UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 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, 2009





or




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





Commission
file number: 000-51426







FORTRESS
INTERNATIONAL GROUP, INC.


(Exact name of registrant as specified in its charter)





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





(410)
423-7438


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 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 each registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes  o  No o




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




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




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




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




Common
Stock, par value $0.0001 per share, as of April 30,
2008                12,661,716









FORTRESS
INTERNATIONAL GROUP, INC.


Table
of Contents





PagePART
      I - FINANCIAL INFORMATIONItem
      1.      Financial StatementsCondensed
      Consolidated Balance Sheets as of March 31, 2009 and as of December 31,
      2008
                  1Condensed
      Consolidated Statements of Operations for the three months ended March 31,
      2009 and March 31, 2008
                  2Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2009 and March 31, 2008
                  3Notes
      to Condensed Consolidated Financial Statements
                  4Item
      2.      Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
                  10Item
      3.      Quantitative and Qualitative Disclosures
      about Market Risk
                  17Item
      4T.   Controls and Procedures
                  17PART
      II - OTHER INFORMATIONItem
      1.      Legal Proceedings
                  18Item
      1A.   Risk Factors
                  18Item
      2.      Unregistered Sales of Equity Securities
      and Use of Proceeds
                  18Item
      3.      Defaults upon Senior
      Securities
                  18Item
      4.      Submission of Matters to a Vote of
      Security Holders
                  18Item
      5.      Other Information
                  18Item
      6.      Exhibits
                  18SIGNATURES
                  19










PART I - FINANCIAL
INFORMATION





Item
1. Financial Statements





FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





March 31,
                                    
                                    
                                    December 31,2009
                                    
                                    
                                    2008(Unaudited)Current
      AssetsCash
      and cash equivalents
                                    
                                    $
                                    8,277,286
                                    
                                    
                                    $
                                    12,448,157Contract
      and other receivables, net
                                    
                                    
                                    17,268,293
                                    
                                    
                                    
                                    21,288,660Costs
      and estimated earnings in excess of billingson
      uncompleted contracts
                                    
                                    
                                    3,924,909
                                    
                                    
                                    
                                    3,742,530Prepaid
      expenses and other current assets
                                    
                                    
                                    867,814
                                    
                                    
                                    
                                    539,124Total
      current assets
                                    
                                    
                                    30,338,302
                                    
                                    
                                    
                                    38,018,471Property
      and equipment, net
                                    
                                    
                                    787,212
                                    
                                    
                                    
                                    824,487Goodwill
                                    
                                    
                                    4,811,000
                                    
                                    
                                    
                                    4,811,000Intangible
      assets, net
                                    
                                    
                                    12,867,129
                                    
                                    
                                    
                                    13,559,234Other
      assets
                                    
                                    
                                    260,823
                                    
                                    
                                    
                                    225,853Total
      assets
                                    
                                    $
                                    49,064,466
                                    
                                    
                                    $
                                    57,439,045Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesNotes
      payable, current portion
                                    
                                    $
                                    110,601
                                    
                                    
                                    $
                                    1,688,845Convertible
      note, current portion
                                    
                                    
                                    1,333,333
                                    
                                    
                                    
                                    -Accounts
      payable and accrued expenses
                                    
                                    
                                    20,974,510
                                    
                                    
                                    
                                    24,394,990Billings
      in excess of costs and estimated earningson
      uncompleted contracts
                                    
                                    
                                    3,307,477
                                    
                                    
                                    
                                    6,047,765Total
      current liabilities
                                    
                                    
                                    25,725,921
                                    
                                    
                                    
                                    32,131,600Notes
      payable, less current portion
                                    
                                    
                                    291,034
                                    
                                    
                                    
                                    311,709Convertible
      notes, less current portion
                                    
                                    
                                    2,666,667
                                    
                                    
                                    
                                    4,000,000Other
      liabilities
                                    
                                    
                                    55,224
                                    
                                    
                                    
                                    137,198Total
      liabilities
                                    
                                    
                                    28,738,846
                                    
                                    
                                    
                                    36,580,507Commitments
      and Contingencies
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Stockholders’
      EquityPreferred
      stock- $.0001 par value; 1,000,000 shares authorized; no
      sharesissued
      or outstanding
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Common
      stock- $.0001 par value, 100,000,000 shares authorized;
      12,837,296and
      12,797,296 issued; 12,661,716 and 12,621,716 outstanding
atMarch
      31,2009 and December 31, 2008, respectively
                                    
                                    
                                    1,283
                                    
                                    
                                    
                                    1,279Additional
      paid-in capital
                                    
                                    
                                    61,745,903
                                    
                                    
                                    
                                    61,262,218Treasury
      stock, 175,580 shares at cost at March 31, 2009 and December 31,
      2008
                                    
                                    
                                    (869,381
                                    )
                                    
                                    
                                    (869,381
                                    )Accumulated
      deficit
                                    
                                    
                                    (40,552,185
                                    )
                                    
                                    
                                    (39,535,578
                                    )Total
      stockholders’ equity
                                    
                                    
                                    20,325,620
                                    
                                    
                                    
                                    20,858,538Total
      liabilities and stockholders’ equity
                                    
                                    $
                                    49,064,466
                                    
                                    
                                    $
                                    57,439,045


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




1





FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





(Unaudited)For the Three Months EndedMarch 31, 2009
                    
                    
                    March 31, 2008Results
      of Operations:Revenue
                    
                    $
                    30,071,329
                    
                    
                    $
                    19,432,080Cost
      of revenue
                    
                    
                    26,403,191
                    
                    
                    
                    16,020,878Gross
      profit
                    
                    
                    3,668,138
                    
                    
                    
                    3,411,202Operating
      expenses:Selling,
      general and administrative
                    
                    
                    3,853,661
                    
                    
                    
