial
                Statements**Consolidated
                Balance Sheets as of March 31, 2008 (unaudited) and as of December
                31,
                2007
            1Consolidated
                Statements of Operations (unaudited) for the three months ended March
                31,
                2008 and March 31, 2007 (successor) and for the period from January
                1,
                2007 to January 19, 2007 (predecessor)
            2Consolidated
                Statements of Cash Flows (unaudited) for the three months ended March
                31,
                2008 and March 31, 2007 (successor) and for the period from January
                1,
                2007 to January 19, 2007 (predecessor)
            3Notes
                to Consolidated Financial Statements
            4**Item
                2.      Management’s Discussion and Analysis of
                Financial Condition and Results of Operations**
            13**Item
                3.      Quantitative and Qualitative Disclosures
                about Market Risk**
            20**Item
                4T.   Controls and Procedures**
            21**PART
                II - OTHER INFORMATION****Item
                1.      Legal
                Proceedings**
            21**Item
                1A.   Risk Factors**
            21**Item
                2.      Unregistered Sales of Equity Securities
                and Use of Proceeds**
            21**Item
                3.      Defaults upon Senior
                Securities**
            22**Item
                4.      Submission of Matters to a Vote of
                Security Holders**
            22**Item
                5.      Other
                Information**
            22**Item
                6.      Exhibits**
            22**SIGNATURES**
            23










**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





FORTRESS
      INTERNATIONAL GROUP, INC.


CONSOLIDATED
      BALANCE SHEETS





March
                31,
            
            December
                31,2008
            
            2007(unaudited)
            
            (audited)*Current
                Assets*Cash
                and cash equivalents
            
            $
            8,391,830
            
            $
            13,172,210Contract
                and other receivables, less allowances for doubtful accounts of $120,000
                and
              $65,000,
                respectively
            
            
            12,221,311
            
            
            18,349,140Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            
            1,428,688
            
            
            1,322,254Prepaid
                expenses and other current assets
            
            
            606,526
            
            
            301,487Income
                taxes receivable
            
            
            893,322
            
            
            893,322Total
                current assets
            
            
            23,541,677
            
            
            34,038,413Property
                and equipment, net of accumulated depreciation of $501,790 and $394,913,
                respectively
            
            
            1,017,451
            
            
            1,044,545Goodwill
            
            
            22,429,483
            
            
            20,714,967Intangible
                assets, net
            
            
            21,585,826
            
            
            21,089,136Other
                assets
            
            
            814,414
            
            
            512,000Total
                assets
            
            $
            69,388,851
            
            $
            77,399,061*Liabilities
                and Stockholders’ Equity*Current
                liabilitiesNotes
                payable, current portion
            
            $
            224,100
            
            $
            1,650,306Accounts
                payable and accrued expenses
            
            
            11,691,848
            
            
            16,121,492Billings
                in excess of costs and estimated earnings on uncompleted
                contracts
            
            
            2,814,715
            
            
            3,880,279Total
                current liabilities
            
            
            14,730,663
            
            
            21,652,077Notes
                payable, less current portion
            
            
            8,239,544
            
            
            7,848,661Other
                liabilities
            
            
            44,648
            
            
            44,648Total
                liabilities
            
            
            23,014,855
            
            
            29,545,386Commitments
                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; 12,247,296 and 12,150,400
                issued; 12,089,221 and 11,996,325 outstanding atMarch
                31, 2008 and December 31, 2007, respectively
            
            
            1,224
            
            
            1,214Additional
                paid-in capital
            
            
            56,088,523
            
            
            55,268,012Treasury
                stock, 158,075 shares at March 31, 2008 and December 31, 2007, at
                cost
            
            
            (814,198
            )
            
            (814,198
            )Accumulated
                defecit
            
            
            (8,901,553
            )
            
            (6,601,353
            )Total
                stockholders' equity
            
            
            46,373,996
            
            
            47,853,675Total
                liabilities and stockholders’ equity
            
            $
            69,388,851
            
            $
            77,399,061




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




1




FORTRESS
      INTERNATIONAL GROUP, INC.


CONSOLIDATED
      STATEMENTS OF OPERATIONS





Successor (Fortress International Group, Inc.)
            
            Predecessor
              (TSS/Vortech)For the periodFor the three
            
            For the three
            
            January
                1,months ended
            
            months ended
            
            throughMarch 31, 2008
            
            March 31, 2007
            
            January 19, 2007(unaudited)
            
            (unaudited)
            
            (audited)Results
                of Operations:Revenue
            
            $
            19,432,080
            
            $
            8,676,937
            
            $
            1,412,137Cost
                of revenue
            
            
            16,020,878
            
            
            7,205,566
            
            
            1,108,276Gross
                profit
            
            
            3,411,202
            
            
            1,471,371
            
            
            303,861Operating
                expenses:Selling,
                general and administrative
            
            
            4,806,070
            
            
            2,637,940
            
            
            555,103Depreciation
            
            
            106,877
            
            
            55,431
            
            
            33,660Amortization
                of intangibles
            
            
            755,385
            
            
            440,454
            
            
            -Total
                operating costs
            
            
            5,668,332
            
            
            3,133,825
            
            
            588,763Operating
                loss
            
            
            (2,257,130
            )
            
            (1,662,454
            )
            
            (284,902
            )Interest
                income (expense), net
            
            
            (43,070
            )
            
            98,805
            
            
            3,749Loss
                from operations before income taxes
            
            
            (2,300,200
            )
            
            (1,563,649
            )
            
            (281,153
            )Income
                tax benefit
            
            
            -
            
            
            531,641
            
            
            -Net
                loss
            
            $
            (2,300,200
            )
            $
            (1,032,008
            )
            $
            (281,153
            )Per
                Common Share (Basic and Diluted):Basic
                and diluted net loss
            
            $
            (0.19
            )
            $
            (0.09
            )
            $
            -Weighted
                average common shares outstanding-basic and diluted
            
            
            12,073,072
            
            
            11,390,487
            
            
            -




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


2




FORTRESS
      INTERNATIONAL GROUP, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS





PredecessorSuccessor (Fortress International Group, Inc.)
            
            (TSS/Vortech)For the periodFor the three
            
            For the three
            
            January
                1,months ended
            
            months ended
            
            throughMarch 31, 2008
            
            March 31, 2007
            
            January 19, 2007(unaudited)
            
            (unaudited)
            
            (audited)Cash
                Flows from Operating Activities:Net
                loss
            
            $
            (2,300,200
            )
            $
            (1,032,008
            )
            $
            (281,153
            )Adjustments
                to reconcile net loss to net cash provided by (used in) operating
                activities:Depreciation
            
            
            106,877
            
            
            55,431
            
            
            33,660Amortization
                of intangibles
            
            
            857,310
            
            
            529,052
            
            
            -Allowance
                for doubtful accounts
            
            
            55,000
            
            
            -
            
            
            -Equity-based
                compensation
            
            
            357,746
            
            
            202,359
            
            
            -Benefit
                from income taxes
            
            
            -
            
            
            (531,641
            )
            
            -Changes
                in operating assets and liabilities, net of effects of
                acquisitions:Contract
                and other receivables
            
            
            6,945,193
            
            
            (914,335
            )
            
            3,698,863Costs
                  and estimated earnings in excess of billings on
                  uncompletedcontracts
            
            
            (106,434
            )
            
            897,984
            
            
            (1,078,505
            )Prepaid
                expenses
            
            
            (305,039
            )
            
            (484,607
            )
            
            (108,618
            )Due
                from affiliates
            
            
            -
            
            
            -
            
            
            519,923Other
                assets
            
            
            25,967
            
            
            (345,896
            )
            
            (42,968
            )Accounts
                payable and accrued expenses
            
            
            (4,698,613
            )
            
            73,567
            
            
            (1,861,306
            )Billings
                  in excess of costs and estimated earnings onuncompleted
                  contracts
            
            
            (1,575,681
            )
            
            (580,734
            )
            
            419,676Other
                liabilities
            
            
            -
            
            
            (586,283
            )
            
            (643,571
            )Net
                cash provided by (used in) operating activities
            
            
            (637,874
            )
            
            (2,717,111
            )
            
            656,001Cash
                Flows from Investing Activities:Purchase
                of property and equipment
            
            
            (79,783
            )
            
            (99,129
            )
            
            (127,602
            )Sale
                of investments held in trust
            
            
            -
            
            
            44,673,994
            
            
            -Purchase
                of TSS/Vortech, net of cash acquired
            
            
            -
            
            
            (9,677,683
            )
            
            -Purchase
                of SMLB, net of cash acquired
            
            
            (2,094,561
            )
            
            -
            
            
            -Other
                long term assets
            
            
            (432,837
            )
            
            (916,983
            )
            
            -Net
                cash provided by (used in) investing activities
            
            
            (2,607,181
            )
            
