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 March 31, 2010





or




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





Commission
file number: 000-51426







FORTRESS
INTERNATIONAL GROUP, INC.


(Exact name of registrant as specified in its charter)





Delaware
            
            20-2027651(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer Identification No.)7226
      Lee DeForest Drive, Suite 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 o




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




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




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




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




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




Common
Stock, par value $0.0001 per share, as of May 10,
2010                14,208,494














FORTRESS
INTERNATIONAL GROUP, INC.


Table
of Contents





PagePART
      I - FINANCIAL INFORMATIONItem
      1.      Financial StatementsCondensed
      Consolidated Balance Sheets as of March 31, 2010 and as of December 31,
      2009
            1Condensed
      Consolidated Statements of Operations for the three months ended March 31,
      2010 and March 31, 2009
            2Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2010 and March 31, 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
            19Item
      4.      Removed and reserved.
            19Item
      5.      Other Information
            19Item
      6.      Exhibits
            19SIGNATURES
            20










PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements





FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS








(Unaudited)March
      31,
              
              
              December
      31,2010
              
              
              2009Current
      AssetsCash
      and cash equivalents
              
              $
              6,106,120
              
              
              $
              2,263,146Contract
      and other receivables, net
              
              
              14,660,344
              
              
              
              14,196,772Costs
      and estimated earnings in excess of billingson
      uncompleted contracts
              
              
              1,027,512
              
              
              
              1,056,543Prepaid
      expenses and other current assets
              
              
              900,150
              
              
              
              1,007,371Total
      current assets
              
              
              22,694,126
              
              
              
              18,523,832Property
      and equipment, net
              
              
              544,605
              
              
              
              612,569Goodwill
              
              
              3,811,127
              
              
              
              3,811,127Other
      intangible assets, net
              
              
              60,000
              
              
              
              60,000Other
      assets
              
              
              224,815
              
              
              
              246,218Total
      assets
              
              $
              27,334,673
              
              
              $
              23,253,746Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesNotes
      payable, current portion
              
              $
              316,543
              
              
              $
              183,679Accounts
      payable and accrued expenses
              
              
              8,644,631
              
              
              
              8,038,658Billings
      in excess of costs and estimated earningson
      uncompleted contracts
              
              
              10,260,576
              
              
              
              6,536,752Total
      current liabilities
              
              
              19,221,750
              
              
              
              14,759,089Notes
      payable, less current portion
              
              
              -
              
              
              
              152,343Convertible
      notes, less current portion
              
              
              2,750,000
              
              
              
              4,000,000Other
      liabilities
              
              
              176,275
              
              
              
              186,905Total
      liabilities
              
              
              22,148,025
              
              
              
              19,098,337Commitments
      and Contingencies
              
              
              -
              
              
              
              -Stockholders’
      EquityPreferred
      stock- $.0001 par value; 1,000,000 shares authorized; no
      sharesissued
      or outstanding
              
              
              -
              
              
              
              -Common
      stock- $.0001 par value, 100,000,000 shares authorized;
      13,807,962and
      13,142,962 issued; 13,345,896 and 12,846,709 outstanding
atMarch
      31, 2010 and December 31, 2009, respectively
              
              
              1,417
              
              
              
              1,314Additional
      paid-in capital
              
              
              64,848,551
              
              
              
              63,442,796Treasury
      stock 462,066 and 296,253 shares at cost atMarch
      31, 2010 and December 31, 2009, respectively
              
              
              (1,044,439
              )
              
              
              (959,971
              )Accumulated
      deficit
              
              
              (58,618,881
              )
              
              
              (58,328,730
              )Total
      stockholders' equity
              
              
              5,186,648
              
              
              
              4,155,409Total
      liabilities and stockholders’ equity
              
              $
              27,334,673
              
              
              $
              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)For
      the Three Months EndedMarch
      31, 2010
              
              
              March
      31, 2009Results
      of Operations:Revenue
              
              $
              17,115,493
              
              
              $
              16,918,421Cost
      of revenue
              
              
              14,650,971
              
              
              
              14,086,821Gross
      profit
              
              
              2,464,522
              
              
              
              2,831,600Operating
      expenses:Selling,
      general and administrative
              
              
              2,620,405
              
              
              
              3,494,150Depreciation
      and amortization
              
              
              95,479
              
              
              
              102,102Amortization
      of intangibles
              
              
              -
              
              
              
              457,076Total
      operating costs
              
              
              2,715,884
              
              
              