                    4,806,070Depreciation
      and amortization
                    
                    
                    103,422
                    
                    
                    
                    106,877Amortization
      of intangibles
                    
                    
                    692,105
                    
                    
                    
                    755,385Total
      operating costs
                    
                    
                    4,649,188
                    
                    
                    
                    5,668,332Operating  loss
                    
                    
                    (981,050
                    )
                    
                    
                    (2,257,130
                    )Interest
      income (expense), net
                    
                    
                    (35,548
                    )
                    
                    
                    (43,070
                    )Net
      loss
                    
                    $
                    (1,016,598
                    )
                    
                    $
                    (2,300,200
                    )Per
      Common Share (Basic and Diluted):Basic
      and diluted net loss
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.19
                    )Weighted
      average common shares outstanding-basic and diluted
                    
                    
                    12,641,716
                    
                    
                    
                    12,073,072




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





2




FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS





(Unaudited)For the Three Months EndedMarch 31, 2009
                                                        
                                                        
                                                        March 31, 2008Cash
      Flows from Operating Activities:Net
      loss
                                                        
                                                        $
                                                        (1,016,598
                                                        )
                                                        
                                                        $
                                                        (2,300,200
                                                        )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
      and amortization
                                                        
                                                        
                                                        103,422
                                                        
                                                        
                                                        
                                                        106,877Amortization
      of intangibles
                                                        
                                                        
                                                        692,105
                                                        
                                                        
                                                        
                                                        857,310Provision
      for doubtful accounts
                                                        
                                                        
                                                        25,000
                                                        
                                                        
                                                        
                                                        55,000Stock
      and warrant-based compensation
                                                        
                                                        
                                                        483,689
                                                        
                                                        
                                                        
                                                        357,746Extinguishment
      of contract liabilities
                                                        
                                                        
                                                        (269,217
                                                        )
                                                        
                                                        
                                                        -Other
      non-cash income, net
                                                        
                                                        
                                                        1,533
                                                        
                                                        
                                                        
                                                        -Changes
      in operating assets and liabilities, net of the effects from
      acquisitions:Contracts
      and other receivables
                                                        
                                                        
                                                        3,995,367
                                                        
                                                        
                                                        
                                                        6,945,193Costs
      and estimated earnings in excess of billings on
uncompletedcontracts
                                                        
                                                        
                                                        (182,379
                                                        )
                                                        
                                                        
                                                        (106,434
                                                        )Prepaid
      expenses and other current assets
                                                        
                                                        
                                                        (328,690
                                                        )
                                                        
                                                        
                                                        (305,039
                                                        )Other
      assets
                                                        
                                                        
                                                        (34,970
                                                        )
                                                        
                                                        
                                                        25,967Accounts
      payable and accrued expenses
                                                        
                                                        
                                                        (3,151,272
                                                        )
                                                        
                                                        
                                                        (4,698,613
                                                        )Billings
      in excess of costs and estimated earnings onuncompleted
      contracts
                                                        
                                                        
                                                        (2,740,288
                                                        )
                                                        
                                                        
                                                        (1,575,681
                                                        )Other
      liabilities
                                                        
                                                        
                                                        (83,507
                                                        )
                                                        
                                                        
                                                        -Net
      cash used in operating activities
                                                        
                                                        
                                                        (2,505,805
                                                        )
                                                        
                                                        
                                                        (637,874
                                                        )Cash
      Flows from Investing Activities:Purchase
      of property and equipment
                                                        
                                                        
                                                        (66,147
                                                        )
                                                        
                                                        
                                                        (79,783
                                                        )Purchase
      of SMLB, net of cash acquired
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (2,094,561
                                                        )Deferred
      acquisition costs
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (432,837
                                                        )Net
      cash used in investing activities
                                                        
                                                        
                                                        (66,147
                                                        )
                                                        
                                                        
                                                        (2,607,181
                                                        )Cash
      Flows from Financing Activities:Payments
      on notes payable
                                                        
                                                        
                                                        (1,598,919
                                                        )
                                                        
                                                        
                                                        (1,535,325
                                                        )Net
      cash used in financing activities
                                                        
                                                        
                                                        (1,598,919
                                                        )
                                                        
                                                        
                                                        (1,535,325
                                                        )Net
      decrease in cash
                                                        
                                                        
                                                        (4,170,871
                                                        )
                                                        
                                                        
                                                        (4,780,380
                                                        )Cash,
      beginning of period
                                                        
                                                        
                                                        12,448,157
                                                        
                                                        
                                                        
                                                        13,172,210Cash,
      end of period
                                                        
                                                        $
                                                        8,277,286
                                                        
                                                        
                                                        $
                                                        8,391,830Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                                                        
                                                        $
                                                        115,278
                                                        
                                                        
                                                        $
                                                        113,474Cash
      paid for taxes
                                                        
                                                        
                                                        116,411
                                                        
                                                        
                                                        
                                                        -Supplemental
      disclosure of non-cash investing activities:Issuance
      of common stock in connection with the acquisition of SMLB
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        500,000Promissory
      notes payable issued in connection with the acquisition of
      SMLB
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        500,000


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





3




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(1)
            Basis of
      Presentation




The
unaudited condensed consolidated financial statements are for the three
months ended March 31, 2009 and 2008 for Fortress International Group, Inc.
(“Fortress” or the “Company”).  The results of operations attributable to
each acquisitions are included in the condensed consolidated financial
statements from the date of acquisition.




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





Nature
of Business and Organization








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





On July
20, 2005, the Company closed its initial public offering (IPO) of
7,800,000 units, including an over-allotment 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 was placed into a trust
fund 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 VTC,
L.L.C. and Vortech, L.L.C. (“TSS/Vortech”)
in exchange for a combination of cash, the Company’s common stock, and issuance
of two convertible notes. The acquisition transformed the Company from a special
acquisition corporation to an operating business. Concurrent with the
acquisition, the Company changed its name to Fortress International Group,
Inc.




