UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




(Mark
One)




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





For the
quarterly period ended June 30, 2010





or




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





Commission
file number: 000-51426








FORTRESS
INTERNATIONAL GROUP, INC.


(Exact name of registrant as specified in its charter)





Delaware
                
                20-2027651(State
      or other jurisdiction of
                  incorporation
      or organization)
                
                (I.R.S.
      Employer Identification No.)7226
      Lee DeForest Drive, Suite 209
                  Columbia,
      Maryland
                
                21046(Address
      of principal executive offices)
                
                (Zip
      Code)





(410)
423-7300


(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 Securities 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  ̈




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  
 ̈   No 
 ̈




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




Large
      accelerated filer  ̈
                Accelerated
      filer  ̈Non-accelerated
      filer  ̈ (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  ̈ 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 August 1,
2010                14,268,494











FORTRESS
INTERNATIONAL GROUP, INC.


Table
of Contents





PagePART
      I - FINANCIAL INFORMATIONItem
      1.      Financial StatementsCondensed
      Consolidated Balance Sheets as of June 30, 2010 and as of December 31,
      2009
                        1Condensed
      Consolidated Statements of Operations for the three and six months ended
      June 30, 2010 and June 30, 2009
                        2Condensed
      Consolidated Statements of Cash Flows for the six months ended June 30,
      2010 and June 30, 2009
                        3Notes
      to Condensed Consolidated Financial Statements
                        4Item
      2.      Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
                        11Item
      3.      Quantitative and Qualitative Disclosures
      about Market Risk
                        18Item
      4T.   Controls and Procedures
                        18PART
      II - OTHER INFORMATIONItem
      1.      Legal Proceedings
                        19Item
      1A.   Risk Factors
                        19Item
      2.      Unregistered Sales of Equity Securities
      and Use of Proceeds
                        19Item
      3.      Defaults upon Senior
      Securities
                        20Item
      4.      Removed and reserved.
                        20Item
      5.      Other Information
                        20Item
      6.      Exhibits
                        20SIGNATURES
                        21







PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements





FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS






(Unaudited)June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009Current
      AssetsCash
      and cash equivalents
                  
                  $
                  9,545,263
                  
                  
                  $
                  2,263,146Contract
      and other receivables, net
                  
                  
                  10,723,968
                  
                  
                  
                  14,196,772Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                  
                  
                  1,424,429
                  
                  
                  
                  1,056,543Prepaid
      expenses and other current assets
                  
                  
                  1,138,137
                  
                  
                  
                  1,007,371Total
      current assets
                  
                  
                  22,831,797
                  
                  
                  
                  18,523,832Property
      and equipment, net
                  
                  
                  497,457
                  
                  
                  
                  612,569Goodwill
                  
                  
                  3,811,127
                  
                  
                  
                  3,811,127Other
      intangible assets, net
                  
                  
                  60,000
                  
                  
                  
                  60,000Other
      assets
                  
                  
                  54,248
                  
                  
                  
                  246,218Total
      assets
                  
                  $
                  27,254,629
                  
                  
                  $
                  23,253,746Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesNotes
      payable, current portion
                  
                  $
                  294,646
                  
                  
                  $
                  183,679Accounts
      payable and accrued expenses
                  
                  
                  9,051,957
                  
                  
                  
                  8,038,658Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                  
                  
                  9,203,563
                  
                  
                  
                  6,536,752Total
      current liabilities
                  
                  
                  18,550,166
                  
                  
                  
                  14,759,089Notes
      payable, less current portion
                  
                  
                  -
                  
                  
                  
                  152,343Convertible
      notes, less current portion
                  
                  
                  2,750,000
                  
                  
                  
                  4,000,000Other
      liabilities
                  
                  
                  165,510
                  
                  
                  
                  186,905Total
      liabilities
                  
                  
                  21,465,676
                  
                  
                  
                  19,098,337Commitments
      and Contingencies
                  
                  
                  -
                  
                  
                  
                  -Stockholders’
      EquityPreferred
      stock- $.0001 par value; 1,000,000 shares authorized; no shares issued or
      outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock- $.0001 par value, 100,000,000 shares authorized; 13,882,738 and
      13,142,962 issued; 13,415,580 and 12,846,709 outstanding at June 30, 2010
      and December 31, 2009, respectively
                  
                  
                  1,381
                  
                  
                  
                  1,314Additional
      paid-in capital
                  
                  
                  65,048,073
                  
                  
                  
                  63,442,796Treasury
      stock 467,158 and 296,253 shares at cost at June 30, 2010 and December 31,
      2009, respectively
                  
                  
                  (1,076,009
                  )
                  
                  
                  (959,971
                  )Accumulated
      deficit
                  
                  
                  (58,184,492
                  )
                  
                  
                  (58,328,730
                  )Total
      stockholders' equity
                  
                  
                  5,788,953
                  
                  
                  
                  4,155,409Total
      liabilities and stockholders’ equity
                  
                  $
                  27,254,629
                  
                  
                  $
                  23,253,746




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


1




FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS








(Unaudited)
                            
                            
                            (Unaudited)For the Three Months Ended
                            
                            
                            For the Six Months EndedJune 30, 2010
                            
                            
                            June 30, 2009
                            
                            
                            June 30, 2010
                            
                            
                            June 30, 2009Results
      of Operations:Revenue
                            
                            $
                            22,654,415
                            
                            
                            $
                            12,087,200
                            
                            
                            $
                            39,769,907
                            
                            
                            $
                            29,005,620Cost
      of revenue
                            
                            
                            19,454,452
                            
                            
                            
                            10,637,715
                            
                            
                            
                            34,105,423
                            
                            
                            
                            24,724,536Gross
      profit
                            
                            
                            3,199,963
                            
                            
                            
                            1,449,485
                            
                            
                            
                            5,664,484
                            
                            
                            
                            4,281,084Operating
      expenses:Selling,
      general and administrative
                            
                            
                            2,649,436
                            
                            
                            
                            4,157,981
                            
                            
                            
                            5,269,841
                            
                            
                            
                            7,652,131Depreciation
      and amortization
                            
                            
                            92,321
                            
                            
                            
                            103,719
                            
                            
                            
                            187,800
                            
                            
                            
                            205,820Amortization
      of intangibles
                            
                            
                            -
                            
                            
                            
                            455,826
                            
                            
                            
                            -
                            
                            
                            
                            912,902Impairment
      loss on goodwill and other intangibles
                            
                            
                            -
                            
                            
                            
                            10,254,910
                            
                            
                            
                            -
                            
                            
                            
                            10,254,910Total
      operating costs
                            
                            
                            2,741,757
                            
                            
                            
                            14,972,436
                            
                            
                            
                            5,457,641
                            
                            
                            
                            19,025,763Operating
      income (loss)
                            
                            
                            458,206
                            
                            
                            
                            (13,522,951
                            )
                            
                            
                            206,843
                            
                            
                            
                            (14,744,679
                            )Interest
      income (expense), net
                            
                            
                            (23,816
                            )
                            
                            
                            (52,271
                            )
                            
                            
                            (62,605
                            )
                            
                            
                            (88,060
                            )Income
      (loss) from continuing operations before income taxes
                            
                            
                            434,390
                            
                            
                            
                            (13,575,222
                            )
                            
                            
                            144,238
                            
                            
                            
                            (14,832,739
                            )Income
      tax expense
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Net
      income (loss) from continuing operations
                            
                            
                            434,390
                            
                            
                            
                            (13,575,222
                            )
                            
                            
                            144,238
                            
                            
                            