              4,053,328Operating
      loss
              
              
              (251,362
              )
              
              
              (1,221,728
              )Interest
      income (expense), net
              
              
              (38,789
              )
              
              
              (35,789
              )Loss
      from continuing operations before income taxes
              
              
              (290,151
              )
              
              
              (1,257,517
              )Income
      tax expense
              
              
              -
              
              
              
              -Net
      loss from continuing operations
              
              
              (290,151
              )
              
              
              (1,257,517
              )Income
      from discontinued operations
              
              
              -
              
              
              
              240,919Net
      loss
              
              $
              (290,151
              )
              
              $
              (1,016,598
              )Per
      Common Share (Basic and Diluted):Net
      loss from continuing operations, net of tax
              
              $
              (0.02
              )
              
              $
              (0.10
              )Discontinued
      operations, net of tax
              
              
              -
              
              
              
              0.02Net
      loss
              
              $
              (0.02
              )
              
              $
              (0.08
              )Weighted
      average common shares outstanding-basic and diluted
              
              
              13,038,719
              
              
              
              12,641,716
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.




2




FORTRESS
INTERNATIONAL GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS




(Unaudited)For
      the Three Months EndedMarch
      31, 2010
                  
                  
                  March
      31, 2009Cash
      Flows from Operating Activities:Net
      loss
                  
                  $
                  (290,151
                  )
                  
                  $
                  (1,016,598
                  )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
      and amortization
                  
                  
                  95,479
                  
                  
                  
                  103,422Amortization
      of intangibles
                  
                  
                  -
                  
                  
                  
                  692,105Impairment
      loss on goodwill and other intangibles
                  
                  
                  -
                  
                  
                  
                  -Provision
      for doubtful accounts
                  
                  
                  -
                  
                  
                  
                  25,000Stock
      and warrant-based compensation
                  
                  
                  155,858
                  
                  
                  
                  483,689Extinguishment
      of contract liabilities
                  
                  
                  -
                  
                  
                  
                  (269,217
                  )Other
      non-cash income, net
                  
                  
                  2,935
                  
                  
                  
                  1,533Changes
      in operating assets and liabilities:Contracts
      and other receivables
                  
                  
                  (463,572
                  )
                  
                  
                  3,995,367Costs
      and estimated earnings in excess of billings on
uncompletedcontracts
                  
                  
                  29,031
                  
                  
                  
                  (182,379
                  )Prepaid
      expenses and other current assets
                  
                  
                  107,221
                  
                  
                  
                  (328,690
                  )Other
      assets
                  
                  
                  21,403
                  
                  
                  
                  (34,970
                  )Accounts
      payable and accrued expenses
                  
                  
                  605,973
                  
                  
                  
                  (3,151,272
                  )Billings
      in excess of costs and estimated earnings onuncompleted
      contracts
                  
                  
                  3,723,824
                  
                  
                  
                  (2,740,288
                  )Other
      liabilities
                  
                  
                  (13,565
                  )
                  
                  
                  (83,507
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  3,974,436
                  
                  
                  
                  (2,505,805
                  )Cash
      Flows from Investing Activities:Purchase
      of property and equipment
                  
                  
                  (27,515
                  )
                  
                  
                  (66,147
                  )Net
      cash used in investing activities
                  
                  
                  (27,515
                  )
                  
                  
                  (66,147
                  )Cash
      Flows from Financing Activities:Payments
      on notes payable
                  
                  
                  (1,248
                  )
                  
                  
                  (23,301
                  )Payment
      on seller notes
                  
                  
                  (18,231
                  )
                  
                  
                  (1,575,618
                  )Purchase
      of treasury stock
                  
                  
                  (84,468
                  )
                  
                  
                  -Net
      cash used in financing activities
                  
                  
                  (103,947
                  )
                  
                  
                  (1,598,919
                  )Net
      increase (decrease) in cash
                  
                  
                  3,842,974
                  
                  
                  
                  (4,170,871
                  )Cash,
      beginning of period
                  
                  
                  2,263,146
                  
                  
                  
                  12,448,157Cash,
      end of period
                  
                  $
                  6,106,120
                  
                  
                  $
                  8,277,286Less:
      Cash associated with discontinued operations
                  
                  
                  -
                  
                  
                  
                  2,572,157Cash,
      end of period from continuing operations
                  
                  $
                  6,106,120
                  
                  
                  $
                  5,705,129Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                  
                  $
                  126,644
                  
                  
                  $
                  377,196Cash
      paid for taxes
                  
                  
                  27,323
                  
                  
                  
                  24,602Supplemental
      disclosure of non-cash financing activities:Promissory
      notes payable issued to officers converted to common stock
                  
                  $
                  1,250,000
                  
                  
                  $
                  -




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




3





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(1)
            Basis
      of Presentation




The
unaudited condensed consolidated financial statements are for the three
months ended March 31, 2010 and 2009 for Fortress International Group, Inc.
(“Fortress” or the “Company” or “We”).  The results of operations
attributable to each acquisition are included in the condensed consolidated
financial statements from the date of acquisition.