After
acquiring TSS/Vortech, the Company continued its expansion through the
acquisitions of Comm Site of South Florida, Inc. on May 7, 2007 (“Comm
Site”), Innovative Power Systems, Inc. and Quality Power Systems, Inc.
(collectively, “Innovative”) on September 24, 2007, Rubicon Integration, LLC
(“Rubicon”) on November 30, 2007, and  SMLB LTD (“SMLB”), on January
2, 2008.  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. All
inter-company transactions have been eliminated in consolidation.




Recently
Issued Accounting Pronouncements




On
April 1, 2009, Financial Accounting Standards Board (FASB) Staff Position
(FSP) No.141(R)-1, Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, or FSP 141(R)-1, was issued. FSP 141(R)-1 amends and
clarifies FASB Statement No. 141 (revised 2007), Business Combinations (SFAS
141(R)) to address application issues raised by preparers, auditors and members
of the legal profession on initial recognition and measurement, subsequent
measurement and accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. FSP 141(R)-1 applies to all assets
acquired and liabilities assumed in a business combination that arise from
contingencies that would be within the scope of Statement of Financial
Accounting Standards (SFAS) 5, Accounting for Contingencies,
if not acquired or assumed in a business combination, except for assets or
liabilities arising from contingencies that are subject to specific guidance in
SFAS 141(R). An acquirer should recognize at fair value, at the acquisition
date, an asset acquired or a liability assumed in a business combination that
arises from a contingency if the acquisition-date fair value of that asset or
liability can be determined during the measurement period. An acquirer should
disclose information that enables users of its financial statements to evaluate
the nature and financial effects of a business combination that occurs either
during the current reporting period or after the reporting period but before the
financial statements are issued. FSP 141(R)-1 is effective for assets or
liabilities arising from contingencies in business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.




The SEC
issued a final rule RIN 3235-AJ71 Interactive Data to Improve
Financial Reporting, requiring companies to provide financial statements
information in a form that is intended to improve its usefulness to investors.
This final rule applies to public companies and foreign private issuers that
prepare their financial statements in accordance with GAAP and foreign private
issuers that prepare their financial statements using International Financial
Reporting Standards (IFRS). Companies will provide their financial statements to
the SEC and on their corporate website in interactive data format using
eXtensible Business Reporting Language (XBRL). The interactive data will be
provided as an exhibit to periodic and current reports and registration
statements, as well as to transition reports for a change in fiscal year. The
Company will be required to submit an interactive data file starting
2011.




In
November 2008, the SEC issued for comment a proposed roadmap regarding the
potential use by U.S. issuers of financial statements prepared in accordance
with IFRS. IFRS is a comprehensive series of accounting standards published by
the International Accounting Standards Board (IASB). Under the proposed roadmap,
the Company could be required in fiscal 2016 to prepare financial statements in
accordance with IFRS. The SEC will make a determination in 2011 regarding the
mandatory adoption of IFRS. The Company will assess the impact that this
potential change would have on our condensed consolidated financial statements
and it will continue to monitor the development of the potential implementation
of IFRS.





4




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(2)
            Accounts
      Receivable, net





The
Company had accounts receivable allowances of $175,000 and $150,000 at
March 31, 2009 and December 31, 2008, respectively.  Included in accounts
receivable was retainage associated with construction projects totaling $1.0
million and $0.4 million at March 31, 2009 and December 31, 2008,
respectively.





As of
March 31, 2009, accounts receivable include $1.8 million due from two customers
to whom the Company offered extended payment terms.  During the first
quarter of 2009, the Company executed a note receivable for $0.8 million which
has a six-month repayment schedule.  In April 2009, the Company
received $200,000, plus the first of six remaining payments on such new
note.





As of
December 31, 2008, accounts receivable of $1.0 million is due from a customer to
whom the Company has offered extended payment terms.  The customer
executed a promissory note of $1.0 million bearing interest at 8% per annum with
payments of interest only due monthly.  The balance of the note is due
in full on June 15, 2009.
 During
the second quarter 2008, the Company recognized a $0.7 million loss on a
customer contract due to concerns as to whether the amounts due from this
customer were collectible. During the three months ended March 31, 2009, the
Company finalized the extinguishment of approximately $0.3 million due to two
vendors contract assignment. Pursuant to the contract assignment these two
vendors have relieved the Company of its obligation previously recorded by the
Company. These vendors will pursue collection remedy independently and without
recourse to the Company per terms of the assignment. The Company recorded the
extinguishment of the amount due these two vendors as a reduction to accounts
payable and a reduction to cost of sales of $0.3 million during the three months
ended March 31, 2009.


(3)
            Acquisition




On
November 30, 2007, the Company acquired 100% of the membership interests of
Rubicon. The purchase agreement executed in connection with the
Rubicon transaction contains earn-out provisions that may require the
Company to make an additional payment to be calculated based on excess
profits during the applicable earn-out periods. Under the Rubicon earn-out
arrangement at December 31, 2008, the Company recorded approximately $0.5
million for the 2008 earn-out period which began December 1, 2007 and continued
through December 31, 2008 (2008 Earn-out).  Per the terms of the
purchase agreement on March 31, 2009, the Company delivered the 2008 Earn-out
calculation and the Rubicon sellers have separately responded with a
calculation of $1.7 million, based on varying interpretations of the
purchase agreement. Subsequently, the Company entered into discussions with the
Rubicon sellers regarding the 2008 Earn-out.  The Company has made no
payment for the 2008 Earn-out, which will be paid subject to finalizing these
discussions.