                            (14,832,739
                            )Loss
      from discontinued operations, net of taxes
                            
                            
                            -
                            
                            
                            
                            (3,192,459
                            )
                            
                            
                            -
                            
                            
                            
                            (2,951,539
                            )Net
      income (loss)
                            
                            $
                            434,390
                            
                            
                            $
                            (16,767,681
                            )
                            
                            $
                            144,238
                            
                            
                            $
                            (17,784,278
                            )Per
      Common Share (Basic and Diluted):Net
      income (loss) from continuing operations, net of tax
                            
                            $
                            0.03
                            
                            
                            $
                            (1.07
                            )
                            
                            $
                            0.01
                            
                            
                            $
                            (1.17
                            )Loss
      from discontinued operations, net of taxes
                            
                            
                            -
                            
                            
                            
                            (0.25
                            )
                            
                            
                            -
                            
                            
                            
                            (0.23
                            )Net
      income (loss)
                            
                            $
                            0.03
                            
                            
                            $
                            (1.32
                            )
                            
                            $
                            0.01
                            
                            
                            $
                            (1.40
                            )Weighted
      average common shares outstanding-basicBasic
                            
                            
                            13,370,738
                            
                            
                            
                            12,678,381
                            
                            
                            
                            13,193,534
                            
                            
                            
                            12,660,049Diluted
                            
                            
                            14,156,784
                            
                            
                            
                            12,678,381
                            
                            
                            
                            14,010,302
                            
                            
                            
                            12,660,049





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 Six Months EndedJune 30, 2010
                      
                      
                      June 30, 2009Cash
      Flows from Operating Activities:Net
      income (loss)
                      
                      $
                      144,238
                      
                      
                      $
                      (17,784,278
                      )Adjustments
      to reconcile net income (loss) to net cash provided by used in operating
      activities:Depreciation
      and amortization
                      
                      
                      187,800
                      
                      
                      
                      208,459Amortization
      of intangibles
                      
                      
                      -
                      
                      
                      
                      1,382,960Impairment
      loss on goodwill and other intangibles
                      
                      
                      -
                      
                      
                      
                      13,062,140Provision
      for doubtful accounts
                      
                      
                      -
                      
                      
                      
                      1,025,000Stock
      and warrant-based compensation
                      
                      
                      355,344
                      
                      
                      
                      946,740Extinguishment
      of contract liabilities
                      
                      
                      -
                      
                      
                      
                      (269,217
                      )Other
      non-cash income, net
                      
                      
                      (36,484
                      )
                      
                      
                      2,935Changes
      in operating assets and liabilities:Contracts
      and other receivables
                      
                      
                      3,472,804
                      
                      
                      
                      7,668,648Costs
      and estimated earnings in excess of billings on uncompleted contracts
                      
                      
                      (367,886
                      )
                      
                      
                      1,441,882Prepaid
      expenses and other current assets
                      
                      
                      (248,917
                      )
                      
                      
                      (463,314
                      )Other
      assets
                      
                      
                      191,970
                      
                      
                      
                      (42,617
                      )Accounts
      payable and accrued expenses
                      
                      
                      1,049,783
                      
                      
                      
                      (9,193,492
                      )Billings
      in excess of costs and estimated earnings on   uncompleted contracts
                      
                      
                      2,666,811
                      
                      
                      
                      (2,235,251
                      )Other
      liabilities
                      
                      
                      (21,395
                      )
                      
                      
                      (83,507
                      )Net
      cash provided by (used in) operating activities
                      
                      
                      7,394,068
                      
                      
                      
                      (4,332,912
                      )Cash
      Flows from Investing Activities:Purchase
      of property and equipment
                      
                      
                      (72,688
                      )
                      
                      
                      (94,897
                      )Proceeds
      from repayment of note in connection with the sale of certain assets and
      liabilities of Rubicon
                      
                      
                      118,151Payment
      of earnout in connection with the acquisition of Rubicon
                      
                      
                      -
                      
                      
                      
                      (700,000
                      )Payment
      of earnout in connection with the acquisition of
Innovative
                      
                      
                      -
                      
                      
                      
                      (353,187
                      )Net
      cash provided by (used in) investing activities
                      
                      
                      45,463
                      
                      
                      
                      (1,148,084
                      )Cash
      Flows from Financing Activities:Payments
      on notes payable
                      
                      
                      (4,915
                      )
                      
                      
                      (27,511
                      )Payment
      on seller notes
                      
                      
                      (36,461
                      )
                      
                      
                      (1,672,420
                      )Purchase
      of treasury stock
                      
                      
                      (116,038
                      )
                      
                      
                      -Net
      cash used in financing activities
                      
                      
                      (157,414
                      )
                      
                      
                      (1,699,931
                      )Net
      increase (decrease) in cash
                      
                      
                      7,282,117
                      
                      
                      
                      (7,180,927
                      )Cash,
      beginning of period
                      
                      
                      2,263,146
                      
                      
                      
                      12,448,157Cash,
      end of period
                      
                      $
                      9,545,263
                      
                      
                      $
                      5,267,230Less:
      Cash associated with discontinued operations
                      
                      
                      -
                      
                      
                      
                      889,920Cash,
      end of period from continuing operations
                      
                      $
                      9,545,263
                      
                      
                      $
                      4,377,310Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                      
                      $
                      85,950
                      
                      
                      $
                      126,444Cash
      paid for taxes
                      
                      
                      -
                      
                      
                      
                      116,411Supplemental
      disclosure of non-cash financing activities:Promissory
      notes, issued to an officer, converted to commonstock
                      
                      $
                      1,250,000
                      
                      
                      $
                      -Promissory
      notes payable issued in connection with the acquisition of
      Rubicon
                      
                      
                      -
                      
                      
                      
                      550,000




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


3




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(1)
            Basis of
      Presentation




The
unaudited condensed consolidated financial statements are for the three and
six months ended June 30, 2010 and 2009 for Fortress International Group,
Inc. (“Fortress” or the “Company” or “We”).




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 year ended December 31,
2009, 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 provides a single source solution for highly technical mission-critical
facilities such as data centers, operations centers, network facilities, server
rooms, security operations centers, communications facilities and the
infrastructure systems that are critical to their function. The Company’s
services consist of technology consulting, design and engineering, construction
management, systems installations and facilities management.





During
the year ended December 31, 2009, the Company experienced a significant and
unexpected decrease in its revenues, caused by delays in starting projects or
cancellations thereof resulting in a significant loss and negative cash flows
from operations.  The Company has taken actions to address the
liquidity concerns that this caused.





Based on
an unexpected lack of closed contracts and continued customer delays experienced
during 2009, management revised our financial forecast and implemented selling,
general and administrative cost cutting measures with an approximate annual
savings of $2.2 million.  In an effort to achieve positive cash flows
from operations and align costs with forecasted revenues in the future, the
Company voluntarily delisted from the NASDAQ Capital Market in March 2010 to
reduce professional fees and other costs necessary to maintain a listing on the
NASDAQ Capital Market.





Due to
the downturn in the economy, which had an adverse impact on the Company’s
existing customers, financial security and stock value, the Company suspended
its strategy of growth through acquisitions in 2009.  The corporate
focus is centered on preserving cash, achieving positive cash flow and
discontinuing or selling operations that threatened that focus.   The
Company engaged an investment bank to assist it in evaluating various
disposition and financial alternatives, which culminated in the sale of the
Rubicon division to its management and former owners on December 29,
2009.  The Company is no longer actively evaluating the disposition of
assets as its improved operating results and prospects based on improvements we
have seen in our operating environment.