The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and note disclosures normally included
in the annual financial statements, prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”), have
been condensed or omitted pursuant to those rules and regulations. We recommend
that you read these unaudited condensed consolidated financial statements in
conjunction with the audited consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the 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 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 further sought to restructure scheduled debt repayments with our
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. 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. Gallagher, our Chief
Operating Officer (COO).  Furthermore, the principal repayment of the
remaining $2.7 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 a $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
February 2010, Accounting Standards Update No. 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements, was
issued. This Update addresses both the interaction of the requirements of ASC
855, Subsequent Events,
with the SEC’s reporting requirements and the intended breadth of the reissuance
disclosures provision related to subsequent events. The amendments in this
Update affect all entities. The amendments remove the requirement for an SEC
filer to disclose a date in both issued and revised financial statements through
which management evaluated subsequent events. Revised financial statements
include financial statements revised as a result of either correction of an
error or retrospective application of GAAP.  All of the amendments in
this Update are effective upon issuance. The adoption of this Update did not
have a significant impact on the Company’s results of operations or financial
position.




In
January 2010, Accounting Standards Update No. 2010-02, Consolidation (Topic 810):
Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification, was issued. The objective of this Update is to address
implementation issues related to the changes in ownership provisions in ASC
810-10, Consolidation—Overall. The
amendments in this Update affect accounting and reporting by an entity that
experiences a decrease in ownership in a subsidiary that is a business or
non-profit. The amendments also affects accounting and reporting by an entity
that exchanges a group of assets that constitutes a business or nonprofit
activity for an equity interest in another entity. The amendments affect
entities that have previously adopted the decrease in ownership provisions of
ASC 810-10 but have applied the guidance in that Subtopic differently from the
guidance provided in the Update. This Update provides amendments to ASC 810-10
and related guidance within GAAP to clarify the scope of the decrease in
ownership provisions of the Subtopic and related guidance and applies to a
subsidiary or group of assets that is a business or non-profit activity; a
subsidiary that is a business or non-profit activity that is transferred to an
equity method investee or joint venture; and an exchange of a group of assets
that constitutes a business or nonprofit activity for a noncontrolling interest
in an entity. The amendments in this Update expand the disclosures about the
deconsolidation of a subsidiary or derecognition of a group of assets within the
scope of ASC 810-10. In addition to the existing disclosures, an entity should
disclose the valuation techniques used to measure the fair value of any retained
investment in the former subsidiary or group of assets and information that
enables users of its financial statements to assess the input used to develop
the measurement; the nature of continuing involvement with the subsidiary or the
group of assets after it has been deconsolidated or derecognized; and whether
the transaction that resulted in the deconsolidation of the subsidiary or the
derecognition of the group of assets was with a related party or whether the
former subsidiary or entity acquiring the group of assets will be a related
party after deconsolidation. An entity also should disclose the valuation
techniques used to measure an entity interest in an acquiree held by the entity
immediately before the acquisition date in a business combination achieved in
stages. The amendments in this Update are effective beginning in the period that
an entity adopts Statement of Financial Accounting Standard (SFAS) 160, which
was codified in July 2009 in ASC 810-10. If an entity has previously adopted
SFAS 160 as of the date the amendments in this Update are included in the ASC,
the amendments in this Update are effective beginning in the first interim or
annual reporting period ending on or after December 15, 2009. The
amendments in this Update should be applied retrospectively to the first period
that an entity adopted SFAS 160. We do not anticipate that the adoption of this
Update will have any significant impact on the Company’s results of operations
or financial position.





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. 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 March 31, 2010 and December 31, 2009.  Bad debt expense for the
three months ended March 31, 2010 and 2009 was zero and $25,000,
respectively.





Included
in accounts receivable was retainage associated with construction projects
totaling $1.5 million and $0.5 million at March 31, 2010 and December 31, 2009,
respectively.