(4)
            Property
      and Equipment, net





Major
classes of property and equipment are summarized as follows:





March 31,
                      
                      
                      December 31,2009
                      
                      
                      2008Vehicles
                      
                      $
                      164,576
                      
                      
                      $
                      164,576Trade
      equipment
                      
                      
                      139,143
                      
                      
                      
                      139,143Leasehold
      improvements
                      
                      
                      500,040
                      
                      
                      
                      500,040Furniture
      and fixtures
                      
                      
                      38,694
                      
                      
                      
                      38,694Computer
      equipment and software
                      
                      
                      918,690
                      
                      
                      
                      852,5451,761,143
                      
                      
                      
                      1,694,998Less
      accumulated depreciation
                      
                      
                      (973,931
                      )
                      
                      
                      (870,511
                      )Property
      and equipment, net
                      
                      $
                      787,212
                      
                      
                      $
                      824,487





(5)
            Goodwill
      and Other Intangibles, net





There
have been no changes in carrying amount of goodwill during the three months
ended March 31, 2009.  Other intangible assets, net consisted of the
following:




March 31, 2009
                        
                        
                        December 31, 2008Accumulated
                        
                        
                        Net Carrying
                        
                        
                        
                        
                        
                        Accumulated
                        
                        
                        Net CarryingCarrying Amount
                        
                        
                        Amortization
                        
                        
                        Amount
                        
                        
                        CarryingAmount
                        
                        
                        Amortization
                        
                        
                        AmountFinite
      Lived-Intangible assets:Customer
      relationships
                        
                        $
                        17,630,000
                        
                        
                        $
                        (5,067,120
                        )
                        
                        $
                        12,562,880
                        
                        
                        $
                        17,630,000
                        
                        
                        $
                        (4,469,474
                        )
                        
                        $
                        13,160,526Non
      competition agreement
                        
                        
                        740,600
                        
                        
                        
                        (496,351
                        )
                        
                        
                        244,249
                        
                        
                        
                        740,600
                        
                        
                        
                        (401,892
                        )
                        
                        
                        338,708Total
                        
                        
                        18,370,600
                        
                        
                        
                        (5,563,471
                        )
                        
                        
                        12,807,129
                        
                        
                        
                        18,370,600
                        
                        
                        
                        (4,871,366
                        )
                        
                        
                        13,499,234Indefinite
      Lived-Intangible assets:Trade
      name
                        
                        
                        60,000
                        
                        
                        
                        -
                        
                        
                        
                        60,000
                        
                        
                        
                        60,000
                        
                        
                        
                        -
                        
                        
                        
                        60,000Net
      other intangible assets
                        
                        $
                        18,430,600
                        
                        
                        $
                        (5,563,471
                        )
                        
                        $
                        12,867,129
                        
                        
                        $
                        18,430,600
                        
                        
                        $
                        (4,871,366
                        )
                        
                        $
                        13,559,234




5




There
were no changes in the carrying amount of other intangibles during the three
months ended March 31, 2009.




(6)
            Basic and Diluted Net Loss per
      Share





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





For the Three Months Ended March 31,2009
                    
                    
                    2008Net
      loss
                    
                    $
                    (1,016,598
                    )
                    
                    $
                    (2,300,200
                    )Basic
      and diluted weighted average common shares
                    
                    
                    12,641,716
                    
                    
                    
                    12,073,072Net
      loss per share
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.19
                    )





As of
March 31, 2009, there were unvested restricted stock and restricted stock units,
options to purchase units, convertible unsecured promissory notes, and warrants
outstanding which were convertible to purchase 688,667, 2,100,000, 533,333, and
15,710,300 shares of common stock, respectively. These were excluded in the
computation of diluted net loss per common share for the three months ended
March 31, 2009, as their inclusion would be anti-dilutive.





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.





6





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(7)
            Employee Benefit
      Plans





Restricted
Stock




For the
three months ended March 31, 2009 and March 31, 2008, the Company granted 40,000
and 2,000 shares of restricted stock, respectively, and restricted stock units
of 20,000 and zero, respectively, under the 2006 Omnibus Incentive
Compensation Plan. For the three months ended March 31, 2009 and 2008, the
Company recorded non-cash compensation expense included in selling, general and
administrative expense associated with vesting awards of $393,683 and $370,193,
respectively, and in cost of revenue recorded $90,006 and $128,975,
respectively. There was no other restricted stock activity.





(8)
            Options to Purchase Units and
      Warrants





At March
31, 2009 and December 31, 2008, there were options to purchase units and
warrants outstanding which were convertible to a total of 17,810,300 of shares
of common stock. 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 2007,
the Company entered into a one-year agreement with an advisor to whom the
Company issued 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.





(9)
            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, 2009 and December 31, 2008, a full valuation allowance
has been recorded against the Company’s deferred tax assets, as the Company has
concluded that under relevant accounting standards, it is more likely than not
that the deferred tax assets will not be realizable.





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


Effective
January 1, 2007, the Company was required to adopt FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). As of March 31, 2009, we do
not have any material gross unrecognized items.




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





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





7




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(10)
            Notes
    Payable





March 31,
                              
                              
                              December 31,2009
                              
                              
                              2008Convertible,
      unsecured promissory note, due 2012 (6.0%)
                              
                              $
                              4,000,000
                              
                              
                              $
                              4,000,000Unsecured
      promissory note, due 2009 (6.0%)
                              
                              
                              -
                              
                              
                              
                              1,575,618Unsecured
      promissory note, due 2010 (6.0%)
                              
                              
                              120,572
                              
                              
                              
                              120,572Unsecured
      promissory note, due 2011 (6.0%)
                              
                              
                              265,227
                              
                              
                              
                              283,457Vehicle
      notes
                              
                              
                              15,836
                              
                              
                              
                              20,907Total
      debt
                              
                              
                              4,401,635
                              
                              
                              
                              6,000,554Less
      current portion
                              
                              
                              1,443,934
                              
                              
                              
                              1,688,845Total
      debt, less current portion
                              
                              $
                              2,957,701
                              
                              
                              $
                              4,311,709





For the
three months ended March 31, 2009 and 2008, the Company made principal
repayments of $1.6 million and $1.5 million, respectively.  Otherwise,
there were no new issuances of debt during the three months ended March 31,
2009.