The
Company further sought to restructure scheduled debt repayments with its
creditors.  In addition to the added liquidity from the proceeds of the
sale of Rubicon, the Company eliminated scheduled debt repayments through debt
forgiveness of approximately $0.5 million to the former sellers of Rubicon. On
February 28, 2010, the Company improved its net worth through the principal
conversion of $1.3 million of principal due on a seller note to Mr. Gerard
Gallagher, our Chief Operating Officer (COO).  Furthermore, the principal
repayment of the remaining $2.8 million originally scheduled to begin payment on
March 1, 2010 was amended to begin in the second quarter of 2012.  As a
result of these note restructurings, at December 31, 2009 short term debt
obligations were reduced $2.3 million and in turn our short-term liquidity
substantially improved.





As a
result of the cost reduction efforts to realign operations with decreased
anticipated revenues, the added liquidity from the sale of Rubicon, and the
financial restructuring of the $4.0 million seller note, management believes
that our current cash and cash equivalents and expected future cash generated
from operations will satisfy the Company’s expected working capital, capital
expenditure and investment requirements through the next twelve
months.


4




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Recently
Issued Accounting Pronouncements




In
October 2009, Accounting Standards Update No. 2009-13, Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue
Arrangementsa consensus of the FASB Emerging Issues Task Force was
issued. The objective of this Update is to address the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. Vendors often
provide multiple products or services to their customers. Those deliverables
often are provided at different points in time or over different time periods.
Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, establishes
the accounting and reporting guidance for arrangements under which the vendor
will perform multiple revenue-generating activities. Specifically, this Subtopic
addresses how to separate deliverables and how to measure and allocate
arrangement consideration to one or more units of accounting. The amendments in
this Update will affect accounting and reporting for all vendors that enter into
multiple-deliverable arrangements with their customers when those arrangements
are within the scope of ASC Subtopic 605-25. The amendments in this Update
significantly expand the disclosures related to a vendor’s multiple-deliverable
revenue arrangement. The objective of the disclosures is to provide information
about the significant judgments made and changes to those judgments and about
the application of the relative selling-price method affects the timing of the
revenue recognition. The amendments in this Update will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. The Company does not anticipate that the adoption of this standard
will have any significant impact on its results of operations or financial
position.


5




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(2)
            Accounts Receivable,
      net





The
Company had accounts receivable allowances for doubtful accounts of $0.5
million at June 30, 2010 and December 31, 2009.  Bad debt expense for the
three and six months ended June 30, 2010 and 2009 was zero and $1.0 million,
respectively.





Included
in accounts receivable was retainage associated with construction projects
totaling $1.9 million and $0.5 million at June 30, 2010 and December 31, 2009,
respectively.





The
Company earned approximately 74% and 45% of its revenue from two customers for
the three months ended June 30, 2010 and 2009, respectively.  The
Company earned approximately 72% and 46% of its revenue from two and three
customers for the six months ended June 30, 2010 and 2009,
respectively.  Accounts receivable from these customers at June 30,
2010 and December 31, 2009 was $3.2 million and $8.1 million,
respectively.





Additionally,
a customer, comprising 60% and 64% of the Company’s total revenue for the three
and six months ended June 30, 2010, respectively, was purchased in the second
quarter of 2010.   We are unable determine the effect the merger may
have on continued business with our customer.





(3)
            Extinguishment of
      Liabilities




During
the six months ended June 30, 2009, the Company finalized the extinguishment of
approximately $0.3 million.  During 2009, pursuant to a contract
assignment, two different subcontractors relieved the Company of its obligation
due to these vendors which had been previously recorded by the
Company.  The Company’s customer has not made payments under the
contract and these vendors will pursue collection remedy independently and
without recourse to the Company pursuant to the terms of the contract
assignment. The Company recorded the extinguishment of liabilities for the
amount due to these two vendors as a reduction to accounts payable and a
reduction to cost of sales of $0.3 million during the six months ended June 30,
2009.





(4)
            Discontinued
      Operations




On
December 29, 2009, the Company completed the sale of substantially all of the
assets and liabilities of Rubicon for total consideration of $1.8 million
consisting of $0.8 million in cash proceeds, net of transaction costs, a $0.6
million note receivable and $0.4 million in forgiveness of actual obligations
and potential liabilities related to 2008 and 2009 earn-outs to the former
owners and management of Rubicon.   The Company is in the process
of reviewing the buyer’s working capital calculation as outlined in the purchase
agreement and received scheduled note payments through July
2010.  Additionally, the Company is entitled to contingent
consideration in the form of an earn-out equal to 7.5% of gross profit on
designated projects during a one year period commencing on the close
date.  At June 30, 2010, the Company had not recorded any contingent
consideration associated with this earn-out.




For all
periods presented, the Company classified Rubicon, which focused on construction
management and equipment integration, as discontinued operations as the Company
has no ongoing involvement with the business component that has distinguishable
operations and financials from the rest of the entity.  We sold this
business to enhance the Company’s liquidity, while maintaining similar service
capabilities. Associated results of operations, financial position and cash
flows are separately reported for all periods presented.




Information
for business components included in discontinued operations is as
follows:




For
      the Three Months Ended
                    
                    
                    For
      the Six Months EndedJune 30, 2009
                    
                    
                    June 30, 2009Revenue
                    
                    $
                    2,852,222
                    
                    
                    $
                    16,005,130Loss
      from operations of discontinued businesses, before taxes
                    
                    
                    (3,192,459
                    )
                    
                    
                    (2,951,539
                    )Income
      tax expense
                    
                    
                    -
                    
                    
                    
                    -Loss
      from operations of discontinued businesses
                    
                    $
                    (3,192,459
                    )
                    
                    $
                    (2,951,539
                    )




6





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(5)
              Basic and Diluted Net Loss per
      Share





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





Three
      Months Ended June 30,2010
                                
                                
                                2009Income
                                
                                
                                Shares
                                
                                
                                $ per
                                  Share
                                
                                
                                Income
                                
                                
                                Shares
                                
                                
                                $ per
                                  ShareBASIC
      EARNINGS (LOSS) PER SHAREIncome
      (loss) from continuing operations
                                
                                $
                                434,390
                                
                                
                                
                                13,370,738
                                
                                
                                $
                                0.03
                                
                                
                                $
                                (13,575,222
                                )
                                
                                
                                12,678,381
                                
                                
                                $
                                (1.07
                                )EFFECT
      OF DILUTIVE SECURITIESUnvested
      restricted stock
                                
                                
                                -
                                
                                
                                
                                786,046
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -DILUTED
      EARNINGS (LOSS) PER SHARE
                                
                                $
                                434,390
                                
                                
                                
                                14,156,784
                                
                                
                                $
                                0.03
                                
                                
                                $
                                (13,575,222
                                )
                                
                                
                                12,678,381
                                
                                
                                $
                                (1.07
                                )




Six
      Months Ended June 30,2010
                                    
                                    
                                    2009Income
                                    
                                    
                                    Shares
                                    
                                    
                                    $ per
                                      Share
                                    
                                    
                                    Income
                                    
                                    
                                    Shares
                                    
                                    
                                    $ per
                                      ShareBASIC
      EARNINGS (LOSS) PER SHAREIncome
      (loss) from continuing operations
                                    
                                    $
                                    144,238
                                    
                                    
                                    
                                    13,193,534
                                    
                                    
                                    $
                                    0.01
                                    
                                    
                                    $
                                    (14,832,739
                                    )
                                    
                                    
                                    12,660,049
                                    
                                    
                                    $
                                    (1.17
                                    )EFFECT
      OF DILUTIVE SECURITIESUnvested
      restricted stock
                                    
                                    
                                    -
                                    
                                    
                                    
                                    816,768
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -DILUTED
      EARNINGS (LOSS) PER SHARE
                                    
                                    $
                                    144,238
                                    
                                    
                                    
                                    14,010,302
                                    
                                    
                                    $
                                    0.01
                                    
                                    
                                    $
                                    (14,832,739
                                    )
                                    
                                    
                                    12,660,049
                                    
                                    
                                    $
                                    (1.17
                                    )


Unvested
restricted stock units and options to purchase shares of common stock for 87,167
and 700,000 shares of common stock, respectively, that were outstanding at June
30, 2010 were not included in the computation of diluted net loss per common
share for the three and six months ended June 30, 2010, as they either vest at
$3.00 per share or were out of the money.  Additionally, for the three
and six months ended June 30, 2010, all convertible notes were omitted from the
earnings per share calculation because the effect of conversion would be
anti-dilutive.