The
Company earned approximately 64% and 29% of its revenue from one and two
customers for the three months ended March 31, 2010 and 2009,
respectively.  Accounts receivable from these customers at March 31,
2010 and December 31, 2009 was $5.4 million and $8.1 million,
respectively.  Additionally, the customer, comprising 64% of the
Company’s total revenue for the three months ended March 31, 2010, 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 three months ended March 31, 2009, the Company finalized the extinguishment
of approximately $0.3 million due to two vendors as a result of contract
assignment. Pursuant to the contract assignment, these two vendors have relieved
the Company of its obligation due to these vendors which had been previously
recorded by the Company.  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 three months ended March
31, 2009.  There were no such extinguishments in during the three
months ended March 31, 2010.





(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 the first note payment in April
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 March 31, 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:




March
      31,2009Revenue
              
              $
              13,152,908Income
      from operations of discontinued businesses, before taxes
              
              
              240,919Income
      tax expense
              
              
              -Income
      from operations of discontinued businesses
              
              $
              240,919





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:





For
      the Three Months Ended March 31,2010
              
              
              2009Net
      loss from continuing operations
              
              $
              (290,151
              )
              
              $
              (1,257,517
              )Basic
      and diluted weighted average common shares
              
              
              13,038,719
              
              
              
              12,641,716Net
      loss from continuing operations per share
              
              $
              (0.02
              )
              
              $
              (0.10
              )





Unvested
restricted stock, convertible unsecured promissory notes and options to purchase
885,601, 366,667, and 700,000 shares of common stock, respectively, that were
outstanding at March 31, 2010 were not included in the computation of diluted
net loss per common share for the three months ended March 31, 2010, as their
inclusion would be anti-dilutive.





Unvested
restricted stock, convertible unsecured promissory notes, options to purchase
units and warrants for 688,667, 533,333, 2,100,000 and 15,710,300 shares of
common stock, respectively, that were outstanding at March 31, 2009 were not
included in the computation of diluted net loss per common share for the three
months ended March 31, 2009, as their inclusion would be
anti-dilutive.





(6)
            Employee
      Benefit Plans





Restricted
Stock




For the
three months ended March 31, 2010 and March 31, 2009, the Company granted zero
and 40,000 shares of restricted stock, respectively, and restricted stock units
of zero and 20,000, respectively, under the 2006 Omnibus Incentive
Compensation Plan. For the three months ended March 31, 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. At March 31, 2010, there was approximately $0.5 million of
unrecognized stock compensation.





(7)
            Options
      to Purchase Shares of Common Stock





At March
31, 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 will expire July 13, 2010.





(8)
            Income
      Taxes


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





The
Company is in a net operating loss carryover position. The net operating losses
not utilized can be carried forward for 20 years to offset future taxable
income. As of March 31, 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.




7





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(9)
            Notes
      Payable




March
      31,
              
              
              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%)
              
              
              192,304
              
              
              
              210,535Vehicle
      notes
              
              
              3,667
              
              
              
              4,915Total
      debt
              
              
              3,066,543
              
              
              
              4,336,022Less
      current portion
              
              
              316,543
              
              
              
              183,679Total
      debt, less current portion
              
              $
              2,750,000
              
              
              $
              4,152,343





For the
three months ended March 31, 2010 and 2009, the Company made principal
repayments of $19,480 and $1.6 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 the Company’s common shares.  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 shares
will be subject to that certain Registration Rights Agreement between the
Company and the COO. 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 55% owned by the Company’s Chief Executive Officer. Telco
P&C is a specialty electrical installation company that acts as a
subcontractor to the Company. The Company has also acted as a subcontractor to
Telco as needed.





TPR Group Re Three, LLC 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 months ended March 31, 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
      MonthsEnded
                    
                    
                    EndedMarch
      31, 2010
                    
                    
                    March
      31, 2009RevenueCTS
      Services, LLC
                    
                    $
                    -
                    
                    
                    $
                    2,000Telco
      P&C, LLC
                    
                    
                    246,247
                    
                    
                    
                    -Chesapeake
      Mission Critical, LLC
                    
                    
                    1,298
                    
                    
                    
                    139,273Total
                    
                    $
                    247,545
                    
                    
                    $
                    141,273Cost
      of RevenueCTS
      Services, LLC
                    
                    $
                    78,146
                    
                    
                    $
                    620,212Chesapeake
      Systems, LLC
                    
                    
                    -
                    
                    
                    
                    -Chesapeake
      Mission Critical, LLC
                    
                    
                    6,800
                    
                    
                    
                    10,030S3
      Integration, LLC
                    
                    
                    97,106
                    
                    
                    
                    146,961LH
      Cranston & Sons, Inc.
                    