            33,980,199
            
            
            (127,602
            )Cash
                Flows from Financing Activities:Payments
                on notes payable
            
            
            (17,572
            )
            
            (9,356
            )
            
            (6,281
            )Payment
                of seller notes
            
            
            (1,517,753
            )
            
            -
            
            
            -Payment
                on promissory note payable to officer
            
            
            -
            
            
            (20,000
            )
            
            -Payment
                to shareholders electing to redeem their shares in connection with
                the
                TSS/Vortech acquisition
            
            
            -
            
            
            (4,342,310
            )
            
            -Repurchase
                of treasury stock
            
            
            -
            
            
            (1,222,817
            )
            
            -Members'
                distributions
            
            
            -
            
            
            -
            
            
            (1,561,639
            )Net
                cash used in financing activities
            
            
            (1,535,325
            )
            
            (5,594,483
            )
            
            (1,567,920
            )Net
                increase (decrease) in cash
            
            
            (4,780,380
            )
            
            25,668,605
            
            
            (1,039,521
            )Cash,
                beginning of period
            
            
            13,172,210
            
            
            7,347
            
            
            2,361,838Cash,
                end of period
            
            $
            8,391,830
            
            $
            25,675,952
            
            $
            1,322,317Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            113,474
            
            $
            654
            
            $
            368Cash
                paid for taxes
            
            
            -
            
            
            593,166
            
            
            -Supplemental
                disclosure of non cash Investing Activities:Issuance
                of common stock in connection with acquisitions (See Note
                2)
            
            
            500,000
            
            
            14,211,359
            
            
            -Promissory
                notes payable issued in connection with acquisitions (See Note
                2)
            
            
            500,000
            
            
            10,000,000
            
            
            -




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


3


FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**(1)**
            **Basis
                of Presentation**




The
      consolidated financial statements are for the three months ended March 31,
      2008 and 2007 for Fortress International Group, Inc. (the “Successor
      Company”, “Fortress” or the “Company”) and are for the period January 1, 2007 to
      January 19, 2007 (the acquisition date) for VTC, L.L.C. t/a Total Site Solutions
      and Vortech, L.L.C. (collectively the “Predecessor Company” or
“TSS/Vortech”).  The results of operations attributable to each acquisition
      are included in the consolidated financial statements from the date of
      acquisition.





Except
      for the balance sheet of the Company at December 31, 2007 and the results
      of operations for the period January 1, 2007 through January 19, 2007,
      which are derived from audited financial statements, the accompanying
      consolidated financial statements are unaudited. In the opinion of management,
      all adjustments necessary for a fair statement of such financial position and
      results of operations have been included. All such adjustments are of a normal
      recurring nature. Interim results are not necessarily indicative of results
      for
      a full year.




The
      consolidated financial statements and notes are presented as required by Form
      10-Q and do not contain certain information included in the Company’s annual
      financial statements and notes. These financial statements should be read in
      conjunction with the Company’s audited financial statements and the notes
      thereto filed with the Securities and Exchange Commission (“SEC”) in the
      Company’s Annual Report on Form 10-K for the year ended December 31,
      2007.





***Nature
      of Business and Organization***





The
      Company was formed in Delaware on December 20, 2004 as a special purpose
      acquisition company formed under the name “Fortress America Acquisition
      Corporation” for the purpose of acquiring an operating business that performed
      services to the homeland security industry.





On
      July
      20, 2005, we closed our initial public offering (“IPO”) of 7,800,000 units,
      including an overallotment option of 800,000 units, with each unit consisting
      of
      one share of our common stock and two warrants (each to purchase one share
      of
      common stock at $5.00). Of the total IPO proceeds of $43,183,521, net of
      issuance, costs, $41,964,000 placed into a trust fund (“Trust”) and the
      remaining $1,219,521 were available to fund operations in the pursuit of
      acquiring a company.





On
      January 19, 2007, the Company acquired all of the outstanding interest in
      TSS/Vortech in exchange for a combination of cash, the Company’s common stock,
      and issuance of two convertible notes (See Note 2). The
      acquisition fundamentally transformed the Company from a firm primarily
      investing capital to an operating business. Concurrent
      with the acquisition, the Company changed its name to Fortress International
      Group, Inc.




After
      acquiring TSS/Vortech and during 2007, the Company continued its expansion
      through the acquisition of  Comm Site of South Florida, Inc. (“Comm Site”),
      Innovative Power Systems, Inc. and Quality Power Systems, Inc. (“Innovative”),
      and Rubicon Integration, L.L.C. (“Rubicon”). On January 2, 2008, the Company
      acquired SMLB, Ltd. in continued footprint expansion with complementary service
      offerings. As applicable, the Company also acquired these companies’ operating
      subsidiaries. The results of operations, cash flows and financial position
      attributable to these acquisitions are included in the consolidated financial
      statements from the respective dates of their acquisition (See Note 2). All
      intercompany transactions have been eliminated in consolidation.




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.




***Recently
      Issued Accounting Pronouncements***




In
      March
      2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
      No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities, an amendment of FASB
      Statement No. 133,* which
      requires additional disclosures about the objectives of the derivative
      instruments and hedging activities, the method of accounting for such
      instruments under SFAS No. 133 and its related interpretations, and a
      tabular disclosure of the effects of such instruments and related hedged items
      on our financial position, financial performance, and cash flows. SFAS
      No. 161 is effective for us beginning January 1, 2009. The Company is
      currently assessing the potential impact that adoption of SFAS No. 161 may
      have on its financial statements. **




In
      December 2007, the FASB issued SFAS No. 141R, *Business
      Combinations* ,
      which
      replaces SFAS No. 141. The statement retains the purchase method of
      accounting for acquisitions, but requires a number of changes, including changes
      in the way assets and liabilities are recognized in the purchase accounting.
      It
      also changes the recognition of assets acquired and liabilities assumed arising
      from contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. SFAS No. 141R is effective for the Company beginning
      January 1, 2009 and will apply prospectively to business combinations
      completed on or after that date.


4


FORTRESS
        INTERNATIONAL GROUP, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      No. 51,* which
      changes the accounting and reporting for minority interests. Minority interests
      will be recharacterized as noncontrolling interests and will be reported as
      a
      component of equity separate from the parent’s equity, and purchases or sales of
      equity interests that do not result in a change in control will be accounted
      for
      as equity transactions. In addition, net income attributable to the
      noncontrolling interest will be included in consolidated net income on the
      face
      of the income statement and, upon a loss of control, the interest sold, as
      well
      as any interest retained, will be recorded at fair value with any gain or loss
      recognized in earnings. SFAS No. 160 is effective for us beginning
      January 1, 2009 and will apply prospectively, except for the presentation
      and disclosure requirements, which will apply retrospectively. The Company
      does
      not expect the adoption of SFAS No. 160 to have a material effect on its
      consolidated results of operation of financial condition.




**(2)**
            **Acquisitions**




In
      2007,
      the Company transitioned from a special purpose acquisition company to an
      operating entity with its purchase of TSS/Vortech. The Company has continued
      its
      strategy to build on to the TSS/Vortech operations through acquisitions that
      expand geographical reach, add complementary services, and access new key
      customers for additional selling opportunities. All of the acquisitions have
      been accounted for using purchase accounting. The results of operations
      attributable to each acquisition are included in the consolidated financial
      statements from the date of acquisition. The value of Fortress common stock
      issued in connection with the acquisitions was determined based on the five
      day
      average closing price of Fortress common stock beginning two days before through
      two days after the announcement date multiplied by the number of shares
      issued.




2008
      Acquisition




**SMLB,
      Ltd.**





On
      January 2, 2008, the Company acquired all of the outstanding stock of SMLB,
      Ltd., which provides consulting, facility management and equipment integration
      services for the mission-critical facilities in the Chicago area. The closing
      consideration consisted of (i) $2,094,561 in cash, including acquition costs
      of
      $151,133 and net of acquired cash of $56,573, subject to certain adjustment
      to
      be determined subsequent to the closing of the acquisition, as provided in
      the Purchase Agreement (ii) 96,896 shares of Fortress stock valued at
      approximately $500,000, (iii) $500,000 in unsecured promissory notes
      bearing interest at 6% per annum and (iv) additional earn-out amounts up to
      a
      maximum of $600,000 contingent upon the achievement of certain earnings targets
      by SMLB for each of the calendar years 2008-2009.





All
      of
      the shares issued to the selling members were placed into escrow to secure
      the
      rights of Fortress under the acquisition. These shares will be released subject
      to certain conditions under the agreements twelve months from the acquisition
      date.





The
      Company paid a premium (i.e., goodwill) over the fair value of the net tangible
      and preliminarily identified intangible assets acquired for a number of reasons,
      including SMLB’s complementary experience, key customer relationships in an
      expanded market, and service offerings in the mission-critical facility
      industry.