Unvested
restricted stock, convertible unsecured promissory notes, options to purchase
units and warrants for 715,337, 533,333, 700,000 and 15,710,300 shares of common
stock, respectively, that were outstanding at June 30, 2009 were not included in
the computation of diluted net loss per common share for the three and six
months ended June 30, 2009, as their inclusion would be
anti-dilutive.





(6)
            Employee Benefit
      Plans





Restricted
Stock




For the
three months ended June 30, 2010 and 2009, the Company recorded non-cash
compensation expense included in selling, general and administrative expense
associated with vesting awards of $0.2 million and $0.4 million, respectively,
and in cost of revenue recorded zero and $0.1 million,
respectively.





For the
six months ended June 30, 2010 and 2009, the Company recorded non-cash
compensation expense included in selling, general and administrative expense
associated with vesting awards of $0.3 million and $0.8 million, respectively,
and in cost of revenue recorded $0.1 million and $0.2 million, respectively. For
the six months ended June 30, 2010 and June 30, 2009, the Company granted 90,000
and 70,000 shares of restricted stock, respectively, and restricted stock units
of zero and 20,000, respectively, under the 2006 Omnibus Incentive
Compensation Plan (Stock Plan).





On June
6, 2010, shareholders approved a 950,000 increase to shares available for award
under the Stock Plan.  At June 30, 2010, there was approximately $0.5
million of unrecognized stock compensation.





(7)
            Options to Purchase Shares of
      Common Stock





At June
30, 2010 and December 31, 2009, options to purchase 700,000 shares of common
stock at a purchase price of $7.50 per share were outstanding. These options
have a cashless exercise feature, whereby the holder may elect to receive a net
amount of shares and forego the payment of the exercise price.  These
options expired July 13, 2010 and subsequently the Company has no outstanding
options to purchase units or warrants.


7





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(8)
            Income
    Taxes




Deferred
income taxes are provided for the temporary differences between the financial
reporting and tax basis of the Company’s assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.





The
Company is in a net operating loss carryover position. The net operating losses
not utilized can be carried forward for 20 years to offset future taxable
income. As of June 30, 2010 and December 31, 2009, a full valuation allowance
has been recorded against the Company’s deferred tax assets, as the Company has
concluded that under relevant accounting standards it is more likely than not
that the deferred tax assets will not be realizable.





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





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





The
Company’s prior federal and state income tax filings since 2006 remain open
under statutes of limitation.  Innovative Power System Inc.’s statutes of
limitation are open from the 2006 tax year forward for both federal and
Commonwealth of Virginia purposes.  Quality Power Systems
Inc.’s statutes of limitation are open from the 2006 tax year forward for
both federal and Commonwealth of Virginia purposes. SMLB, Ltd. statutes of
limitation are open from the 2006 tax year forward for both federal and State of
Illinois purposes.




(9)
            Notes
    Payable





June
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009Convertible,
      unsecured promissory note, due 2012 (4.0%)
                    
                    $
                    2,750,000
                    
                    
                    $
                    4,000,000Unsecured
      promissory note, due 2010 (6.0%)
                    
                    
                    120,572
                    
                    
                    
                    120,572Unsecured
      promissory note, due 2010 (6.0%)
                    
                    
                    174,074
                    
                    
                    
                    210,535Vehicle
      notes
                    
                    
                    -
                    
                    
                    
                    4,915Total
      debt
                    
                    
                    3,044,646
                    
                    
                    
                    4,336,022Less
      current portion
                    
                    
                    294,646
                    
                    
                    
                    183,679Total
      debt, less current portion
                    
                    $
                    2,750,000
                    
                    
                    $
                    4,152,343




For the
six months ended June 30, 2010 and 2009, the Company made principal repayments
of $0.04 million and $1.7 million, respectively.





On
February 28, 2010, the Chief Operating Officer (COO) entered into an agreement
with the Company to convert $1.3 million of the outstanding note balance into
equity at a conversion price of $2.00 per share, resulting in the aggregate
issuance of 625,000 shares of the Company’s common stock.  The amount
of the excess of the conversion price of $2.00 over the market price at $0.56 on
the date of conversion totaling $0.9 million has been recorded as additional
paid-in capital.   The terms on the remaining principal balance of $2.8
million were amended reducing the interest rate under the note from 6% to 4%,
providing for the payment of certain amounts of accrued interest over time,
providing for interest-only payments under the note until April 1, 2012,
providing for eight principal payments in the amount of $125,000 each beginning
on April 1, 2012, and providing for a final payment of all remaining amounts of
principal and interest due under the note on April 1, 2014.  The note
amendment also provides for the acceleration of all amounts due under the note
upon a change of control of the Company or the death of the
COO.  Based on the amended principal repayment terms, the $4.0 million
note was classified as long-term at December 31, 2009.


8





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(10)
            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 a related party for less than $25,000.





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





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





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





CTS Services, LLC (CTS) is 9%
owned by the Company’s Chief Executive Officer. CTS is a mechanical contractor
that acts as a subcontractor to the Company for certain projects. In addition,
CTS utilizes the Company as a subcontractor on projects as needed. Prior to
April 1, 2009, the Company’s Chief Executive Officer owned 55% of
CTS.





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 9% owned by the Company’s Chief Executive Officer. Telco P&C
is a specialty electrical installation company that acts as a subcontractor to
the Company. The Company has also acted as a subcontractor to Telco as
needed.





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





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


9




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





The
following table sets forth transactions the Company has entered into with the
above related parties for the three and six months ended June 30, 2010 and
2009.  It should be noted that revenue represents amounts earned on
contracts with related parties under which we provide services; and cost of
revenue represents costs incurred in connection with related parties which
provide services to us on contracts for our customers. As such a direct
relationship to the revenue and cost of revenue information below by company
should not be expected.