                    
                    -
                    
                    
                    
                    258,897Telco
      P&C, LLC
                    
                    
                    1,077
                    
                    
                    
                    12,696Total
                    
                    $
                    183,129
                    
                    
                    $
                    1,048,796Selling,
      general and administrativeOffice
      rent paid on Chesapeake Tower Sytsems
                    
                    
                    29,117
                    
                    
                    
                    81,705Office
      rent paid to TPR Group Re Three, LLC
                    
                    
                    100,927
                    
                    
                    
                    100,927Total
                    
                    $
                    130,044
                    
                    
                    $
                    182,632March
      31,
                    
                    
                    March
      31,2010
                    
                    
                    2009Accounts
      receivable/(payable):CTS
      Services, LLC
                    
                    $
                    32,902
                    
                    
                    $
                    43,247CTS
      Services, LLC
                    
                    
                    (97,338
                    )
                    
                    
                    (542,302
                    )Chesapeake
      Mission Critical, LLC
                    
                    
                    11,500
                    
                    
                    
                    86,170Chesapeake
      Mission Critical, LLC
                    
                    
                    -
                    
                    
                    
                    (27,723
                    )Telco
      P&C, LLC
                    
                    
                    267,096
                    
                    
                    
                    -Telco
      P&C, LLC
                    
                    
                    (53,450
                    )
                    
                    
                    (1,150
                    )LH
      Cranston & Sons, Inc.
                    
                    
                    -
                    
                    
                    
                    (68,763
                    )S3
      Integration, LLC
                    
                    
                    (9,697
                    )
                    
                    
                    (44,910
                    )Total
      Accounts receivable
                    
                    $
                    311,498
                    
                    
                    $
                    129,417Total
      Accounts (payable)
                    
                    $
                    (160,485
                    )
                    
                    $
                    (684,848
                    )




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 corporation to an operating business.




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 its 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.





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.





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





Competition
in Current Economic Environment





Our
industry has been and may be further adversely impacted by the current economic
environment and tight credit conditions.  We have seen larger
competitors seek to expand their services offerings including a focus in the
mission-critical market.  These larger competitors have an
infrastructure and support greater than ours and accordingly, we have
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 have not yet been authorized. At March 31,
2010, we had authorizations to proceed with work for approximately $31.2
million, or 88% of our total backlog of $35.3 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
$27.8 million, or 79% of our backlog, relates to three customers at March 31,
2010 and $32.5 million, or 82%, to three customers at December 31,
2009.  Additionally, a customer, who comprised 50% and 58% of our
total backlog at March 31, 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
March 31, 2010, our backlog was approximately $35.3 million, compared to
approximately $47.1 million at December 31, 2009. We believe that approximately
88% of the backlog at March 31, 2010 will be recognized during the
next nine months. The following table reflects the value of our backlog in
the above three categories as of March 31, 2010 and December 31, 2009,
respectively.





(In
millions)




March
      31,
              
              
              December
      31,2010
              
              
              2009Technology
      consulting
              
              $
              2.0
              
              
              $
              1.4Construction
      management
              
              
              21.2
              
              
              
              33.8Facilities
      management
              
              
              12.1
              
              
              
              11.9Total
              
              $
              35.3
              
              
              $
              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.




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




Revenue Recognition




We
recognize revenue when pervasive evidence of an arrangement exists, the
contract price is fixed or determinable, services have been rendered or goods
delivered, and collectability is reasonably assured. Our revenue is derived
from the following types of contractual arrangements: fixed-price contracts,
time-and-materials contracts and cost-plus-fee contracts (including guaranteed
maximum price contracts). Revenue from fixed-price contracts is
accounted for under the application of ASC 605-35Construction-Type and Certain
Production-Type Contracts, recognizing revenue on the percentage-of-completion
method using costs incurred in relation to total estimated project costs. The
cost to total cost method is used because management considers cost incurred and
costs to complete to be the best available measure of progress in the contracts.
Contract costs include all direct materials, subcontract and labor costs and
those indirect costs related to contract performance, such as indirect labor,
payroll taxes, employee benefits and supplies.