2007
        Acquisitions




**Rubicon
      Integration, L.L.C.**





On
      November 30, 2007, Fortress acquired 100% of the membership interests of Rubicon
      Integration L.L.C. (Rubicon), for the aggregate closing consideration consisting
      of (i) $4,806,115 in cash, including acquisition costs of $258,634, net of
      cash
      acquired of $42,660 (ii) 204,000 shares of the Company’s common stock valued at
      $1,080,800, (iii) contingent consideration in the form of two unsecured
      promissory notes in the maximum amount of $1,500,000 and $2,000,000,
      respectively, plus interest accruing at 6% annually from November 30, 2007,
      the
      date of the issuance, payable to the Sellers upon the achievement of certain
      operational and financial targets for December 2007 and for the calendar year
      2008, respectively, and (iv) additional earn-out amounts, contingent upon the
      achievement of certain earnings targets by Rubicon for each of the calendar
      years 2008-2009.


5


FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS




During
      the fourth quarter of 2007, Rubicon achieved certain 2007 earnings targets
      established in the purchase agreement, entitling the sellers to an unsecured
      promissory note of $1,517,753 which was paid in the first quarter 2008.
      Additionally, the purchase agreement required net working capital of $200,000
      at
      the acquisition date, while any excess or shortfall would result in
      consideration adjustment. In the fourth quarter 2007, the
      adjustment resulted in additional cash consideration of $90,141 which
      was paid in the first quarter 2008.





During
      the first quarter of 2008, the Company revised its estimated intangible
      valuation associated with Rubicon, which resulted in an increase in the value
      of
      customer relationship intangibles of $1.0 million with a corresponding decrease
      in goodwill.




The
      Company paid a premium (i.e., goodwill) over the fair value of the net tangible
      and preliminarily identified intangible assets acquired for a number of reasons,
      including Rubicon’s complementary experience, key customer relationships, and
      service offerings in the mission-critical facility industry.





**Innovative
      Power Systems, Inc. and Quality Power Systems, Inc** .





On
      September 24, 2007, Fortress acquired 100% of the issued and outstanding stock
      of Innovative Power Systems, Inc. and Quality Power Systems, Inc. (collectively
      “Innovative”) for aggregate consideration consisting of (i) $1,658,318 in cash,
      including acquisition costs of $156,286, and net of acquired cash of $244,968,
      (ii) a promissory note (the “Note”) for the aggregate amount of $300,000 payable
      to Sellers accruing at 6% annually from the date of issuance of the Note (the
      Note is payable in three years, based on a five-year amortization schedule,
      as
      described in the Note), (iii) 25,155 shares of common stock valued at $150,000
      and (iv) additional contingent consideration if Innovative achieves certain
      targeted earnings for each of the calendar years 2007-2010, as further described
      in the agreement.





During
      the fourth quarter of 2007, Innovative achieved 2007 earnings targets
      established in the purchase agreement, entitling the sellers to additional
      purchase consideration of $265,000, consisting of $200,000 in cash which is
      currently due and a $65,000 promissory note, net of a $135,000 post closing
      working capital adjustment, accruing interest at 6% annually (the Note is
      payable in three years, based on a five-year amortization schedule, as described
      in the Note 7). The purchase agreement required working capital of $300,000
      at
      September 24, 2007, while any excess or shortfall would result in consideration
      adjustment. Actual working capital was approximately $165,000, resulting in
      a
      $135,000 promissory note reduction in the fourth quarter of 2007 consistent
      with
      terms in the purchase agreement.




The
      Company paid a premium (i.e., goodwill) over the fair value of the net tangible
      and preliminarily identified intangible assets acquired for a number of reasons,
      including Innovative’s complementary
      experience, contacts and facilities maintenance offerings in the
      mission-critical facility industry and is complementary to the Company’s primary
      operations.





**Comm
      Site of South Florida, Inc.**




On
      May 7,
      2007, the Company purchased all of the assets of Comm Site of South Florida,
      Inc. for $150,000 paid in cash. In connection with this purchase, $135,000
      has
      been allocated to goodwill with the balance to other current assets and property
      and equipment, based on their historic cost which management believes
      approximates fair value.





**TSS/Vortech**





On
      January 19, 2007, Fortress acquired all of the outstanding membership interests
      of TSS/Vortech. In total, the Company paid consideration consisting of
      approximately (i) $11,519,151 in cash, including acquisition costs of $1,841,468
      and net of $1,322,317 of acquired cash (ii) $14,211,359 of Fortress common
      stock, consisting of 2,602,813 shares of Fortress common stock, of which
      2,534,988 shares were issued to the selling members and 67,825 shares were
      issued associated with acquisition costs, and (iii) $10,000,000 in two
      convertible promissory notes of $5,000,000 each, bearing interest at 6% (See
      Note 7).  Concurrent with the acquisition the Company issued 574,000 shares
      of restricted stock under the Fortress International Group, Inc. 2006 Omnibus
      Incentive Compensation Plan.





All
      of
      the shares issued to the selling members (2,534,988 shares) were placed into
      escrow accounts as follows: 2,461,728 into the General Indemnity escrow to
      secure the rights of Fortress under the acquisition and 73,260 shares into
      the
      Balance Sheet escrow subject to TSS/Vortech delivering $1,000,000 in working
      capital. These shares will be released subject to certain conditions under
      the
      respective agreements. Based on a determination of net working capital at the
      acquisition date, the Company has recorded a payable for approximately $200,000,
      included in accounts payable and accrued expenses in the March 31, 2008
      consolidated balance sheet, expected to be paid to the sellers as a purchase
      price adjustment.




Shareholders
      owning 756,100 shares of Fortress common stock voted against the acquisition
      and
      requested to receive the pro rata share of cash in the Trust Fund. The
      Company paid approximately $4,342,000 in exchange for these shares.




6


FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS




The
      cash
      portion of the payments made in the acquisition was financed entirely through
      the use of cash raised in the Company’s initial public offering and held in a
      trust fund prior to the closing of the TSS/Vortech acquisition. In connection
      with the acquisition of TSS/Vortech, holders of 756,100 shares of common stock
      voted against the acquisition and exercised their right to convert their shares
      of common stock into $5.74 of cash per share. An aggregate of $4,342,310 was
      paid to converting stockholders. These conversions were also funded with the
      proceeds of the Company’s IPO.




All
      of
      the shares of the Company’s common stock issued to Messrs. Rosato and Gallagher
      are subject to a lock-up agreement restricting the sale or transfer of those
      shares through July 13, 2008 and are being held in escrows maintained by the
      escrow agent (up to 2,461,728 shares held in a general indemnity escrow and
      73,260 shares held in a balance sheet escrow). The shares of the Company’s stock
      issued to certain employees as restricted stock grants are subject to forfeiture
      if the receiving employee terminates his or her employment within three years
      of
      the acquisition closing date, in which event the forfeited shares will be
      delivered to the selling members.




The
      Company paid a premium (i.e., goodwill) over the fair value of the net tangible
      and preliminarily identified intangible assets acquired for a number of reasons,
      including the following:





·
            TSS/Vortech
                has a broad range of experience, contacts and service offerings in
                the
                mission-critical facility industry. TSS/Vortech has a very experienced
                and
                committed management team with strong core competencies. TSS has
                a
                significant number of personnel with security clearances which is
                important in the homeland security industry.





·
            TSS/Vortech’s
                business model and potential for growth, increasing demand in its
                industry
                and its complete service offering when compared to similar companies.
                In
                addition TSS/Vortech may provide the platform to assist us in managing
                acquisitions in the future.





·
            TSS/Vortech
                has been building a national business development organization to
                expand
                beyond its current regional
                presence.




*Purchase
      Price Allocation*




Under
      business combination accounting, the purchase price for each of the acquired
      companies was allocated to the net tangible and identifiable intangible assets
      based on their estimated fair values as of the acquisition dates. The allocation
      of the purchase price was based upon valuations performed for each acquired
      company. The valuations for TSS/Vortech and Innovative were finalized in
      2007. We finalized the Rubicon valuation in first quarter of
      2008 and expect to finalize SMLB during the second quarter 2008.




The
      valuations indicated that the estimated fair value of the assets acquired was
      less than the total of the purchase price paid and the liabilities assumed
      in
      the transactions. As a result, the excess purchase price was assigned to
      goodwill for each acquisition. These estimates are subject to change upon the
      finalization of the valuation of certain assets and liabilities and may be
      adjusted in accordance with the provisions of SFAS No. 141, *Business
      Combinations* . 
      The transactions resulted in goodwill of $22.4 million of which $19.8 million
      is
      expected to be deductible for income tax purposes.