(11)
            Related Party
      Transactions





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





The
Company participated in transactions with the following entities affiliated
through common ownership and management.  The Audit Committee of the
Board reviewed and approved in advance all of these related party transactions
in accordance with its written charter.





S3 Integration, LLC S3
Integration LLC (S3 Integration) is owned 15% 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, LLC
(Chesapeake Systems) is 9% owned and significantly indebted to the Company’s
Chief Executive Officer. Chesapeake Systems is a manufacturers’ representative
and distributor of mechanical and electrical equipment.





Chesapeake Mission Critical,
LLC (Chesapeake MC) is 9% owned 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.





CTS Services, LLC (CTS) is 55%
owned by the Company’s Chief Executive Officer and was 5% owned by the Company’s
former Treasurer until the sale of his interest on December 31, 2008. 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. (Cranston) was 25% owned by
the Company’s Chief Executive Officer until the sale of his interest on February
28, 2009. Cranston is a mechanical, electrical and plumbing contractor that
acts, directly or through its Subsidiary L.H. Cranston and Sons, Inc., as
subcontractor to the Company on a project-by-project basis.





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




8







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 Company had an independent valuation, which determined the
lease to be at fair value.




The
following table sets forth transactions the Company has entered into with the
above related parties for the three months ended March 31, 2009 and
2008.  It should be noted that revenue represents amounts earned on
contracts with related parties under which we provide services; and cost of
revenue represents costs incurred in connection with related parties which
provide services to us on contracts for our customers. As such a direct
relationship to the revenue and cost of revenue information below by Company
should not be expected.





Three Months
                                            
                                            
                                            Three MonthsEnded
                                            
                                            
                                            EndedMarch 31, 2009
                                            
                                            
                                            March 31, 2008RevenueCTS
      Services, LLC
                                            
                                            $
                                            2,000
                                            
                                            
                                            $
                                            106,049Chesapeake
      Mission Critical, LLC
                                            
                                            
                                            139,273
                                            
                                            
                                            
                                            29,564Total
                                            
                                            $
                                            141,273
                                            
                                            
                                            $
                                            135,613Cost
      of RevenueCTS
      Services, LLC
                                            
                                            $
                                            620,212
                                            
                                            
                                            $
                                            358,623Chesapeake
      Systems, LLC
                                            
                                            
                                            -
                                            
                                            
                                            
                                            14,910Chesapeake
      Mission Critical, LLC
                                            
                                            
                                            10,030
                                            
                                            
                                            
                                            39,298S3
      Integration, LLC
                                            
                                            
                                            146,961
                                            
                                            
                                            
                                            37,406LH
      Cranston & Sons, Inc.
                                            
                                            
                                            258,897
                                            
                                            
                                            
                                            -Telco
      P&C, LLC
                                            
                                            
                                            12,696
                                            
                                            
                                            
                                            -Total
                                            
                                            $
                                            1,048,796
                                            
                                            
                                            $
                                            450,237Selling,
      general and administrativeOffice
      rent paid on Chesapeake sublease agmt
                                            
                                            
                                            81,705
                                            
                                            
                                            
                                            57,508Office
      rent paid to TPR Group Re Three, LLC
                                            
                                            
                                            100,927
                                            
                                            
                                            
                                            97,691Total
                                            
                                            $
                                            182,632
                                            
                                            
                                            $
                                            155,199
 
 March 31,
                              
                              
                              December 31,2009
                              
                              
                              2008Accounts
      receivable/(payable):CTS
      Services, LLC
                              
                              $
                              43,247
                              
                              
                              $
                              50,437CTS
      Services, LLC
                              
                              
                              (542,302
                              )
                              
                              
                              (584,460
                              )Chesapeake
      Mission Critical, LLC
                              
                              
                              86,170
                              
                              
                              
                              15,900Chesapeake
      Mission Critical, LLC
                              
                              
                              (27,723
                              )
                              
                              
                              -Telco
      P&C, LLC
                              
                              
                              (1,150
                              )
                              
                              
                              (21,154
                              )LH
      Cranston & Sons, Inc.
                              
                              
                              (68,763
                              )
                              
                              
                              (67,455
                              )S3
      Integration, LLC
                              
                              
                              (44,910
                              )
                              
                              
                              (53,630
                              )Total
      Accounts receivable
                              
                              $
                              129,417
                              
                              
                              $
                              66,337Total
      Accounts (payable)
                              
                              $
                              (684,848
                              )
                              
                              $
                              (726,699
                              )





9





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





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




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





Business
Formation and Overview




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




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




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





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





Competition
in Current Economic Environment





Our
industry has been and may be further adversely impacted by the current economic
environment and tight credit conditions.  We have seen larger
competitors seek to expand their services offerings including a focus in
mission-critical market.  These larger competitors have an
infrastructure and support greater than ours and accordingly, we have begun
to experience some price pressure as some companies are willing to take on
projects at lower margins. With certain customers, we have experienced a
delay in spending, or deferral of projects to an indefinite commencement date
due to the economic uncertainty or lack of access to capital.  This
type of delay was demonstrated by our largest customer, which led us to
significantly reduce our backlog by $144.9 million to 63.1 million at
December 31, 2008 although a formal cancellation of contracted amounts has not
been received.