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


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




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





Allowance
for Doubtful Accounts





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





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





13





Non-cash
Compensation




We apply
the expense recognition provisions of ASC 718 Compensation-Stock
Compensation.  The recognition of the value of the instruments results
in compensation or professional expenses in  our financial statements.
The expense differs from other compensation and professional expenses in that
these charges are typically settled through the issuance of common stock
or stock purchase warrants, which would have a dilutive effect upon
earnings per share, if and when such warrants are exercised or restricted stock
vests. The determination of the estimated fair value used to record the
compensation or professional expenses associated with the equity or liability
instruments issued requires management to make a number of assumptions and
estimates that can change or fluctuate over time.




Goodwill
and Other Purchased Intangible Assets




Goodwill
represents the excess of costs over fair value of net assets of businesses
acquired. Other purchased intangible assets include the fair value of items such
as customer contracts, backlog and customer relationships. ASC 350
Intangibles-Goodwill and Other Intangible Assets establishes financial
accounting and reporting for acquired goodwill and other intangible assets.
Goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but rather
tested for impairment on an annual basis or triggering event. Purchased
intangible assets with a definite useful life are amortized on a straight-line
basis over their estimated useful lives.




The
estimated fair market value of identified intangible assets is amortized over
the estimated useful life of the related intangible asset. We have a process
pursuant to which we typically retain third-party valuation experts to assist us
in determining the fair market values and useful lives of identified intangible
assets. We evaluate these assets for impairment when events occur that suggest a
possible impairment. Such events could include, but are not limited to, the loss
of a significant client or contract, decreases in federal government
appropriations or funding for specific programs or contracts, or other similar
events.  We determine impairment by comparing the net book value of
the asset to its future undiscounted net cash flows. If impairment occurs, we
will record an impairment expense equal to the difference between the net book
value of the asset and its estimated discounted cash flows using a discount rate
based on our cost of capital and the related risks of
recoverability.




Long-Lived
Assets (Excluding Goodwill)




In
accordance with the provisions of ASC360-10-35 Impairment or Disposal of
Long-Lived Assets in accounting for long-lived assets such as property,
equipment and intangible assets subject to amortization, we review the
assets for impairment. If circumstances indicate the carrying value of the asset
may not be fully recoverable, a loss is recognized at the time impairment exists
and a permanent reduction in the carrying value of the asset is
recorded. We believe that the carrying values of its long-lived assets as
of March 31, 2010 are fully realizable.





Income
Taxes




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




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




14


We
adopted ASC 740 Income Taxes, which prescribes a more-likely-than-not threshold
of financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on de-recognition of income tax assets and liabilities, classification of
current and deferred tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures.  As of March 31, 2010, we
do not have any material gross unrecognized tax benefit
liabilities.




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




Recently
Issued Accounting Pronouncements




In
February 2010, Accounting Standards Update No. 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements, was
issued. This Update addresses both the interaction of the requirements of ASC
855, Subsequent Events,
with the SEC’s reporting requirements and the intended breadth of the reissuance
disclosures provision related to subsequent events. The amendments in this
Update affect all entities. The amendments remove the requirement for an SEC
filer to disclose a date in both issued and revised financial statements through
which management evaluated subsequent events. Revised financial statements
include financial statements revised as a result of either correction of an
error or retrospective application of GAAP.  All of the amendments in
this Update are effective upon issuance. The adoption of this Update did not
have a significant impact on the our results of operations or financial
position.