*Tangible
      and Other Intangible Long-Lived Assets*




In
      performing the purchase price allocation for each acquired company, the Company
      considered, among other factors, the intention for future use of acquired
      assets, analysis of historical financial performance and estimates of future
      performance of each acquired company’s products. The fair value of assets was
      based, in part, on a valuation using either a cost, income, or in some cases,
      market valuation approach and estimates and assumptions provided by management.
      The tangible assets primarily include personal property such as computers,
      software and service vehicles. Intangible assets consist primarily of customer
      relationships, order backlog, and trade name.




The
      preliminary estimated value and the range of amortizable lives of each of the
      components of intangible assets as of March 31, 2008 are as
      follows:





AmortizableSMLB
            
            Rubicon
            
            Innovative
            
            TSS/Vortech
            
            Total
            
            Lives
                in YearsIntangible
                asset:Trade
                name
            
            $
            36,000
            
            $
            460,000
            
            $
            60,000
            
            $
            4,930,000
            
            $
            5,486,000
            
            
            IndefiniteIn-place
                contracts
            
            
            146,000
            
            
            50,000
            
            
            350,000
            
            
            406,200
            
            
            952,200
            
            
            1-1.25Customer
                relationships
            
            
            202,000
            
            
            2,970,000
            
            
            560,000
            
            
            14,100,000
            
            
            17,832,000
            
            
            5-8Non
                competition agreement
            
            
            -
            
            
            685,000
            
            
            50,600
            
            
            -
            
            
            735,600
            
            
            2Total
                intangible
            
            
            384,000
            
            
            4,165,000
            
            
            1,020,600
            
            
            19,436,200
            
            
            25,005,800Accumulated
                amortization
            
            
            (69,581
            )
            
            (327,071
            )
            
            (184,806
            )
            
            (2,838,516
            )
            
            (3,419,974
            )Net
                intangible assets
            
            $
            314,419
            
            $
            3,837,929
            
            $
            835,794
            
            $
            16,597,684
            
            $
            21,585,826




7


FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS




For
      the
      three month period ended March 31, 2008 and March 31, 2007, amortization expense
      totaling $857,310 and $529,052, respectively, has been included in the
      accompanying consolidated statement of operations related to the above
      intangibles of which $101,925 and $88,598, respectively, is included in cost
      of
      revenue.




Unaudited pro
      forma results of operations are as follows. The amounts are shown as if the
      acquisitions had occurred at the beginning of the period presented:




Three Months
                Ended
                March 31,2007Proforma
                  revenue
              
              $
              11,313,254Proforma
                  operating (loss) income
              
              
              (1,773,704
              )Proforma
                  pretax (loss) income
              
              
              (1,671,150
              )Proforma
                  net (loss) income
              
              
              (1,139,509
              )Pro
                  forma basic and diluted net (loss) per share
              
              $
              (0.09
              )Weighted
                  average common shares
              
              
              12,168,715





This
      information is not necessarily indicative of the operational results that would
      have occurred if the acquisition had been consummated on the dates indicated
      nor
      is it necessarily indicative of future operating results of the combined
      enterprise.


8


FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS


The
      adjusted fair values of the assets acquired and the liabilities assumed for
      the
      companies Fortress acquired in 2007 and 2008 are as follows:





SMLB
            
            Rubicon
            
            Innovative
            
            Comm
                site
            
            TSS/Vortech
            
            TotalCash****
            
            $
            2,000,000
            
            $
            4,590,141
            
            $
            1,747,000
            
            $
            150,000
            
            $
            11,000,000
            
            $
            19,487,141Common
                stock
            
            
            462,775
            
            
            1,080,800
            
            
            150,075
            
            
            -
            
            
            14,211,359
            
            
            15,905,009Promissory
                notes to sellers****
            
            
            500,000
            
            
            1,517,753
            
            
            564,611
            
            
            -
            
            
            10,000,000
            
            
            12,582,364Acquistion
                costs
            
            
            151,133
            
            
            258,634
            
            
            156,286
            
            
            -
            
            
            1,841,468
            
            
            2,407,521Total
                purchase price****
            
            
            3,113,908
            
            
            7,447,328
            
            
            2,617,972
            
            
            150,000
            
            
            37,052,827
            
            
            50,382,035AssetsCash
                and equivalents****
            
            
            56,573
            
            
            42,660
            
            
            244,968
            
            
            -
            
            
            1,322,317
            
            
            1,666,518Contracts
                and other receivables
            
            
            872,364
            
            
            637,132
            
            
            466,852
            
            
            5,200
            
            
            6,261,988
            
            
            8,243,536Costs
                and estimated earnings****
            
            
            -
            
            
            98,278
            
            
            317,868
            
            
            -
            
            
            1,559,045
            
            
            1,975,191Prepaid
                expenses
            
            
            -
            
            
            -
            
            
            12,855
            
            
            -
            
            
            233,894
            
            
            246,749Total
                current assets****
            
            
            928,937
            
            
            778,070
            
            
            1,042,543
            
            
            5,200
            
            
            9,377,244
            
            
            12,131,994Property
                and equipment - net
            
            
            -
            
            
            3,048
            
            
            163,947
            
            
            10,177
            
            
            904,689
            
            
            1,081,484Goodwill
            
            
            2,580,060
            
            
            2,989,139
            
            
            986,189
            
            
            134,623
            
            
            15,739,472
            
            
            22,429,483Identifiable
                intangibles, net
            
            
            384,000
            
            
            4,165,000
            
            
            1,020,600
            
            
            -
            
            
            19,436,200
            
            
            25,005,800Other
                Assets****
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            64,158
            
            
            64,158Total
                assets
            
            
            3,892,997
            
            
            7,935,257
            
            
            3,213,279
            
            
            150,000
            
            
            45,521,763
            
            
            60,713,296Liabilities****Notes
                payable, current
            
            
            -
            
            
            -
            
            
            6,684
            
            
            -
            
            
            72,808
            
            
            79,492Accounts
                payable and accrued expenses
            
            
            137,309
            
            
            487,929
            
            
            398,903
            
            
            -
            
            
            6,653,886
            
            
            7,678,027Income
                taxes payable
            
            
            131,662
            
            
            -
            
            
            114,075
            
            
            -
            
            
            -
            
            
            245,737Billings
                in excess of costs****
            
            
            510,118
            
            
            -
            
            
            67,842
            
            
            -
            
            
            1,662,718
            
            
            2,240,678Total
                current liabilities
            
            
            779,089
            
            
            487,929
            
            
            587,504
            
            
            -
            
            
            8,389,412
            
            
            10,243,934Long-Term
                Liabilities****Notes
                payable, less current portion
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            79,524
            
            
            79,524Other
                long term liabilities****
            
            
            -
            
            
            -
            
            
            7,803
            
            
            -
            
            
            -
            
            
            7,803Total
                liabilities****
            
            
            779,089
            
            
            487,929
            
            
            595,307
            
            
            -
            
            
            8,468,936
            
            
            10,331,261Allocated
                purchase price
            
            $
            3,113,908
            
            $
            7,447,328
            
            $
            2,617,972
            
            $
            150,000
            
            $
            37,052,827
            
            $
            50,382,035




**(3)**
            **Basic
                and Diluted Net Loss per
                Share**





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





SuccessorThree
                Months EndedMarch
                31,
            
            March
                31,2008
            
            2007Net
                loss
            
            $
            (2,300,200
            )
            $
            (1,032,008
            )Basic
                and diluted weighted average common shares
            
            
            12,073,072
            
            
            11,390,487Earnings
                per share
            
            $
            (0.19
            )
            $
            (0.09
            )





As
      of March 31, 2008, there were unvested restricted stock, options to purchase
      units, convertible unsecured promissory notes, and warrants outstanding which
      were convertible to purchase 282,000, 2,100,000, 1,000,000, 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 months ended
      March 31, 2008, as their inclusion would be anti-dilutive.





As
      of
      March 31, 2007, there were options to purchase units, convertible unsecured
      promissory notes, and warrants outstanding which were convertible to purchase
      2,100,000, 1,000,000, and 15,725,000 shares of common stock, respectively.
      These were excluded in the computation of diluted net loss per common share
      for the three months ended March 31, 2007, as their inclusion would be
      anti-dilutive.


9


FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS




No
      weighted average common shares or income (loss) per share amounts are shown
      for
      the Predecessor since the Predecessor was limited liability company whose
      capital structure consisted of membership interests. As such, no weighted
      average number of outstanding shares and earnings per share are
      presented.




**(4)**
            **Employee
                Benefit Plans**





*Restricted
      Stock*




For
      the
      three month period ended March 31, 2008 and March 31, 2007, the Company granted
      2,000 and 574,000 restricted common shares, respectively, under the 2006
      Omnibus Incentive Compensation Plan (“Plan”). The Company recorded non-cash
      compensation expense included in selling, general and administrative expense
      associated with vesting awards of $370,193 and $202,359 and $128,975 and $0
      in
      cost of revenue for the three months ended March 31, 2008 and 2007,
      respectively. There was no other restricted stock activity.