Three
      Months
                                                  
                                                  
                                                  Three
      Months
                                                  
                                                  
                                                  Six
      Months
                                                  
                                                  
                                                  Six
      MonthsEnded
                                                  
                                                  
                                                  Ended
                                                  
                                                  
                                                  Ended
                                                  
                                                  
                                                  EndedJune 30, 2010
                                                  
                                                  
                                                  June 30, 2009
                                                  
                                                  
                                                  June 30, 2010
                                                  
                                                  
                                                  June 30, 2009RevenueTelco
      P&C, LLC
                                                  
                                                  $
                                                  219,088
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  465,335
                                                  
                                                  
                                                  $
                                                  -Chesapeake
      Mission Critical, LLC
                                                  
                                                  
                                                  10,202
                                                  
                                                  
                                                  
                                                  17,385
                                                  
                                                  
                                                  
                                                  11,500
                                                  
                                                  
                                                  
                                                  156,658Total
                                                  
                                                  $
                                                  229,290
                                                  
                                                  
                                                  $
                                                  17,385
                                                  
                                                  
                                                  $
                                                  476,835
                                                  
                                                  
                                                  $
                                                  156,658Cost
      of RevenueCTS
      Services, LLC
                                                  
                                                  $
                                                  55,963
                                                  
                                                  
                                                  $
                                                  880,726
                                                  
                                                  
                                                  $
                                                  134,109
                                                  
                                                  
                                                  $
                                                  1,500,938Chesapeake
      Systems, LLC
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Chesapeake
      Mission Critical, LLC
                                                  
                                                  
                                                  80,967
                                                  
                                                  
                                                  
                                                  48,250
                                                  
                                                  
                                                  
                                                  87,767
                                                  
                                                  
                                                  
                                                  58,280S3
      Integration, LLC
                                                  
                                                  
                                                  203,180
                                                  
                                                  
                                                  
                                                  191,636
                                                  
                                                  
                                                  
                                                  300,286
                                                  
                                                  
                                                  
                                                  338,597LH
      Cranston & Sons, Inc.
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  10,852
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  269,749Telco
      P&C, LLC
                                                  
                                                  
                                                  36,201
                                                  
                                                  
                                                  
                                                  59,860
                                                  
                                                  
                                                  
                                                  37,278
                                                  
                                                  
                                                  
                                                  72,556Total
                                                  
                                                  $
                                                  376,311
                                                  
                                                  
                                                  $
                                                  1,191,324
                                                  
                                                  
                                                  $
                                                  559,440
                                                  
                                                  
                                                  $
                                                  2,240,120Selling,
      general and administrativeOffice
      rent paid on Chesapeake sublease agmt
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  54,833
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  136,538Office
      rent paid on Chesapeake Tower Sytsems
                                                  
                                                  
                                                  45,901
                                                  
                                                  
                                                  
                                                  10,333
                                                  
                                                  
                                                  
                                                  75,018
                                                  
                                                  
                                                  
                                                  10,333Office
      rent paid to TPR Group Re Three, LLC
                                                  
                                                  
                                                  100,927
                                                  
                                                  
                                                  
                                                  100,927
                                                  
                                                  
                                                  
                                                  201,854
                                                  
                                                  
                                                  
                                                  201,854Total
                                                  
                                                  $
                                                  146,828
                                                  
                                                  
                                                  $
                                                  166,093
                                                  
                                                  
                                                  $
                                                  276,872
                                                  
                                                  
                                                  $
                                                  348,725




June
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009Accounts
      receivable/(payable):CTS
      Services, LLC
                    
                    $
                    32,902
                    
                    
                    $
                    104,065CTS
      Services, LLC
                    
                    
                    (114,894
                    )
                    
                    
                    (104,528
                    )Chesapeake
      Mission Critical, LLC
                    
                    
                    -
                    
                    
                    
                    2,000Chesapeake
      Mission Critical, LLC
                    
                    
                    (9,580
                    )
                    
                    
                    (124,425
                    )Chesapeake
      Tower Systems, Inc.
                    
                    
                    -
                    
                    
                    
                    -Telco
      P&C, LLC
                    
                    
                    150,744
                    
                    
                    
                    39,813Telco
      P&C, LLC
                    
                    
                    (53,450
                    )
                    
                    
                    (52,373
                    )LH
      Cranston & Sons, Inc.
                    
                    
                    -
                    
                    
                    
                    -S3
      Integration, LLC
                    
                    
                    (27,700
                    )
                    
                    
                    (3,425
                    )TPR
      Group RE Three, LLC
                    
                    
                    -
                    
                    
                    
                    -Total
      Accounts receivable
                    
                    $
                    183,646
                    
                    
                    $
                    145,878Total
      Accounts (payable)
                    
                    $
                    (205,624
                    )
                    
                    $
                    (284,751
                    )


10





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” and the “Company” 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 company to an operating business.





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.





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.




Based on
an unexpected lack of closed contracts and continued customer delays experienced
at June 30, 2009 and through December 31, 2009, management revised our financial
forecast and implemented selling, general and administrative cost cutting
measures with an approximate annual savings of $2.2 million.  In an
effort to attempt to achieve positive cash flows from operations and align costs
with forecasted revenues in the future, the Company delisted from the NASDAQ
Capital Market in March 2010 to reduce professional fees and other costs
necessary to maintain a listing on the NASDAQ Capital Market.





The
Company’s strategic growth through acquisitions was suspended due to the
downturn in the economy, the impact this had on the Company’s existing customer
base, and as well as the impact it had on the Company’s own financial security
and common stock value.  The corporate focus is centered on preserving
cash, achieving positive cash flow and discontinuing or selling operations that
threatened that focus.   The Company engaged an investment bank to
assist it in evaluating various disposition and financial alternatives, which
culminated in the sale of the Rubicon division to its management and former
owners on December 29, 2009.  The Company is no longer actively
evaluating the disposition of assets as its improved operating results and
prospects based on improvements we have seen in our operating
environment.





Competition
in Current Economic Environment





Our
industry has been and may be further adversely impacted by the current economic
environment and tight credit conditions.  We have seen larger
competitors seek to expand their services offerings including a focus in the
mission-critical market.  These larger competitors have an
infrastructure and support greater than ours and accordingly, we have
experienced 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.


11





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 have
seen our margins decrease and 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 or time and materials basis, and (2) contracts awarded to us
where some, but not all, of the work has not yet been authorized. At June 30,
2010, we had authorizations to proceed with work for approximately $37.5
million, or 73% of our total backlog of $51.5 million. At December 31, 2009, we
had authorizations to proceed with work for approximately $39.9 million, or 85%
of our total backlog of $47.1 million.





Approximately
$37.5 million, or 73% of our backlog, relates to two customers at June 30, 2010
and $32.5 million, or 69%, to three customers at December 31,
2009.  Additionally, a customer, who comprised 53% and 58% of our
total backlog at June 30, 2010 and December 31, 2009, respectively, was
purchased in the second quarter of 2010.  We are unable to determine
the effect of the merger may have on continued business with our
customer.





As of
June 30, 2010, our backlog was approximately $51.5 million, compared to
approximately $47.1 million at December 31, 2009. We believe that approximately
58% of the backlog at June 30, 2010 will be recognized during the next six
months. The following table reflects the value of our backlog in the above three
categories as of June 30, 2010 and December 31, 2009, respectively.





(In
millions)





June
      30,
                          
                          
                          December
      31,2010
                          
                          
                          2009Technology
      consulting
                          
                          $
                          11.0
                          
                          
                          $
                          1.4Construction
      management
                          
                          
                          29.1
                          
                          
                          
                          33.8Facilities
      management
                          
                          
                          11.4
                          
                          
                          
                          11.9Total
                          
                          $
                          51.5
                          
                          
                          $
                          47.1


12





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.  As there have been no significant revisions, please refer
to our Annual Report and Form 10-K for a description of our critical accounting
policies that affect the more significant estimates and judgments used in the
preparation of our financial statement.