In
January 2010, Accounting Standards Update No. 2010-02, Consolidation (Topic 810):
Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification, was issued. The objective of this Update is to address
implementation issues related to the changes in ownership provisions in ASC
810-10, Consolidation—Overall. The
amendments in this Update affect accounting and reporting by an entity that
experiences a decrease in ownership in a subsidiary that is a business or
non-profit. The amendments also affects accounting and reporting by an entity
that exchanges a group of assets that constitutes a business or nonprofit
activity for an equity interest in another entity. The amendments affect
entities that have previously adopted the decrease in ownership provisions of
ASC 810-10 but have applied the guidance in that Subtopic differently from the
guidance provided in the Update. This Update provides amendments to ASC 810-10
and related guidance within GAAP to clarify the scope of the decrease in
ownership provisions of the Subtopic and related guidance and applies to a
subsidiary or group of assets that is a business or non-profit activity; a
subsidiary that is a business or non-profit activity that is transferred to an
equity method investee or joint venture; and an exchange of a group of assets
that constitutes a business or nonprofit activity for a noncontrolling interest
in an entity. The amendments in this Update expand the disclosures about the
deconsolidation of a subsidiary or derecognition of a group of assets within the
scope of ASC 810-10. In addition to the existing disclosures, an entity should
disclose the valuation techniques used to measure the fair value of any retained
investment in the former subsidiary or group of assets and information that
enables users of its financial statements to assess the input used to develop
the measurement; the nature of continuing involvement with the subsidiary or the
group of assets after it has been deconsolidated or derecognized; and whether
the transaction that resulted in the deconsolidation of the subsidiary or the
derecognition of the group of assets was with a related party or whether the
former subsidiary or entity acquiring the group of assets will be a related
party after deconsolidation. An entity also should disclose the valuation
techniques used to measure an entity interest in an acquiree held by the entity
immediately before the acquisition date in a business combination achieved in
stages. The amendments in this Update are effective beginning in the period that
an entity adopts Statement of Financial Accounting Standard (SFAS) 160, which
was codified in July 2009 in ASC 810-10. If an entity has previously adopted
SFAS 160 as of the date the amendments in this Update are included in the ASC,
the amendments in this Update are effective beginning in the first interim or
annual reporting period ending on or after December 15, 2009. The
amendments in this Update should be applied retrospectively to the first period
that an entity adopted SFAS 160. We do not anticipate that the adoption of this
Update will have any significant impact on the Company’s results of operations
or financial position.





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.




15




Results
of operations for the three months ended March 31, 2010 compared with the
three months ended March 31, 2009.





Revenue.
Revenue remained consistent with an increase of $0.2 million to $17.1
million for the three months ended March 31, 2010 from $16.9 million for the
three months ended March 31, 2009.





Cost of Revenue. Cost of
revenue increased $0.6 million to $14.7 million for the three months ended March
31, 2010 from $14.1 million for the three months ended March 31,
2009.  During the three months ended March 31, 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 14.4% for the three months ended March 31,
2010 compared to 16.7% for the three months ended March 31,
2009.  Excluding the $0.3 million reduction in cost of sales for the
extinguishment of contract liabilities during the three months ended March 31,
2009, gross margin declined to 14.4% for the three months ended March 31, 2010
compared to 15.3% during the three months ended March 31, 2009.  The
decline in gross margin is attributable to the decrease in gross margin
percentage across our services, which is due to the competitive environment
in which we have contracted work at lower than historic margins.





Selling, general and administrative
expenses.  Selling, general and administrative expenses
decreased $0.9 million to $2.6 million for the three months ended March 31, 2010
from $3.5 million for the three months ended March 31, 2009. The decrease is
primarily driven by $0.6 million decrease in salaries and related costs of
benefits and non-cash compensation due to a reduction in
headcount.  The remaining decline is attributable to a reduction in
professional fees and marketing efforts.  To the extent we continue to
experience delays in the timing of revenues associated with certain customers
and lower margins, we may take additional actions to reduce operating costs
associated with personnel and related costs.




Depreciation.
Depreciation remained consistent at $0.1 million for the three months
ended March 31, 2010 compared to $0.1 million for the three months
ended March 31, 2009.




Amortization of intangible
assets. Amortization expense decreased $0.5 million to zero for the three
months ended March 31, 2010 from $0.5 million for the three months ended
March 31, 2009.  During the three months ended March 31, 2010, there
were no amortizable assets, as they were impaired to zero net carrying value
during the three months ended June 30, 2009.





Interest income (expense),
net. Our interest income (expense), net remained consistent at ($38,789)
for the three months ended March 31, 2010 compared to ($35,789) for the three
months ended March 31, 2009.





Income from discontinued business,
net of tax.We recorded income from discontinued operations of zero for the three
months ended March 31, 2010 as compared to $0.2 million for the three months
ended March 31, 2009.  We sold substantially all of the assets and
liabilities of Rubicon on December 29, 2009.





16





Financial
Condition, Liquidity and Capital Resources





For
      the Three Months Ended March 31,2010
              
              
              2009
              
              
              ChangeNet
      loss
              
              $
              (290,151
              )
              
              $
              (1,016,598
              )
              
              $
              726,447Adjustments
      to reconcile net loss to net cashused
      in operations:Amortization
      of intangibles
              
              
              -
              
              
              
              692,105
              
              
              
              (692,105
              )Stock
      and warrant-based compensation
              
              
              155,858
              
              
              
              483,689
              
              
              
              (327,831
              )Extinguishment
      of liabities
              
              
              -
              
              
              
              (269,217
              )
              
              
              269,217Other
      non-cash items
              
              
              98,414
              
              
              