10




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




Although
we will closely monitor our proposal pricing and the volume of the work, we can
not be certain that our current margins will be
sustained.  Furthermore, given the environment, to the extent the
volume of our contracts further decrease, we may have to take additional
measures to reduce our operating costs through additional reductions in general,
administrative and marketing costs, including potential reductions in personnel
and related costs.





Contract
Backlog





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





Backlog
is not a measure defined in generally accepted accounting principles, and our
methodology for determining backlog may not be comparable to the methodology of
other companies in determining their backlog. Our backlog is generally
recognized under two categories: (1) contracts for which work authorizations
have been or are expected to be received on a fixed-price basis, guaranteed
maximum price basis and time and materials basis, and (2) contracts awarded to
us where some, but not all, of the work have not yet been authorized. At March
31, 2009, we had authorizations to proceed with work for approximately $22.9
million, or 50% of our total backlog of $45.5 million. At December 31, 2008, we
had authorizations to proceed with work for approximately $51.6 million, or 82%
of our total backlog of $63.1 million. Additionally, approximately $32.1
million, or 71% of our backlog, relates to three customers at March 31, 2009 and
$36.0 million, or 57%, to one customer at December 31,
2008.




As of
March 31, 2009, our backlog was approximately $45.5 million, compared to
approximately $63.2 million at December 31, 2008. We believe that approximately
47% of the backlog at March 31, 2009 will be recognized during the
next nine months. The following table reflects the value of our backlog in
the above three categories as of March 31, 2009 and December 31, 2008,
respectively.





11





(In
millions)




March 31,
                        
                        
                        December 31,2009
                        
                        
                        2008Technology
      consulting
                        
                        $
                        3.0
                        
                        
                        $
                        4.0Construction
      management
                        
                        
                        32.2
                        
                        
                        
                        48.7Facilities
      management
                        
                        
                        10.3
                        
                        
                        
                        10.5Total
                        
                        $
                        45.5
                        
                        
                        $
                        63.2





Condensed
Consolidated Statements of Operations





(Unaudited)For the Three Months EndedMarch 31, 2009
                            
                            
                            March 31, 2008Results
      of Operations:Revenue
                            
                            $
                            30,071,329
                            
                            
                            $
                            19,432,080Cost
      of revenue
                            
                            
                            26,403,191
                            
                            
                            
                            16,020,878Gross
      profit
                            
                            
                            3,668,138
                            
                            
                            
                            3,411,202Operating
      expenses:Selling,
      general and administrative
                            
                            
                            3,853,661
                            
                            
                            
                            4,806,070Depreciation
      and amortization
                            
                            
                            103,422
                            
                            
                            
                            106,877Amortization
      of intangibles
                            
                            
                            692,105
                            
                            
                            
                            755,385Total
      operating costs
                            
                            
                            4,649,188
                            
                            
                            
                            5,668,332Operating  loss
                            
                            
                            (981,050
                            )
                            
                            
                            (2,257,130
                            )Interest
      income (expense), net
                            
                            
                            (35,548
                            )
                            
                            
                            (43,070
                            )Net
      loss
                            
                            $
                            (1,016,598
                            )
                            
                            $
                            (2,300,200
                            )





Critical
Accounting Policies and Estimates





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




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




Revenue Recognition




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




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


12




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




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





Allowance
for Doubtful Accounts





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




As of
March 31, 2009, accounts receivable of $1.8 million is due from two
customers to whom we offered extended payment terms.  During the first
quarter 2009, we executed a note receivable for $0.8 million which has a
six-month repayment schedule.  In April 2009, we received $200,000,
plus the first of six remaining payments on the new note issued in the first
quarter of 2009.





During
the second quarter 2008, we recognized a $0.7 million loss on customer
contract due to concerns as to whether the amounts due from this customer were
collectible. During the three months ended March 31, 2009, we finalized a
contract assignment totaling $0.3 million to two vendors that were included in
the prior year loss estimate.   As the vendors will pursue a
collection remedy independently and without recourse to us per the terms of
the assignment, we recorded an associated reduction to cost of sales of
$0.3 million during the three months ended March 31, 2009.





Non-cash
Compensation




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




Goodwill
and Other Purchased Intangible Assets




Goodwill
represents the excess of costs over fair value of net assets of businesses
acquired. Other purchased intangible assets include the fair value of items such
as customer contracts, backlog and customer relationships. 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 triggering event. Purchased intangible assets
with a definite useful life are amortized on a straight-line basis over their
estimated useful lives.




The
estimated fair market value of identified intangible assets is amortized over
the estimated useful life of the related intangible asset. We have a process
pursuant to which we typically retain third-party valuation experts to assist us
in determining the fair market values and useful lives of identified intangible
assets. 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.




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, 2009 are fully
realizable.




13




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 has concluded that the adoption of
FIN 48 had no material effect on our financial position or results of
operations. As of March 31, 2009, we do not have any material gross
unrecognized tax benefit liabilities.




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




Recently
Issued Accounting Pronouncements




On
April 1, 2009, Financial Accounting Standards Board (FASB) Staff Position
(FSP) No.141(R)-1, Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, or FSP 141(R)-1, was issued. FSP 141(R)-1 amends and
clarifies FASB Statement No. 141 (revised 2007), Business Combinations (SFAS
141(R)) to address application issues raised by preparers, auditors and members
of the legal profession on initial recognition and measurement, subsequent
measurement and accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. FSP 141(R)-1 applies to all assets
acquired and liabilities assumed in a business combination that arise from
contingencies that would be within the scope of Statement of Financial
Accounting Standards (SFAS) 5, Accounting for Contingencies,
if not acquired or assumed in a business combination, except for assets or
liabilities arising from contingencies that are subject to specific guidance in
SFAS 141(R). An acquirer should recognize at fair value, at the acquisition
date, an asset acquired or a liability assumed in a business combination that
arises from a contingency if the acquisition-date fair value of that asset or
liability can be determined during the measurement period. An acquirer should
disclose information that enables users of its financial statements to evaluate
the nature and financial effects of a business combination that occurs either
during the current reporting period or after the reporting period but before the
financial statements are issued. FSP 141(R)-1 is effective for assets or
liabilities arising from contingencies in business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.