Recently
Issued Accounting Pronouncements




In
October 2009, Accounting Standards Update No. 2009-13, Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues Task Force was
issued. The objective of this Update is to address the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. Vendors often
provide multiple products or services to their customers. Those deliverables
often are provided at different points in time or over different time periods.
Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, establishes
the accounting and reporting guidance for arrangements under which the vendor
will perform multiple revenue-generating activities. Specifically, this Subtopic
addresses how to separate deliverables and how to measure and allocate
arrangement consideration to one or more units of accounting. The amendments in
this Update will affect accounting and reporting for all vendors that enter into
multiple-deliverable arrangements with their customers when those arrangements
are within the scope of ASC Subtopic 605-25. The amendments in this Update
significantly expand the disclosures related to a vendor’s multiple-deliverable
revenue arrangement. The objective of the disclosures is to provide information
about the significant judgments made and changes to those judgments and about
the application of the relative selling-price method affects the timing of the
revenue recognition. The amendments in this Update will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. We do not anticipate that the adoption of this standard will have any
significant impact on our results of operations or financial
position.


13




Results
of operations for the three months ended June 30, 2010 compared with the
three months ended June 30, 2009.





Revenue.
Revenue increased $10.6 million to $22.7 million for the three months ended
June 30, 2010 from $12.1 million for the three months ended June 30,
2009.  The increase was driven primarily by a $9.3 million increase in
construction management services attributable to two large
contracts.





Cost of Revenue. Cost of
revenue increased $8.9 million to $19.5 million for the three months ended June
30, 2010 from $10.6 million for the three months ended June 30,
2009.  The increase was driven primarily by an $8.8 million increase
in construction management services attributable to two large
contracts.





Gross Margin
Percentage. Gross margin percentage increased to 14.1% for the three
months ended June 30, 2010 compared to 12.0% for the three months ended June 30,
2009.   The increase in gross margin is attributable to primarily
to improvements from our technology consulting and facilities management
services, as we realigned employee related compensation as a result of pay and
workforce reductions and fully vested stock grants.





Selling, general and administrative
expenses.  Selling, general and administrative expenses
decreased $1.6 million to $2.6 million for the three months ended June 30, 2010
from $4.2 million for the three months ended June 30, 2009. The decrease is
primarily driven by $0.5 million decrease in salaries and related costs of
benefits and non-cash compensation due to a reduction in
headcount.  The remaining decline of $0.9 million is attributable to a
decrease in provision for bad debt expense.  Based on the improved
operating results and prospects based on improvement we have seen in our
operating environment, subsequent to the quarter end we returned existing
employees to their original salaries and anticipate the increase will result in
an annual increase in selling, general and administrative costs of $0.4
million.  We will continue to closely monitor our bookings and
anticipated revenues, and we may take future actions to reduce operating costs
associated with personnel and related costs in an effort to remain
profitable.




Depreciation.
Depreciation remained consistent at $0.1 million for the three months
ended June 30, 2010 compared to $0.1 million for the three months
ended June 30, 2009.




Amortization of intangible
assets. Amortization expense decreased $0.5 million to zero for the three
months ended June 30, 2010 from $0.5 million for the three months ended June 30,
2009.  During the three months ended June 30, 2010, there were no
amortizable assets, as they were deemed impaired and reduced to zero during the
three months ended June 30, 2009.





Impairment loss on goodwill and
other intangibles, net. We did not record any
impairment losses during the three months ended June 30, 2010.  During
the three months ended June 30, 2009, we had experienced continued operating
losses and a decline in market value and accordingly conducted analyses of our
operations in order to identify any impairment in the carrying value of the
goodwill and other intangibles related to our business. Analyzing our business
using both an income approach and a market approach and an evaluation of
customer relation relationships, we determined that the carrying value exceeded
the current fair value of our business and customer related intangibles,
resulting in goodwill and other intangible impairment of $10.3 million for the
three months ended June 30, 2009.





Interest income (expense),
net. Our interest income (expense), net remained consistent at ($0.02)
million for the three months ended June 30, 2010 compared to ($0.1) million for
the three months ended June 30, 2009.





Loss from discontinued business, net
of tax. We
recorded loss from discontinued operations of zero for the three months ended
June 30, 2010 as compared to $3.2 million for the three months ended June 30,
2009.  We sold substantially all of the assets and liabilities of
Rubicon on December 29, 2009.




14





Results
of operations for the six months ended June 30, 2010 compared with the six
months ended June 30, 2009.





Revenue.
Revenue increased $10.8 million to $39.8 million for the six months ended
June 30, 2010 from $29.0 million for the six months ended June 30,
2009.  The increase in revenue was driven by a $10.5 million increase
in our construction services as we had added a significant development project
and completed another during the six months ended June 30, 2010.





Cost of
Revenue.Cost of revenue
increased $9.4 million to $34.1 million for the six months ended June 30, 2010
from $24.7 million for the six months ended June 30, 2009.  The
increase in revenue was driven by a $9.3 million increase in our construction
services as we had added a significant development project during the six months
ended June 30, 2010.  During the six months ended June 30,
2009, the Company had approximately $0.3 million of extinguishment of contract
liabilities reducing cost of sales by a corresponding
amount.





Gross Margin
Percentage. Gross margin percentage declined to 14.2% for the six months
ended June 30, 2010 compared to 14.8% for the six months ended June 30,
2009.  Excluding the $0.3 million reduction in cost of sales for the
extinguishment of contract liabilities during the six months ended June 30,
2009, gross margin increased to 14.2% for the six months ended June 30, 2010
compared to 13.8% during the six months ended June 30, 2009.  The
increase in gross margin is attributable to the gross margin improvements for
our facilities management services as we restructured our employee- related
costs through pay and headcount decreases.





Selling, general and administrative
expenses.  Selling, general and administrative expenses
decreased $2.4 million to $5.3 million for the six months ended June 30, 2010
from $7.7 million for the six months ended June 30, 2009. The decrease is
primarily driven by $1.0 million decrease in salaries and related costs of
benefits and non-cash compensation due to a reduction in
headcount.  The remaining decline of $1.4 million is attributable to a
decrease in provision for bad debt expense and rent of $1.0 million and $0.2
million.  Based on the improved operating results and prospects based
on improvements we have seen in our operating environment, subsequent to the
quarter end we returned existing employees to their original salaries and
anticipate the increase will result in an annual increase in selling, general
and administrative costs of $0.4 million. We will continue to closely monitor
our bookings and anticipated revenues, and we may take future actions to reduce
operating costs associated with personnel and related costs in an effort to
remain profitable.





Depreciation.
Depreciation remained consistent at $0.2 million for the six months
ended June 30, 2010 compared to $0.2 million for the six months ended
June 30, 2009.




Amortization of intangible
assets. Amortization expense decreased $0.9 million to zero for the six
months ended June 30, 2010 from $0.9 million for the six months ended June 30,
2009.  During the six months ended June 30, 2010, there were no
amortizable assets, as they were deemed impaired to zero during the six months
ended June 30, 2009.





Impairment loss on goodwill and
other intangibles, net. We did not record any
impairment losses during the six months ended June 30, 2010.  During
the six months ended June 30, 2009, we had experienced continued operating
losses and a decline in market value and accordingly conducted analyses of our
operations in order to identify any impairment in the carrying value of the
goodwill and other intangibles related to our business. Analyzing our business
using both an income approach and a market approach and an evaluation of
customer relation relationships, we determined that the carrying value exceeded
the current fair value of our business and customer related intangibles,
resulting in goodwill and other intangible impairment of $10.3 million for the
six months ended June 30, 2009.





Interest income (expense),
net. Our interest income (expense), net remained consistent at ($0.1)
million for the six months ended June 30, 2010 compared to ($0.1) million for
the six months ended June 30, 2009.