**(5)**
            **Common
                Stock Repurchases**




Prior
      to
      the consummation of the acquisition of TSS/Vortech, the Company announced and
      implemented a common stock repurchase program under which it may purchase up
      to
      3,000,000 shares of common stock. Currently the Board of Directors has
      authorized the repurchase of up to 500,000 shares under this program. 
During the three months ended March 31, 2007, the Company repurchased 221,000
      of
      the Company’s common shares valued in aggregate at $1.2 million. During 2007,
      the total purchases under the plan were 379,075 common shares of which 221,000
      shares were retired. The plan was suspended in the third quarter of 2007;
      accordingly there has been no activity under the plan in the 2008.





In
      January 2007, the Company repurchased 756,100 shares at an aggregate value
      of $4.3 million from those shareholders that voted against the acquisition
      of TSS/Vortech and requested that their shares be redeemed at the then per
      share
      trust value of $5.74 per share (including deferred interest of $0.38 per
      share).





**(6)**
              **Options
                  to Purchase Units and
                  Warrants**





At
      March
      31, 2008 and December 31, 2007, there were options to purchase units and
      warrants outstanding which were convertible to 17,810,300 of common shares.
      Both
      the option to purchase units and warrant have a cashless exercise feature,
      whereby the holder may elect to receive a net amount of shares and forego the
      payment of the strike price.





In
      February 2007, the Company entered into a one year agreement with an advisor
      in
      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 months ended March 31, 2008,
      the
      computed Black-Scholes value of the warrant declined $141,422, resulting in
      a
      corresponding reduction in selling, general and administrative expense.





**(7)**
            **Income
                Taxes**




The
        Company accounts for income taxes in accordance with SFAS No. 109, *Accounting
        for Income Taxes.* APB No.
        28 *Interim
        Financial Reporting* and FASB
        Interpretation No. 18, *Accounting
        for Income Taxes in Interim Periods* .
        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 March 31, 2008 and December 31, 2007 a partial valuation allowance
        has been recorded against the majority of the Company’s deferred tax assets, as
        the Company has concluded that under relevant accounting standards, it is
        more
        likely than not that deferred tax assets will be not be realizable.
 
 The
        Company’s effective tax rate is based upon the rate expected to be applicable to
        the full fiscal year. The rate differs from those used in the three months
        ended
        March 31, 2007 primarily due to changes in the valuation allowance subsequent
        to
        that date.
 
 Effective
        January 1, 2007, the Company was required to adopt FASB Interpretation No.
        48, *Accounting
        for Uncertainty in Income Taxes* (FIN
        48).
 
 Management
        is in the process of evaluating the various tax positions associated with
        the
        acquisition of SMLB and is of the opinion that any deferred tax liabilities
        that
        would ultimately result from uncertain tax positions related to this acquisition
        is not anticipated to be material.
 
 The
        Company files a consolidated federal tax return and in states that allow
        it, in
        other states it files separate company returns.
 
 All
        of
        the Company's prior federal and state income tax filings since inception
        remain
        open under statutes of limitation.  Innovative Power System Inc.'s statutes
        of limitation are open from the 2002 tax year forward for both federal and
        Virginia purposes.  Quality Power Systems Inc.'s statutes of
        limitation are open from the 2003 tax year forward for both federal and Virginia
        purposes. SMLB’s  statutes of limitation are open from the 2006 tax year
        forward for both federal and Illinois purposes.


10


FORTRESS
        INTERNATIONAL GROUP, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




**(8)**
            **Notes
                Payable**





March 31,
            
            December 31,2008
            
            2007Convertible,
                unsecured promissory notes, due 2012 (6.0%)
            
            $
            7,500,000
            
            $
            7,500,000Unsecured
                promissory note, due 2011 (6.0%)
            
            
            364,611
            
            
            394,611Unsecured
                promissory note, due 2008 (6.0%)
            
            
            -
            
            
            1,517,753Unsecured
                promissory note, due 2011 (6.0%)
            
            
            500,000
            
            
            -Vehicle
                notes
            
            
            99,033
            
            
            86,603Total
                debt
            
            
            8,463,644
            
            
            9,498,967Less
                current portion
            
            
            224,100
            
            
            1,650,306$
            8,239,544
            
            $
            7,848,661





In
      connection with the acquisition of TSS/Vortech, on January 19, 2007 the Company
      issued convertible, unsecured promissory notes, with an aggregate value of
      $10,000,000 to the sellers. During the third quarter of 2007, the Company
      entered into an agreement with the Chief Executive Officer (the “CEO”) to retire
      $2,500,000 of the note due to him by paying $2,000,000 and the CEO used the
      proceeds to repurchase the Company’s common stock and warrants. The prepayment
      discount realized of $500,000 has been recorded as additional paid-in capital.
      The notes bear interest at six percent per year and have a term of five years.
      Interest only is payable during the first two years of each note with principal
      payments commencing on the second anniversary (January 19, 2009) and continuing
      throughout the balance of the term of the notes in equal quarterly principal
      installments totaling $625,000 with a balloon payment of $3.0 million on January
      19, 2010, as adjusted for the early repayment of Mr. Rosato’s notes. The notes
      are convertible at any time by the selling members into 1,000,000 shares of
      our
      common stock at a conversion price of $7.50 per share and are automatically
      convertible if the average closing price of our common stock for 20 consecutive
      trading days equals or exceeds $7.50 per share.





In
      connection with the Innovative acquisition, on September 24, 2007 the Company
      issued an unsecured promissory note with the sellers in the amount of
      $300,000. The note bears interest at six percent per year and has a three year
      term. Quarterly interest is payable and quarterly principal installments of
      $15,000 commenced December 31, 2007 with a final balloon payment of $120,000
      due
      on December 31, 2010. Based on achieving certain earnings targets through
      December 31, 2007 and net of a purchase price adjustment associated with working
      capital, Innovative sellers received an additional promissory note
      of $64,611 at December 31, 2007, see Note 2. The additional
      unsecured promissory note is in similar form to the
      unsecured promissory note issued at closing, bearing interest at six
      percent per year and has a three year term. Quarterly interest is payable and
      quarterly principal installments of $8,200 commenced March 31, 2008 with a
      final
      balloon payment of $65,600 due on March 31, 2011.





In
      connection with the Rubicon acquisition, the Company was obligated to issue
      unsecured promissory notes totaling $1.5 million and $2.0 million contingent
      on
      Rubicon achieving certain earnings targets for the month ended December 31,
      2007
      and certain revenue bookings targets for 2008, respectively. As described in
      Note 2 above, Rubicon exceeded earnings targets for the month ended December,
      31
      2007, resulting in the issuance of a promissory note totaling $1.5 million
      which
      was paid in the first quarter of 2008. Rubicon’s achievement of the financial
      targets for 2008 was not determinable beyond a reasonable doubt; therefore,
      the
      $2.0 million contingent note has not been issued.





In
      connection with the acquisition of SMLB on January 2, 2008, the Company issued
      unsecured promissory notes with an aggregate value of $500,000 to the sellers.
      The note bears interest at six percent per year and has a three year term.
      Principal installments of $100,000, $100,000 and $300,000, plus
      accrued interest, are due on January 2, 2009, January 2, 2010, and
      January 2, 2011, respectively. The Company may prepay the notes any time at
      its
      election without penalty.





**(9)**  **Related
      Party Transactions**





Our
      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 a related party for less than $25,000.




The
      Company participates in transactions with the following entities affiliated
      through common ownership and management.





**S3
      Integration LLC.** S3
      Integration LLC (S3 Integration) is owned 15% by each by 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, L.L.C.** (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 and purchased certain
      assets of Chesapeake Tower Systems, Inc. in February 2007.


11


FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS


**Chesapeake
      Mission Critical, L.L.C.** (Chesapeake MC) is 9% owned each by 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 and purchased certain assets of Chesapeake
      Tower Systems, Inc. in February 2007.





**Chesapeake
      Tower Systems, Inc** .
      Chesapeake Tower Systems, Inc. (Chesapeake) is 100% owned by the Company’s Chief
      Executive Officer. On February 28, 2007, Chesapeake sold substantially all
      of
      its assets to Chesapeake Systems and Chesapeake MC. Except for an office space
      sublease agreement, Chesapeake does not engage in any business with the Company.
      Chesapeake was a manufacturer's representative and distributor of mechanical
      and
      electrical equipment, which Chesapeake sold to the Company. In addition, the
      Company acted as a subcontractor to Chesapeake for certain equipment
      installation on project-by-project basis.





**CTS
      Services, LLC** (CTS) is
      55% 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.





**L.H.
      Cranston Acquisition Group, Inc** .
      L.H.
      Cranston Acquisition Group, Inc. is 25% owned by the Company’s Chief Executive
      Officer. L.H. Cranston Acquisition Group 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.