The SEC
issued a final rule, RIN 3235-AJ71 Interactive Data to Improve
Financial Reporting, requiring companies to provide financial statement
information in a form that is intended to improve its usefulness to investors.
This final rule applies to public companies and foreign private issuers that
prepare their financial statements in accordance with GAAP and foreign private
issuers that prepare their financial statements using International Financial
Reporting Standards (IFRS). Companies will provide their financial statements to
the SEC and on their corporate website in interactive data format using
eXtensible Business Reporting Language (XBRL). The interactive data will be
provided as an exhibit to periodic and current reports and registration
statements, as well as to transition reports for a change in fiscal year. We
will be required to submit an interactive data file starting in June 30,
2011.




In
November 2008, the SEC issued for comment a proposed roadmap regarding the
potential use by U.S. issuers of financial statements prepared in accordance
with IFRS. IFRS is a comprehensive series of accounting standards published by
the International Accounting Standards Board (IASB). Under the proposed roadmap,
we could be required in fiscal 2016 to prepare financial statements in
accordance with IFRS. The SEC will make a determination in 2011 regarding the
mandatory adoption of IFRS. We are currently assessing the impact that this
potential change would have on our condensed consolidated financial statements
and we will continue to monitor the development of the potential implementation
of IFRS.





14




Results
of operations for the three months ended March 31, 2009 compared with the
three months ended March 31, 2008.





Revenue. Revenue increased
$10.7 million to $30.1 million for the three months ended March 31, 2009 from
$19.4 million for the three months ended March 31, 2008. The increase is
primarily driven by a $10.1 million increase in construction management
services, which included revenue from a quick-build project that started late in
the fourth quarter of 2008 and continued through the first quarter
2009.  The remaining increase of approximately $0.6 million is
attributable to an increase in revenue from technology services.





Cost of Revenue. Cost of
revenue increased $10.4 million to $26.4 million for the three months ended
March 31, 2009 from $16.0 million for the three months ended March 31, 2008. The
increase is primarily driven by a $10.2 million increase in construction
management services, which included a quick-build project that started late in
the fourth quarter of 2008 and continued through the first quarter of
2009.




Gross Margin Percentage.
Gross margin percentage declined to 12.2% for the three months ended March 31,
2009 compared to 17.6% for the three months ended March 31, 2008. The decline in
gross margin is attributable to contraction in gross margin percentage in the
construction management services, which decreased by 6.2% to 8.9% for the three
months ended March 31, 2009 from 15.1% for the three months ended March 31,
2008.  The decline in gross margin for construction management
services is due to the competitive environment in which we have contracted work
at lower than historic margins.





Selling, general and administrative
expenses.  Selling, general and administrative expenses
decreased $0.9 million to $3.9 million for the three months ended March 31, 2009
from $4.8 million for the three months ended March 31, 2008. The decrease is
primarily driven by   $0.7 million decrease in salaries due to a
reduction in headcount and an increase in utilization.  The remaining
decline is attributable to a reduction in professional fees and
travel.  To the extent we continue to experience delays in the timing
of revenues associated with certain customers and lower margins, we may take
additional actions to reduce operating costs associated with personnel and
related costs.




Depreciation.
Depreciation remained consistent at $0.1 million for the three months
ended March 31, 2009 compared to $0.1 million for the three months
ended March 31, 2008.




Amortization of intangible
assets. Amortization expense decreased $0.1 million to $0.7 million for
the three months ended March 31, 2009 from $0.8 million for the three
months ended March 31, 2008. The slight decrease in amortization expense was
attributable to the fact that our existing contracts intangibles which were
fully amortized in 2008.





Interest income (expense),
net. Our interest income (expense), net remained consistent at ($35,548)
for the three months ended March 31, 2009 compared to ($43,070) for the three
months ended March 31, 2008.





15




Financial
Condition, Liquidity and Capital Resources





For the Three Months Ended March 31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    ChangeNet
      loss
                                    
                                    $
                                    (1,016,598
                                    )
                                    
                                    $
                                    (2,300,200
                                    )
                                    
                                    $
                                    1,283,602Adjustments
      to reconcile net loss to net cashused
      in operations:Amortization
      of intangibles
                                    
                                    
                                    692,105
                                    
                                    
                                    
                                    857,310
                                    
                                    
                                    
                                    (165,205
                                    )Stock
      and warrant-based compensation
                                    
                                    
                                    483,689
                                    
                                    
                                    
                                    357,746
                                    
                                    
                                    
                                    125,943Extinguishment
      of contract liabilities
                                    
                                    
                                    (269,217
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (269,217
                                    )Other
      non-cash items
                                    
                                    
                                    129,955
                                    
                                    
                                    
                                    161,877
                                    
                                    
                                    
                                    (31,922
                                    )Net
      adjustments to reconcile net income for non-cash items
                                    
                                    
                                    1,036,532
                                    
                                    
                                    
                                    1,376,933
                                    
                                    
                                    
                                    (340,401
                                    )Net
      change in working capital
                                    
                                    
                                    (2,525,739
                                    )
                                    
                                    
                                    285,393
                                    
                                    
                                    
                                    (2,811,132
                                    )Cash
      used in operations
                                    
                                    
                                    (2,505,805
                                    )
                                    
                                    
                                    (637,874
                                    )
                                    
                                    
                                    (1,867,931
                                    )Cash
      used in investing
                                    
                                    
                                    (66,147
                                    )
                                    
                                    
                                    (2,607,181
                                    )
                                    
                                    
                                    2,541,034Cash
      used in financing
                                    
                                    
                                    (1,598,919
                                    )
                                    
                                    
                                    (1,535,325
                                    )
                                    
                                    
                                    (63,594
                                    )Net
      decrease in cash
                                    
                                    $
                                    (4,170,871
                                    )
                                    
                                    $
                                    (4,780,380
                                    )
                                    
                                    $
                                    609,509





Cash and
cash equivalents decreased $4.2 million to $8.3 million at March 31, 2009 from
$12.4 million at December 31, 2008. The decrease was primarily attributable to
$2.5 million used in operating activities, $0.1 million for investing
activities, and $1.6 million used in the repayment of notes
payable.