Income from discontinued business,
net of tax. We
recorded income from discontinued operations of zero for the six months ended
June 30, 2010 as compared to $3.0 million for the six months ended June 30,
2009.  We sold substantially all of the assets and liabilities of
Rubicon on December 29, 2009.




15




EBITDA
from Continuing Operations





A
reconciliation of net income (loss) to EBITDA:





(Unaudited)
                  For
      the Three Months Ended
                
                
                (Unaudited)
                  For
      the Six Months EndedJune
      30, 2010
                
                
                June
      30, 2009
                
                
                June
      30, 2010
                
                
                June
      30, 2009Net
      income (loss) from continuing operations
                
                $
                434,390
                
                
                $
                (13,575,222
                )
                
                $
                144,238
                
                
                $
                (14,832,739
                )Interest
      (income) expense, net
                
                
                23,816
                
                
                
                52,271
                
                
                
                62,605
                
                
                
                88,060Income
      tax expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Depreciation
      and amortization
                
                
                92,321
                
                
                
                103,719
                
                
                
                187,800
                
                
                
                205,820Amortization
      of intangibles
                
                
                -
                
                
                
                455,826
                
                
                
                -
                
                
                
                912,902EBITDAfrom continuing operations
                
                $
                550,527
                
                
                $
                (12,963,406
                )
                
                $
                394,643
                
                
                $
                (13,625,957
                )





EBITDA
from continuing operations increased $13.6 million to $0.6 million in the three
months ended June 30, 2010 from ($13.0) million for the three months ended June
30, 2009.  The increase was primarily driven by increased contracted
profit and curtailment of selling, general and administrative expenses, and no
impairment loss on goodwill and other intangibles was recorded for the
three months ended June 30, 2010.  Please refer to the preceding
discussion within this “—Results of Operations” section.





EBITDA
from continuing operations increased $14.0 million to $0.4 million in the six
months ended June 30, 2010 from ($13.6) million for the six months ended
June 30, 2009. The increase was primarily driven by increased contracted
profit and curtailment of selling, general and administrative expenses, and no
impairment loss on goodwill and other intangibles was recorded for the six
months ended June 30, 2010.  Please refer to the preceding discussion
within this “—Results of Operations” section.





EBITDA
from continuing operations is a supplemental financial measure not defined in
GAAP. We define EBITDA from continuing operations as net income from continuing
operations before interest expense, income taxes, depreciation and amortization.
We have presented EBITDA from continuing operations because we believe it is an
important supplemental measure of operating performance.   We
believe that the line item on the consolidated statement of operations entitled
“net income from continuing operations” is the most directly comparable GAAP
financial measure to EBITDA from continuing operations. Since EBITDA from
continuing operations is not a measure of performance calculated in accordance
with GAAP, it should not be considered in isolation of, or as a substitute for,
net income from continuing operations as an indicator of operating performance
or any other GAAP financial measure. EBITDA from continuing operations, as
calculated by us, may not be comparable to similarly titled measures employed by
other companies. In addition, this measure does not necessarily represent funds
available for discretionary use and is not necessarily a measure of our ability
to fund our cash needs. As EBITDA from continuing operations excludes certain
financial information that is included in net income attributable to the
Company, users of this financial information should consider the type of events
and transactions that are excluded. Our non-GAAP performance measure, EBITDA
from continuing operations, has certain material limitations as
follows:





•
            It
      does not include interest expense. Because we have borrowed money to
      finance some of our operations, interest is a necessary and ongoing part
      of our costs and has assisted us in generating revenue. Therefore, any
      measure that excludes interest expense has material
      limitations;




•
            It
      does not include taxes. Because the payment of taxes is a necessary and
      ongoing part of our operations, any measure that excludes taxes has
      material limitations; and




•
            It
      does not include depreciation and amortization. Because we must utilize
      property, plant and equipment and intangible assets in order to generate
      revenues in our operations, depreciation and amortization are necessary
      and ongoing costs of our operations. Therefore, any measure that excludes
      depreciation and amortization has material
  limitations.


16




Financial
Condition, Liquidity and Capital Resources


For
      the Six Months Ended June 30,2010
                      
                      
                      2009
                      
                      
                      ChangeNet
      income (loss)
                      
                      $
                      144,238
                      
                      
                      $
                      (17,784,278
                      )
                      
                      $
                      17,928,516Adjustments
      to reconcile net income (loss) to net cash provided by (used in)
      operations:Amortization
      of intangibles
                      
                      
                      -
                      
                      
                      
                      1,382,960
                      
                      
                      
                      (1,382,960
                      )Impairment
      loss on goodwill and other intangibles
                      
                      
                      -
                      
                      
                      
                      13,062,140
                      
                      
                      
                      (13,062,140
                      )Stock
      and warrant-based compensation
                      
                      
                      355,344
                      
                      
                      
                      946,740
                      
                      
                      
                      (591,396
                      )Provision
      for doubtful accounts
                      
                      
                      -
                      
                      
                      
                      1,025,000
                      
                      
                      
                      (1,025,000
                      )Extinguishment
      of contract liabilities
                      
                      
                      -
                      
                      
                      
                      (269,217
                      )
                      
                      
                      269,217Other
      non-cash items, net
                      
                      
                      151,316
                      
                      
                      
                      211,394
                      
                      
                      
                      (60,078
                      )Net
      adjustments to reconcile net income for non-cash items
                      
                      
                      506,660
                      
                      
                      
                      16,359,017
                      
                      
                      
                      (15,852,357
                      )Net
      change in working capital
                      
                      
                      6,743,170
                      
                      
                      
                      (2,907,651
                      )
                      
                      
                      9,650,821Cash
      provided by (used in) operations
                      
                      
                      7,394,068
                      
                      
                      
                      (4,332,912
                      )
                      
                      
                      11,726,980Cash
      provided by (used in) investing
                      
                      
                      45,463
                      
                      
                      
                      (1,148,084
                      )
                      
                      
                      1,193,547Cash
      used in financing
                      
                      
                      (157,414
                      )
                      
                      
                      (1,699,931
                      )
                      
                      
                      1,542,517Net
      increase (decrease) in cash
                      
                      $
                      7,282,117
                      
                      
                      $
                      (7,180,927
                      )
                      
                      $
                      14,463,044





Cash and
cash equivalents increased $7.3 million to $9.5 million at June 30, 2010 from
$2.3 million at December 31, 2009. The increase was primarily attributable to
$7.4 million provided by operating activities, offset by $0.2 million used in
repayment of notes payable.





Operating
Activity





Net cash
provided by operating activities increased $11.7 million to $7.4 million for the
six months ended June 30, 2010 from $4.3 million used in operating
activities for the six months ended June 30, 2009. The increase in operating
cash flow was primarily attributable to $9.7 million of cash generated from
working capital.  The cash generated from working capital was
attributable primarily to an increase in billings in excess of costs and
estimated earnings on uncompleted contracts as we billed ahead on projects
during the six months ended June 30, 2010.   For the six months ended
June 30, 2010, cash generated from operations was $7.4 million, which was
primarily driven by a $6.7 million decrease in working capital.





Investing
Activity





Net cash
provided by investing activities increased $1.2 million to $0.05 million for the
six months ended June 30, 2010 from $1.1 million used in investing
activities for the six months ended June 30, 2009.  For the six
months ended June 30, 2009, there were approximately $1.1 million of acquisition
related earn out payments and there were no such payments for the six months
ended June 30, 2010.