**Telco
      P&C, LLC.** Telco
      P&C, LLC (Telco) 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. CTS purchased 100% of Telco’s membership
      interests in the first quarter of 2008.





**Automotive
      Technologies, Inc.** Automotive Technologies, Inc., 60% owned by the Company’s Chief Executive
      Officer and provides vehicle maintenance and repair services to the
      Company.





**TPR
      Group Re Three LLC.** As of
      November 1, 2006, TPR Group Re Three, LLC (TPR Group Re Three) is owned 50%
      each by 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
      following table sets forth transactions the Company has entered into with the
      above related parties for the successor three months ended March 31, 2008 and
      2007 and for the predecessor period January 1, 2007 through January 19,
      2007.





Successor
            
            PredecessorPeriod fromThree Months
            
            Three Months
            
            January 1, 2007Ended
            
            Ended
            
            throughMarch 31, 2008
            
            March 31, 2007
            
            January 19, 2007RevenueCTS
                Services, LLC
            
            $
            106,049
            
            $
            37,840
            
            
            1,800Chesapeake
                Mission Critical, LLC
            
            
            29,564
            
            
            -
            
            
            -Chesapeake
                Tower Systems, Inc.
            
            
            -
            
            
            429
            
            
            -Total
            
            $
            135,613
            
            $
            38,269
            
            
            1,800Cost
                of RevenueCTS
                Services, LLC
            
            $
            358,623
            
            $
            239,428
            
            
            82,032Chesapeake
                Systems, LLC
            
            
            14,910
            
            
            -
            
            
            -Chesapeake
                Mission Critical, LLC
            
            
            39,298
            
            
            -
            
            
            -Chesapeake
                Tower Systems, Inc.
            
            
            -
            
            
            100,327
            
            
            8,225S3
                Integration, LLC
            
            
            37,406
            
            
            88,179
            
            
            -LH
                Cranston & Sons, Inc.
            
            
            -
            
            
            10,777
            
            
            -Telco
                P&C, LLC
            
            
            -
            
            
            29,282
            
            
            -Total
            
            $
            450,237
            
            $
            467,993
            
            
            90,257Selling,
                general and administrativeOffice
                rent paid on Chesapeake sublease agreement
            
            
            57,508
            
            
            46,950
            
            
            16,016Office
                rent paid to TPR Group Re Three, LLC
            
            
            97,691
            
            
            100,984
            
            
            26,472Vehicle
                repairs to Automotive Technologies, Inc.
            
            
            -
            
            
            4,442
            
            
            656Total
            
            $
            155,199
            
            $
            152,376
            
            
            43,144March
                31,
            
            
            December
                31,2008
            
            
            2007Accounts
                receivable/(payable):CTS
                Services, LLC
            
            $
            150,870
            
            
            44,821CTS
                Services, LLC
            
            
            (204,826
            )
            
            (2,969,671
            )Chesapeake
                Systems, LLC
            
            
            -
            
            
            611Chesapeake
                Systems, LLC
            
            
            -
            
            
            (873
            )Chesapeake
                Mission Critical, LLC
            
            
            79,334
            
            
            104,397Chesapeake
                Mission Critical, LLC
            
            
            (22,848
            )
            
            (18,950
            )Telco
                P&C, LLC
            
            
            -
            
            
            (8,000
            )LH
                Cranston & Sons, Inc.
            
            
            -
            
            
            (11,575
            )S3
                Integration, LLC
            
            
            (6,204
            )
            
            (60,556
            )Total
                Accounts receivable
            
            $
            230,204
            
            $
            149,829Total
                Accounts (payable)
            
            $
            (233,878
            )
            $
            (3,069,625
            )




**(10)**  **Subsequent
      Event**





On
        May 8,
        2008, the Compensation Committee (the “Compensation Committee”) of our Board of
        Directors approved the elimination of certain perquisites payments for club
        membership fees and car allowances paid to Thomas P. Rosato, our Chief Executive
        Officer, and Gerard J. Gallagher, our President and Chief Operating Officer,
        under their respective employment agreement, effective immediately.
        Simultaneously, and in connection with the elimination of these perquisites
        payments, the Compensation Committee approved an increase of $30,000 in the
        annual base salary of each of Messrs. Rosato and Gallagher, representing
        the
        aggregate annual amount of the perquisite payments previously paid.


12





**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.





This
      Quarterly Report on Form 10-Q includes forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, as amended, and Section
      21E of the Securities Exchange Act of 1934, as amended. We have based these
      forward-looking statements on our current expectations and projections about
      future events. These forward-looking statements are subject to known and unknown
      risks, uncertainties and assumptions about us that may cause our actual results,
      levels of activity, performance or achievements to be materially different
      from
      any future results, levels of activity, performance or achievements expressed
      or
      implied by such forward-looking statements. In some cases, you can identify
      forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“continue,” “intend,” “project,” “goal,” “potential,” “target,” and similar
      terms or the negative of such terms. Factors that might cause or contribute
      to
      such a discrepancy include, but are not limited to, those described in “Risk
      Factors,” as well as by future decisions by us.




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 formed under the name “Fortress America Acquisition
      Corporation” for the purpose of acquiring an operating business that performed
      services to 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 firm
      primarily seeking to invest capital 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. During 2007, we acquired substantially all of the
      assets of Comm Site of South Florida, Inc., 100% of the outstanding stock of
      Innovative Power Solutions, Inc. and Quality Power Solutions, Inc. and 100%
      of
      the membership interests of Rubicon Integration, L.L.C.




On
      January 2, 2008, we continued our acquisition strategy with the purchase of
      100% of the outstanding stock of SMLB, Ltd., which provides consulting, facility
      management, and equipment integration services for the mission-critical
      facilities in the Chicago area. The closing consideration consisted of (i)
      $2,000,000 in cash, subject to certain adjustment to be determined subsequent
      to
      the closing of the acquisition, as provided in the Purchase Agreement (ii)
      96,896 shares of Fortress stock valued at approximately $500,000, (iii) $500,000
      in unsecured promissory notes bearing interest at 6% per annum and (iv)
      additional earn-out amounts up to a maximum of $600,000 contingent upon the
      achievement of certain earnings targets by SMLB for each of the calendar years
      2008-2009.





With
      the
      acquired assets, 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.





***Contract
      Backlog***





We
      believe a strong 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 March
      31,
      2008, we have authorizations to proceed with work for approximately $34.6
      million or 17% of our total backlog of $207.5 million. At December 31, 2007,
      we
      have authorizations to proceed with work for approximately $32.4 million or
      19%
      of our total backlog of $172.9 million. Additionally, approximately $159.8
      and
      $118.0 million or 77% and 68% of our backlog relates to a single customer at
      March 31, 2008 and December 31, 2007, respectively.


13





As
      of
      March 31, 2008, our backlog was approximately $207.5 million, compared to
      approximately $172.9 million at December 31, 2007. We believe that approximately
      30% of the backlog at March 31, 2008 will be recognized during over the
      next nine months. The following table reflects the value of our backlog in
      the above three categories as of March 31, 2008 and December 31, 2007,
      respectively.


14





(In
      millions)


March
                31,
            
            December
                31,2008
            
            2007Technology
                consulting
            
            $
            4.9
            
            $
            3.9Construction
                management
            
            
            187.6
            
            
            154.1Facilities
                management
            
            
            15.0
            
            
            14.9Total
            
            $
            207.5
            
            $
            172.9




**Consolidated
      Statements of Operations**





Successor (Fortress International Group, Inc.)
            
            Predecessor
              (TSS/Vortech)For the three
              months ended
              March 31, 2008
            
            For the three
              months ended
              March 31, 2007
            
            For the period
              January 1,
              through
              January 19, 2007Results
                of Operations:Revenue
            
            $
            19,432,080
            
            $
            8,676,937
            
            $
            1,412,137Cost
                of revenue
            
            
            16,020,878
            
            
            7,205,566
            
            
            1,108,276Gross
                profit
            
            
            3,411,202
            
            
            1,471,371
            
            
            303,861Operating
                expenses:Selling,
                general and administrative
            
            
            4,806,070
            
            
            2,637,940
            
            
            555,103Depreciation
                and amortization
            
            
            106,877
            
            
            55,431
            
            
            33,660Amortization
                of intangibles
            
            
            755,385
            
            
            440,454
            
            
            -Total
                operating costs
            
            
            5,668,332
            
            
            3,133,825
            
            
            588,763Operating
                loss
            
            
            (2,257,130
            )
            
            (1,662,454
            )
            
            (284,902
            )Interest
                income (expense), net
            
            
            (43,070
            )
            
            98,805
            
            
            3,749Loss
                from operations before income taxes
            
            
            (2,300,200
            )
            
            (1,563,649
            )
            
            (281,153
            )Income
                tax benefit
            
            
            -
            
            
            531,641
            
            
            -Net
                loss
            
            $
            (2,300,200
            )
            $
            (1,032,008
            )
            $
            (281,153
            )





**Critical
      Accounting Policies and Estimates**





Our
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America. The preparation of these
      financial statements 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*




The
      Company recognizes 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. The Company's revenue
      is
      derived from the following types of contractual arrangements: fixed-price
      contracts, time and material contracts and cost-plus-fee contracts (including
      guaranteed maximum price contracts). The Company’s primary source of revenue is
      from fixed price contracts and we apply 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.