Operating
Activity





Net cash
used in operations operating activities totaled $2.5 million for the three
months ended March 31, 2009 compared to $0.6 million for the three months ended
March 31, 2008. The decrease in operating cash flow was primarily attributable
to a $2.8 million decrease in working capital, partially offset by decrease in
net loss of $1.3 million.  The decrease in working capital was due to
changes is contracts receivable and billings in excess, partially offset
by changes in accounts payable in accrued expenses.





Investing
Activity





Net cash
used in investing activities decreased $2.5 million to $0.1 million for the
three months ended March 31, 2009 from $2.6 million for the three months ended
March 31, 2008.  For the three months ended March 31, 2009, cash was
used for acquisition of property and equipment.  For the three months
ended March 31, 2008, cash used for acquisitions and related activity totaled
$2.5 million due primarily to the SMLB acquisition.




Financing
Activity




Net cash
used in financing increased $0.1 million to $1.6 million for the three months
ended March 31, 2009 from $1.5 million for the three months ended March 31,
2008.  For the three months ended March 31, 2009 and 2008 seller note
repayments totaled $1.6 million and $1.5 million, respectively.




16





Non-Cash
Activity





There was no non-operating, non-cash
activity during the three months ended March 31, 2009.  During the three months ended March
31, 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.





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
March 31, 2009, we do not have any off balance sheet arrangements.





Item
3. Quantitative and Qualitative Disclosures about Market Risk.









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, 2009. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that as of March 31, 2009, our
disclosure controls and procedures were ineffective.





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 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act
of 1934, as amended.




17




PART
II - OTHER INFORMATION





Item
1. Legal Proceedings.


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


Item
1A. Risk Factors.




In
addition to the other information set forth in this Form 10-Q, you should
carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in
our Annual Report on Form 10-K for the year ended December 31, 2008, which
could materially affect our business, financial condition or future results. The
risks described in our Annual Report on Form 10-K are not the only risks that we
face. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
  SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  This
Quarterly Report on Form 10-Q and, in particular, our Management’s Discussion
and Analysis of Financial Condition and Results of Operations set forth in Part
I—Item 2 contain or incorporate a number of forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act including statements regarding:
 
 ·
              deliver services and products
      that meet customer demands and generate acceptable
      margins;
 
 ·
              increase sales volume by
      attracting new customers, retaining existing customers and growing the
      overall number of customers to minimize a significant portion of our
      revenues being dependent on a limited number of
      customers;
 
 ·
              risks relating to revenues and
      backlog under customer contracts, many of which can be cancelled on short
      notice;
 
 ·
              manage and meet contractual terms
      of complex projects;
 
 ·
              uncertainty related to current
      economic conditions;
 
 ·
              attract and retain qualified
      management and other
personnel;
 
 ·
              demand for our services and
      products;
 
 ·
              meet all of the terms and
      conditions of our debt obligations;
and
 
 ·
              our
    liquidity.
  Any or
all of our forward-looking statements in this Quarterly Report on Form 10-Q may
turn out to be wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors mentioned in
our discussion in this Quarterly Report on Form 10-Q will be important in
determining future results. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially.
  Without
limiting the foregoing, the words “believes,” “anticipates,” ”plans,” “expects”
and similar expressions are intended to identify forward-looking statements.
There are a number of factors that could cause actual events or results to
differ materially from those indicated by such forward-looking statements, many
of which are beyond our control, including the factors set forth under “Item 1A.
Risk Factors” of our 2008 Annual Report on Form 10-K, as updated or supplemented
by this Quarterly Report on Form 10-Q. In addition, the forward-looking
statements contained herein represent our estimate only as of the date of this
filing and should not be relied upon as representing our estimate as of any
subsequent date. While we may elect to update these forward-looking statements
at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions
or changes in other factors affecting such forward-looking
statements.





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




Not
applicable.





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.




Not
applicable.





Item
6. Exhibits.




10.1
                  Form
      of Restricted Stock Unit Agreement (previously filed with the Securities
      and Exchange Commission as Exhibit 10.14 to the Company’s Annual Report on
      Form 10-K filed on March 31, 2009 and incorporated herein by
      reference).31.1*
                  Certification
      of Fortress International Group, Inc. Chief Principal Executive Officer
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2*
                  Certification
      of Fortress International Group, Inc. Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32.1‡
                  Certification
      of Fortress International Group, Inc. Chief Executive Officer and Chief
      Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.







* Filed
herewith.


‡
Furnished herewith.





18




SIGNATURES




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





FORTRESS
      INTERNATIONAL GROUP, INC.Date:
      May 14, 2009
                  By:
                  /s/
      Thomas P. RosatoThomas
      P. RosatoChief
      Executive Officer (Authorized Officer and Principal Executive
      Office)




Date:
      May14, 2009
                    By:
                    /s/
      Timothy C. DecTimothy
      C. DecChief
      Financial Officer (Authorized Officer and Principal Financial
      Officer)




19