Financing
Activity




Net cash
used in financing decreased $1.5 million to $0.2 million for the six months
ended June 30, 2010 from $1.7 million for the six months ended June 30,
2009.  For the six months ended June 30, 2010, financing activities
consisted primarily of treasury stock repurchases associated with payment of
taxes on the vesting of restricted stock held by employees as compared to $1.7
million of scheduled seller note repayments during the six months ended June 30,
2009.





Non-Cash Financing
Activity





On
February 28, 2010, we entered into an agreement with our Chief Operating Officer
(COO) to convert $1.3 million of the outstanding note balance into equity at a
conversion price of $2.00 per share, resulting in the aggregate issuance of
625,000 shares of our common stock.  The amount of the excess of the
conversion price of $2.00 over the market price at $0.56 on the date of
conversion totaling $0.9 million has been recorded as additional paid-in
capital.   The terms on the remaining principal balance of $2.8 million
were amended reducing the interest rate under the note to 4%, providing for the
payment of certain amounts of accrued interest over time, providing for
interest-only payments under the note until April 1, 2012, providing for eight
principal payments in the amount of $125,000 each beginning on April 1, 2012,
and providing for a final payment of all remaining amounts of principal and
interest due under the note on April 1, 2014.  The note amendment also
provides for the acceleration of all amounts due under the note upon a change of
control of the Company or the death of the COO.  Based on the amended
principal repayment terms, the $4.0 million note was classified as long-term at
December 31, 2009.





During
the six months ended June 30, 2009, in connection with the purchase of Rubicon,
we issued to the sellers $0.6 million of unsecured promissory notes bearing
interest at 6% per annum and repayable over a one-year term.  The
notes were issued in association with the achievement of certain profit targets,
as defined in the purchase agreement, for the year ended December 31,
2008.


17




Liquidity
and Capital Resources





We had
$9.5 million and $2.3 million of unrestricted cash and cash
equivalents at June 30, 2010 and December 31, 2009, respectively. During the six
months ended June 30, 2010, we have financed our operations primarily with
operating cash flows driven by a decrease in working capital and cash on
hand.




Based on
an unexpected lack of closed contracts and continued customer delays during
2009, we revised our financial forecast and implemented selling, general and
administrative cost cutting measures with an approximate annual savings of $2.2
million.  In an effort to attempt to achieve positive cash flows from
operations and align costs with forecasted revenues in the future, the Company
voluntarily delisted from the NASDAQ Capital Market in March 2010 to reduce
professional fees and other costs necessary to maintain a listing on the NASDAQ
Capital Market.





Due to
the downturn in the economy, which had an adverse impact on our existing
customers, our own financial security and stock value, we suspended our strategy
of growth through acquisitions in 2009.  Our corporate focus became
centered on preserving cash, achieving positive cash flow and discontinuing or
selling operations that threatened that focus.   We engaged an
investment bank to assist us in evaluating various disposition and financial
alternatives, which culminated in the sale of the Rubicon division to its
management and former owners on December 29, 2009.





We
further sought to restructure scheduled debt repayments with our
creditors.  In addition to the added liquidity from the proceeds of
the sale of Rubicon, we eliminated scheduled debt repayments through debt
forgiveness of approximately $0.6 million owed to the former sellers. On
February 28, 2010, we improved our net worth through the principal conversion of
$1.3 million of principal due on a seller note to our
COO.  Furthermore, the principal repayment of the remaining $2.7
million was amended to begin in the second quarter of 2012.  As a
result of note restructuring, at December 31, 2009 short term debt obligations
were reduced $2.3 million and in turn our short-term liquidity substantially
improved.





During
the three months ended June 30, 2010, our operating results have improved as we
generated $0.4 million in net income.  Additionally, we have seen some
improvement in our operating environment and as a result have returned our
employees to their original salaries in an effort to retain them.  We
will continue to closely monitor our bookings and anticipated revenues, and we
may take future actions to reduce operating costs associated with personnel and
related costs in an effort to remain profitable.





As a
result of the overall cost reduction efforts to realign operations with
decreased anticipated revenues, the added liquidity from the sale of Rubicon,
and the financial restructuring of the $4.0 million note to our COO, 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.  If we
experience an increase in revenue, we will attempt to maximize a fixed operating
structure and attempt to take a measured approach in any increase to selling,
general and administrative costs to support that additional
revenue.  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. 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 stockholders. If we raise additional funds through the issuance of
debt securities, the terms of such debt could impose additional restrictions on
our operations. Although 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, failure to obtain additional financing, if necessary, could
have a material adverse impact our business, financial condition and
earnings.





Off Balance Sheet
Arrangements





As of
June 30, 2010, we do not have any off balance sheet arrangements.





Item
3. Quantitative and Qualitative Disclosures about Market Risk.




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





Item 4. 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 June 30, 2010. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of June 30, 2010, our disclosure
controls and procedures were ineffective.


18





Changes in Internal Control over
Financial Reporting




During
the three months ended June 30, 2010, the Company developed a remediation plan
with the objective of remediating material weaknesses previously disclosed at
December 31, 2009.  The Company is finalizing formal documentation of
policies and procedures and has begun to automate various controls related to
revenue recognition.





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, 2009, 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. These
forward-looking statements can be identified by the use of forward-looking
terminology, including the words “believes,” “anticipates,” ”plans,” “expects”
and similar expressions that are intended to identify forward-looking
statements. You should read such statements carefully because they discuss our
future expectations, contain projections of our future results of operations or
of our financial position, or state other forward-looking information. 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 2009 Annual Report on Form 10-K





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. 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.




Total Shares
                      
                      
                      Approximate DollarAverage
                      
                      
                      Purchased as Part of
                      
                      
                      Amount of Shares YetMonthly Period During the Three
                      
                      Total Shares
                      
                      
                      Price Paid
                      
                      
                      Publically Announced
                      
                      
                      To Be Purchased UnderMonths Ended June 30, 2010
                      
                      Purchased (a)
                      
                      
                      per Share
                      
                      
                      Plans
                      
                      
                      PlansApril 1, 2010-April 30, 2010
                      
                      
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -May
      1, 2010- May 31, 2010
                      
                      
                      5,092
                      
                      
                      
                      1.83
                      
                      
                      
                      -
                      
                      
                      
                      -June
      1, 2010-June 30, 2010
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      5,092
                      
                      
                      $
                      1.83
                      
                      
                      
                      -
                      
                      
                      
                      -







(a)
              All of these shares were acquired
      from associates to satisfy tax withholding requirements upon the vesting
      of restricted
stock.


19




Item
3. Defaults upon Senior Securities.





Not
applicable.





Item
4. (Removed and Reserved).





Item
5. Other Information.




Not
applicable.





Item
6. Exhibits.





10.1
                    
                    Fortress
      America Acquisition Corporation 2006 Omnibus Incentive Compensation Plan
      (previously filed with the Commission as Annex A to the Proxy Statement
      for the 2010 Annual Meeting of Stockholders filed on April 30, 2010, and
      incorporated herein by reference).31.1*
                    
                    Certification
      of Fortress International Group, Inc. Chief Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
                    
                    Certification
      of Fortress International Group, Inc. Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32.1‡
                    
                    Certification
      of Fortress International Group, Inc. Chief Executive Officer and Chief
      Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.







* Filed
herewith.


‡
Furnished herewith.


20




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:
      August 12, 2010
                By:
                /s/ Thomas P. RosatoThomas
      P. RosatoChief
      Executive Officer (Authorized Officer and Principal
                  Executive
      Officer)Date:
      August 12, 2010
                By:
                /s/ Timothy C. DecTimothy
      C. DecChief
      Financial Officer (Authorized Officer and Principal
                  Financial
      Officer)


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