Revenue
      from fixed price contracts is recognized on the percentage of completion method,
      measured by the percentage of total costs incurred to date to estimated total
      costs for each contract. This 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.


15


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 its
      standard management process, facts develop that require the Company to revise
      its estimated total costs on revenue. To the extent that a revised estimate
      affects contract profit or revenue previously recognized, the Company records
      the cumulative effect of the revision in the period in which the revisions
      becomes 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, the Company may elect to work at risk prior to receiving
      an executed contract document. The Company has 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.





*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. 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, though generally permitted to
      be
      settled in cash, are typically settled through the issuance of common stock,
      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. SFAS No. 142, *Goodwill
      and Other Intangible Assets* (SFAS
      No. 142), 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
      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. Our
      intangible assets consist of trade name, in-place contracts, customer
      relationships, and non-competition agreements with amortizable lives of 1-8
      years for the finite lived intangibles.We evaluate these assets for
      impairment when events occur that suggest a possible impairment. Such events
      could include, but are not limited to, the loss of a significant client or
      contract, decreases in federal government appropriations or funding for specific
      programs or contracts, or other similar events. We determine impairment by
      comparing the net book value of the asset to its future undiscounted net cash
      flows. If impairment occurs, we will record an impairment expense equal to
      the
      difference between the net book value of the asset and its estimated discounted
      cash flows using a discount rate based on our cost of capital and the related
      risks of recoverability.




We
      are
      required to review the recoverability of our goodwill and other intangible
      assets as indicated above. At December 31, 2007, we obtained an independent
      third party valuation to assist in determining fair market value and we
      concluded no impairment existed. We have continued to incur operating losses
      through the first quarter 2008; however, our projected operating results and
      related cash flows indicate no impairment. If actual market conditions are
      less
      favorable than those projected by management or if events occur or circumstances
      change, in a way that would reduce the estimated recoverability of these assets,
      impairment charges may be required.




*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. If circumstances
      indicate the carrying value of the asset may not be fully recoverable, a loss
      is
      recognized at the time impairment exists and a permanent reduction in the
      carrying value of the asset is recorded. We believe that the carrying
      values of its long-lived assets as of March 31, 2008 are fully realizable.


16




*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 FASB Interpretation
      No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN 48”). FIN 48 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 concluded that the
      adoption of FIN 48 had no material effect on our financial position or
      results of operations. As of March 31, 2008, we do not have any
      material gross unrecognized tax benefit liabilities. However, management is
      still in the process of evaluating the various tax positions associated with
      the
      acquisition of SMLB and is of the opinion that any deferred tax liabilities
      that
      would ultimately result from uncertain tax positions related to these entities
      may be covered by indemnification provisions provided in the acquisition
      agreements or may result in an adjustment to goodwill.




*Use
      of Estimates*




The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenue and expenses during the reporting period. The
      most critical estimates and assumptions are made in determining the allowance
      for doubtful accounts, revenue recognition, recovery of long-lived assets,
      useful lives of long-lived assets, accruals for estimated tax and stock
      compensation expense. Actual results could differ from those estimates and
      assumptions.





*Recently
      Issued Accounting Pronouncements*




In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities, an amendment of FASB
      Statement No. 133,* which
      requires additional disclosures about the objectives of the derivative
      instruments and hedging activities, the method of accounting for such
      instruments under SFAS No. 133 and its related interpretations, and a
      tabular disclosure of the effects of such instruments and related hedged items
      on our financial position, financial performance, and cash flows. SFAS
      No. 161 is effective for us beginning January 1, 2009. We are
      currently assessing the potential impact that adoption of SFAS No. 161 may
      have on our financial statements. **




In
      December 2007, the FASB issued SFAS No. 141R, *Business
      Combinations* ,
      which
      replaces SFAS No. 141. The statement retains the purchase method of
      accounting for acquisitions, but requires a number of changes, including changes
      in the way assets and liabilities are recognized in the purchase accounting.
      It
      also changes the recognition of assets acquired and liabilities assumed arising
      from contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. SFAS No. 141R is effective for us beginning July 1,
      2009 and will apply prospectively to business combinations completed on or
      after
      that date.




In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      No. 51,* which
      changes the accounting and reporting for minority interests. Minority interests
      will be recharacterized as noncontrolling interests and will be reported as
      a
      component of equity separate from the parent’s equity, and purchases or sales of
      equity interests that do not result in a change in control will be accounted
      for
      as equity transactions. In addition, net income attributable to the
      noncontrolling interest will be included in consolidated net income on the
      face
      of the income statement and, upon a loss of control, the interest sold, as
      well
      as any interest retained, will be recorded at fair value with any gain or loss
      recognized in earnings. SFAS No. 160 is effective for us beginning
      July 1, 2009 and will apply prospectively, except for the presentation and
      disclosure requirements, which will apply retrospectively. We do not expect
      the
      adoption of SFAS No. 160 to have a material effect on our consolidated results
      of operation of financial.


17




**Results
      of operations for the successor company for the three months ended March 31,
      2008 compared with the three months ended March 31, 2007.**





*Revenue.* Revenue
      increased $10.7 million to $19.4 million for the three months ended March 31,
      2008 from $8.7 million for the three months ended March 31, 2007. The increase
      is primarily driven by the inclusion of $5.7 million of revenue associated
      with the acquisitions of Innovative, Rubicon, and SMLB and the
      inclusion of approximately $1.4 million of revenue associated with TSS/Vortech
      results being included for an additional nineteen days or a full quarter in
      2008. The remaining increase of approximately $3.6 million is attributable
      to an
      increase in revenue from our construction management services.





*Cost
      of Revenue.* Cost
      of
      revenue increased $8.8 million to $16.0 million for the three months ended
      March
      31, 2008 from $7.2 million for the three months ended March 31, 2007. The
      increase is primarily driven by the inclusion of $4.0 million of cost of revenue
      associated with the acquisitions of Innovative, Rubicon, and SMLB and
      the inclusion of approximately $1.1 million of cost of revenue associated with
      TSS/Vortech results being included for an additional nineteen days or a full
      quarter in 2008. The remaining increase of $3.7 million was attributable to
      an
      increase in revenue from our construction management services.




*Gross
      Margin Percentage.* Gross
      margin percentage remained consistent at 17.6% for the three months ended March
      31, 2008 compared to 17.0% for the three months ended March 31, 2007. Excluding
      the effect of gross margin contribution associated with the acquisitions of
      Innovative, Rubicon, and SMLB and the inclusion of TSS/Vortech results for
      an additional nineteen days or a full quarter in 2008, gross margin percentage
      decreased to 11.3% for the three months ended March 31, 2008 from 17.0% for
      the three months ended March 31, 2007. The decline in gross profit is primarily
      attributable to the change in the contract mix of services being performed,
      as a
      greater proportion of first quarter 2008 services were construction
      management.





*Selling,
      general and administrative expenses* .
      Selling, general and administrative expenses increased $2.2 million to $4.8
      million for the three months ended March 31, 2008 from $2.6 million for the
      three months ended March 31, 2007. The increase is primarily driven by the
      inclusion of $0.7 million of selling, general and administrative expenses
      associated with the acquisitions of Innovative, Rubicon and SMLB and the
      inclusion of approximately $0.6 million of selling, general and administrative
      expenses associated with TSS/Vortech’s results being included for an additional
      nineteen days or full quarter in 2008. The remaining $0.9 million increase
      primarily relates to an increased headcount in the proposal, sales and marketing
      departments in an effort to diversify our customer base and additional
      professional services costs associated with being a public company.




*Depreciation.* Depreciation remained
      consistent at $0.1 million for the three months ended March 31,
      2008 compared to $0.1 million for the three months ended March 31,
      2007.




*Amortization
      of intangible assets.* Amortization
      expense increased $0.4 million to $0.8 million for the three months ended
      March 31, 2008 from $0.4 million for the three months ended March 31, 2007.
      The increase in amortization expense was primarily attributable to a
      higher amortizable intangible base in 2008, associated with the
      acquisitions of Innovative, Rubicon, and SMLB that resulted an additional
      $5.0 million in amortizable intangibles.





*Interest
      income (expense), net.* Our
      interest income (expense), net decreased $142,000 to ($43,070) for the three
      months ended March 31, 2008 from $98,805 for the three months ended March 31,
      2007. The decrease in interest income was due to a lower average invested
      balance and interest rates.