              129,955
              
              
              
              (31,541
              )Net
      adjustments to reconcile net income for non-cash items
              
              
              254,272
              
              
              
              1,036,532
              
              
              
              (782,260
              )Net
      change in working capital
              
              
              4,010,315
              
              
              
              (2,525,739
              )
              
              
              6,536,054Cash
      (used in) provided by operations
              
              
              3,974,436
              
              
              
              (2,505,805
              )
              
              
              6,480,241Cash
      used in investing
              
              
              (27,515
              )
              
              
              (66,147
              )
              
              
              38,632Cash
      used in financing
              
              
              (103,947
              )
              
              
              (1,598,919
              )
              
              
              1,494,972Net
      increase (decrease) in cash
              
              $
              3,842,974
              
              
              $
              (4,170,871
              )
              
              $
              8,013,845





Cash and
cash equivalents increased $3.8 million to $6.1 million at March 31, 2010 from
$2.3 million at December 31, 2009. The increase was primarily attributable to
$4.0 million provided by operating activities, offset by $0.1 million used in
repayment of notes payable.





Operating
Activity





Net cash
provided by operating activities totaled $4.0 million for the three months ended
March 31, 2010 compared to $2.5 million used in operating activities for the
three months ended March 31, 2009. The increase in operating cash flow was
primarily attributable to a $6.5 million decrease in working
capital.  The decrease in 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 three months
ended March 31, 2010.  At March 31, 2010, cash increased approximately
$3.2 million as a result of advanced billings from the fourth quarter and
continuance during the three months ended March 31, 2010.





Investing
Activity





Net cash
used in investing activities decreased $38,632 to $27,515 for the three months
ended March 31, 2010 from $66,147 for the three months ended March 31,
2009.  The decrease was associated with a decrease in purchase of
property and equipment.




Financing
Activity




Net cash
used in financing decreased $1.5 million to $0.1 million for the three months
ended March 31, 2010 from $1.6 million for the three months ended March 31,
2009.  For the three months ended March 31, 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 $1.6
million of scheduled seller note repayments during the three months ended March
31, 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 of our common shares.  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 shares
will be subject to that certain Registration Rights Agreement between us and the
COO. 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.





There
were no other non-cash activities during the three months ended March 31, 2009.




17





Liquidity
and Capital Resources





We had
$6.2 million and $2.3 million (including cash associated with
discontinued operations of $0.7 million) of unrestricted cash and cash
equivalents at March 31, 2010 and December 31, 2009, respectively. During the
three months ended March 31, 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
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.





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 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
March 31, 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 March 31, 2010. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that as of March 31, 2010, our
disclosure controls and procedures were ineffective.





Changes in Internal Control over
Financial Reporting




There
were no changes in the Company’s internal control over financial reporting for
the first quarter of 2010 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act
of 1934, as amended.




18





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.




Approximate
      DollarTotal
      Shares
              
              Amount
      ofPurchased
      as
              
              Shares
      YetAverage
              
              Part
      of
              
              To
      BeTotal
              
              Price
              
              Publically
              
              PurchasedMonthly
      Period During the Three
              
              Shares
              
              Paid
              
              Announced
              
              UnderMonths
      Ended March 31, 2010
              
              Purchased
      (a)
              
              per
      Share
              
              
              Plans
              
              
              PlansJanuary
      1, 2010-January 31, 2010
              
              
              159,283
              
              
              $
              0.67
              
              
              
              -
              
              
              
              -February
      1, 2010- February 28, 2010
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -March
      1, 2010-March 31, 2010
              
              
              6,530
              
              
              
              0.61
              
              
              
              -
              
              
              
              -Total
              
              
              165,813
              
              
              $
              0.67
              
              
              
              -
              
              
              
              -




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





Item
3. Defaults upon Senior Securities.





Not
applicable.





Item
4.(Removed and Reserved).




Item
5. Other Information.




Not
applicable.





Item
6. Exhibits.




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







* Filed
herewith.


‡
Furnished herewith.




19


SIGNATURES




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





FORTRESS
      INTERNATIONAL GROUP, INC.Date:
      May 17, 2010
            By:
            /s/
      Thomas P. RosatoThomas
      P. RosatoChief
      Executive Officer (Authorized Officer and Principal Executive
      Officer)Date:
      May17, 2010
            By:
            /s/
      Timothy C. DecTimothy
      C. DecChief
      Financial Officer (Authorized Officer and Principal Financial
      Officer)




20