*Income
      tax benefit.* For
      the
      three months ended March 31, 2008, we recorded no income tax benefit as any
      tax asset associated with net operating losses (NOL’s) generated during the
      quarter were fully reserved as they may not be realized in future periods.
      Income tax benefit was $0.5 million for the three months ended March 31, 2007
      reflecting the value of a NOL carry back to prior periods at an effective rate
      of 34% federal tax rate, which was applicable for the full
      year.


18


**Financial
      Condition, Liquidity and Capital Resources**





Successor (Fortress International Group, Inc.)
            
            Predecessor
              (TSS/Vortech)For the three
              months ended
              March 31, 2008
            
            For the three
              months ended
              March 31, 2007
            
            For the period
              January 1,
              through
              January 19, 2007Net
                cash provided by (used in) operating activities
            
            $
            (637,874
            )
            $
            (2,717,111
            )
            $
            656,001Net
                cash provided by (used in) investing activities
            
            
            (2,607,181
            )
            
            33,980,199
            
            
            (127,602
            )Net
                cash used in financing activities
            
            
            (1,535,325
            )
            
            (5,594,483
            )
            
            (1,567,920
            )Net
                increase (decrease) in cash
            
            $
            (4,780,380
            )
            $
            25,668,605
            
            $
            (1,039,521
            )




Cash
      and
      cash equivalents decreased $4.8 million to $8.4 million at March 31, 2008 from
      $13.2 million at December 31, 2007. The
      decrease was primarily attributable to $0.6 million from operating activities,
      $2.1 million for the purchase of SMLB, and $1.5 million for the repayment of
      promissory notes issued in association with the Rubicon
      acquisition.





*Operating
      Activity*





Net
      cash
      used in operations decreased $2.1 million to $0.6 million for the three months
      ended March 31, 2008 from $ 2.7 million used in operations for the three months
      ended March 31, 2007. The decrease includes approximately $0.7 million of cash
      provided by operating activities from an additional nineteen days in the first
      quarter of 2008.  The decline in cash used in operating cash flows is
      primarily attributable to working capital as follows:





*Increase
      in net loss.* Net
      loss
      increased $1.3 million to $2.3 million for the three months ended March 31,
      2008
      from $1.0 million for the three months ended March 31, 2007. The increase in
      net
      loss was primarily attributable to a $1.1 million increase in non-cash
      items primarily the provision for income taxes, amortization of intangibles
      and
      equity-based compensation expense.




*Increase
      in working capital.* Net
      changes in operating assets and liabilities decreased approximately $1.3
      million, which accounts for the improvement or decline in cash
      used by operating activities. The decrease is primarily attributable to other
      assets and liabilities, as management seeks to balance customer and vendor
      cash
      flows via contractual terms.





*Investing
      Activity*





Net
      cash
      used in investing increased $36.6 million to $2.6 million used in investing
      activities for the three months ended March 31, 2008 from $34.0 million provide
      by investing activities for the three months ended March 31, 2007. The increase
      was primarily attributable to our transition to an operating Company in the
      first quarter of 2007 and the release of investments held in trust for general
      operating purposes.




*Sale
      of investments held in Trust* .
      Upon
      the approval of the TSS/Vortech acquisition, we had a cash inflow from the
      sale of approximately $44.7 million in trust investments, which funded the
      cash
      portion of the acquisition and repurchase of common stock from dissenting
      shareholders electing to receive their IPO proceeds back and provided cash
      for
      future ongoing operations.




*Acquisitions.* Net cash
      used to acquire businesses decreased $7.6 million to $2.1 million for the
      three months ended March 31, 2008 from $9.7 million for the three months ended
      March 31, 2007. In the first quarter of 2008, we acquired SMLB, Ltd. which
      had a
      significantly lower enterprise value and in turn lower cash purchase price
      component as compared to TSS/Vortech acquisition which occurred in the first
      quarter of 2007.




*Financing
      Activity*




Net
      cash
      used in financing decreased $4.1 million to $1.5 million for the three months
      ended March 31, 2008 from $5.6 million for the three months ended March 31,
      2007. The decrease in cash used in financing activities was attributable
      fundamentally to different activity as described in the following:




·
            *Repayment
                of seller notes.*During
                the first quarter of 2008, we repaid a $1.5 million unsecured,
                promissory notes issued at December 31, 2007 associated with achievement
                of certain earnings targets by Rubicon.




·
            *Repurchase
                of commons stock.*During the first quarter of 2007, we used $4.3 million to repurchase
                our
                common stock associated with the election of conversion rights
                by our dissenting shareholders in connection with our acquisition of
                TSS/Vortech and $1.3 million in a share buy back program. The share
                buyback program was suspended in the third quarter of
                2007.


19





*Non-Cash
      Activity*





During
      the first quarter of 2008, in connection with the purchase of SMLB, we
      issued to the sellers $0.5 million of unsecured promissory notes, bearing
      interest at 6% per annum and repayable over a three-year term. During the first
      quarter of 2007, in connection with our purchase of TSS/Vortech, we
      issued to selling members Mr. Rosato and Mr. Gallagher a total of $10.0 million
      in convertible, unsecured promissory notes, bearing interest at 6% per annum
      and
      repayable over a three-year term. The difference in the amount of unsecured
      promissory note consideration between the two acquisitions was primarily
      attributable to differing enterprise values of the acquired entities.





For
      a
      discussion of our acquisitions, see Note 2 —Acquisitions of the Notes to
      Consolidated Financial Statements.





The
      share
      repurchase program was suspended in the third quarter 2007. We do not
      anticipate paying any cash dividend in the foreseeable future. Accordingly,
      we
      expect to retain future earnings, if any, for use in possible expansion of
      our
      business.





We
      believe that our current cash and cash equivalents and expected future cash
      generated from operations will satisfy our expected working capital, capital
      expenditure and investment requirements through the next twelve months. We
      may elect to secure additional capital in the future, at acceptable terms,
      to
      improve our liquidity or fund acquisitions. The amounts involved in any
      such transaction, individually or in the aggregate, may be material and differ
      in structure relative to past acquisitions. To the extent that we raise
      additional capital through the sale of equity securities, the issuance of such
      securities could result in dilution to our existing shareholders. If we raise
      additional funds through the issuance of debt securities, the terms of such
      debt
      could impose additional restrictions on our operations. Additional capital,
      if
      required, may not be available on acceptable terms, if at all. If we are unable
      to obtain additional financing, we may be required to reduce the scope of
      acquisition plan, which could impact our business, financial condition and
      earnings.





***Off
      Balance Sheet Arrangements***  **





As
      of the
      three months ended March 31, 2008, we do not have any off balance sheet
      arrangements.





**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk.**





Refer
      to
      our annual report on Form 10-K for the year ended December 31, 2007 for a
      complete discussion of our market risk. There have been no material changes
      to
      the market risk information included in our Annual Report on form 10-K for
      the year ended December 31, 2007.


20





**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 March 31, 2008. Based upon that evaluation, our Chief Executive Officer
      and Chief Financial Officer have concluded that as of March 31, 2008, our
      disclosure controls and procedures were ineffective. There have been no
      significant changes in the control environment since year end.





**Changes
      in Internal Control over Financial Reporting**




There
      were no other changes in the Company’s internal control over financial reporting
      for the first quarter of 2008 that have materially affected, or are reasonably
      likely to materially affect, the Company’s internal control over financial
      reporting.




**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





We
      are
      not currently subject to any material legal proceedings, nor, to our knowledge,
      is any material legal proceeding threatened against us.





**Item
      1A. Risk Factors**





There
      are
      no material updates to the risk factors previously disclosed in our Form 10-K
      for the year ended December 31, 2007.





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




Not
      applicable.





21




**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
        May 8,
        2008, the Compensation Committee (the “Compensation Committee”) of our Board of
        Directors approved the elimination of certain perquisites payments for club
        membership fees and car allowances paid to Thomas P. Rosato, our Chief Executive
        Officer, and Gerard J. Gallagher, our President and Chief Operating Officer,
        under their respective employment agreement, effective immediately.
        Simultaneously, and in connection with the elimination of these perquisites
        payments, the Compensation Committee approved an increase of $30,000 in the
        annual base salary of each of Messrs. Rosato and Gallagher, representing
        the
        aggregate annual amount of the perquisite payments previously paid.





**Item
      6. Exhibits.**




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


22


**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





**FORTRESS
                INTERNATIONAL GROUP, INC.**Date:
                May 14, 2008
            By:
            /s/
                Thomas P. RosatoThomas
                P. Rosato*Chief
                Executive Officer (Principal Executive
                Office)*




Date:
                May 14, 2008
            By:
            /s/
                Timothy C. DecTimothy
                C. Dec*Chief
                Financial Officer (Principal Financial
                Officer)*




23