**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-Q**




(Mark
      One)


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





For
      the
      quarterly period ended June 30, 2008





or





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





For
      the
      transition period from ___________to ____________





Commission
      file number: 000-51426








**FORTRESS
      INTERNATIONAL GROUP, INC.**


(Exact name of registrant as specified in its charter)





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





**(410)
      312-9988**


(Registrant's
      telephone number, including area code)





9841
      Broken Land Parkway, Columbia, Maryland


(Former
      Name or Former Address, if Changed Since Last Report)





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
      (or
      for such shorter period that the Registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days.
      Yes x No o





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




Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filero(Do not check if a smaller reporting company)
            Smaller
                reporting companyx




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




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 July 31,
      2008                12,091,870**












**FORTRESS
      INTERNATIONAL GROUP, INC.**


**Table
      of Contents**





**Page****PART
                I - FINANCIAL INFORMATION****Item
                1.     Financial
                Statements**Consolidated
                Balance Sheets as of June 30, 2008 (unaudited) and as of December
                31,
                2007
            
            
            1Consolidated
                Statements of Operations (unaudited) for the three and six months
                ended
                June 30, 2008 and June 30, 2007 (successor) and for the period from
                January 1, 2007 to January 19, 2007 (predecessor)
            
            
            2Consolidated
                Statements of Cash Flows (unaudited) for the six months ended June
                30,
                2008 and June 30, 2007 (successor) and for the period from January
                1, 2007
                to January 19, 2007 (predecessor)
            
            
            3Notes
                to Consolidated Financial Statements
            
            
            4**Item
                2.      Management’s Discussion and Analysis of
                Financial Condition and Results of Operations**
            
            
            16**Item
                3.      Quantitative and Qualitative Disclosures
                about Market Risk**
            
            
            24**Item
                4T.   Controls and Procedures**
            
            
            25**PART
                II - OTHER INFORMATION****Item
                1.      Legal
                Proceedings**
            
            
            25**Item
                1A.   Risk Factors**
            
            
            25**Item
                2.      Unregistered Sales of Equity Securities
                and Use of Proceeds**
            
            
            25**Item
                3.      Defaults upon Senior
                Securities**
            
            
            26**Item
                4.      Submission of Matters to a Vote of
                Security Holders**
            
            
            26**Item
                5.      Other
                Information**
            
            
            26**Item
                6.      Exhibits**
            
            
            26**SIGNATURES**
            
            
            27









**PART
      I - FINANCIAL INFORMATION**


**Item
      1. Financial Statements**




FORTRESS
      INTERNATIONAL GROUP, INC.


CONSOLIDATED
      BALANCE SHEETS


June
                  30,
              
              December
                  31,2008
              
              2007(unaudited)
              
              (audited)*Current
                  Assets*Cash
                  and cash equivalents
              
              $
              8,401,630
              
              $
              13,172,210Contract
                  and other receivables, net
              
              
              17,261,140
              
              
              18,349,140Costs
                  and estimated earnings in excess of billingson
                  uncompleted contracts
              
              
              1,775,891
              
              
              1,322,254Prepaid
                  expenses and other current assets
              
              
              602,156
              
              
              301,487Income
                  taxes receivable
              
              
              893,322
              
              
              893,322Total
                  current assets
              
              
              28,934,139
              
              
              34,038,413Property
                  and equipment, net
              
              
              998,380
              
              
              1,044,545Goodwill
              
              
              21,786,509
              
              
              20,714,967Intangible
                  assets, net
              
              
              20,656,626
              
              
              21,089,136Other
                  assets
              
              
              362,580
              
              
              512,000Total
                  assets
              
              $
              72,738,234
              
              $
              77,399,061*Liabilities
                  and Stockholders’ Equity*Current
                  LiabilitiesNotes
                  payable, current portion
              
              $
              1,252,227
              
              $
              1,650,306Accounts
                  payable and accrued expenses
              
              
              18,530,298
              
              
              16,121,492Billings
                  in excess of costs and estimated earningson
                  uncompleted contracts
              
              
              4,788,740
              
              
              3,880,279Total
                  current liabilities
              
              
              24,571,265
              
              
              21,652,077Notes
                  payable, less current portion
              
              
              7,106,238
              
              
              7,848,661Other
                  liabilities
              
              
              54,506
              
              
              44,648Total
                  liabilities
              
              
              31,732,009
              
              
              29,545,386Commitments
                  and Contingencies
              
              
              -
              
              
              -Stockholders’
                  EquityPreferred
                  stock- $.0001 par value; 1,000,000 shares authorized; no sharesissued
                  or outstanding
              
              
              -
              
              
              -Common
                  stock-- $.0001 par value, 100,000,000 shares authorized;
                  12,263,963and
                  12,150,400 issued; 12,099,898 and 11,992,325 outstanding
                  atJune
                  30, 2008 and December 31, 2007, respectively
              
              
              1,226
              
              
              1,214Additional
                  paid-in capital
              
              
              56,743,192
              
              
              55,268,012Treasury
                  stock, 164,065 and 158,075 shares at cost at June 30, 2008and
                  December 31, 2007, respectively
              
              
              (842,312
              )
              
              (814,198
              )Accumulated
                  deficit
              
              
              (14,895,881
              )
              
              (6,601,353
              )Total
                  stockholders' equity
              
              
              41,006,225
              
              
              47,853,675Total
                  liabilities and stockholders’ equity
              
              $
              72,738,234
              
              $
              77,399,061




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




1


FORTRESS
      INTERNATIONAL GROUP, INC.


CONSOLIDATED
      STATEMENTS OF OPERATIONS


Predecessor(TSS/Vortech)Successor
                  (Fortress International Group, Inc.)
              
              For
                  the periodJanuary
                  1,Three
                  Months Ended
              
              Six
                  Months Ended
              
              throughJune
                  30, 2008
              
              June
                  30, 2007
              
              June
                  30, 2008
              
              June
                  30, 2007
              
              January
                  19, 2007(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (audited)Results
                  of Operations:Revenue
              
              $
              20,149,876
              
              $
              10,862,307
              
              $
              39,581,956
              
              $
              19,539,244
              
              $
              1,412,137Cost
                  of revenue
              
              
              18,038,179
              
              
              9,424,029
              
              
              34,059,068
              
              
              16,629,595
              
              
              1,108,276Gross
                  profit
              
              
              2,111,697
              
              
              1,438,278
              
              
              5,522,888
              
              
              2,909,649
              
              
              303,861Operating
                  expenses:Selling,
                  general and administrative
              
              
              5,657,424
              
              
              3,424,040
              
              
              10,428,454
              
              
              6,061,980
              
              
              555,103Depreciation
              
              
              123,217
              
              
              97,245
              
              
              238,456
              
              
              152,676
              
              
              33,660Amortization
                  of intangibles
              
              
              619,436
              
              
              567,108
              
              
              1,401,498
              
              
              1,007,562
              
              
              -Impairment
                  loss on goodwill
              
              
              1,217,000
              
              
              -
              
              
              1,217,000
              
              
              -
              
              
              -Total
                  operating costs
              
              
              7,617,077
              
              
              4,088,393
              
              
              13,285,408
              
              
              7,222,218
              
              
              588,763Operating
                  loss
              
              
              (5,505,380
              )
              
              (2,650,115
              )
              
              (7,762,520
              )
              
              (4,312,569
              )
              
              (284,902
              )Interest
                  income (expense), net
              
              
              (101,938
              )
              
              273,467
              
              
              (145,008
              )
              
              372,272
              
              
              3,749Loss
                  from operations before income taxes
              
              
              (5,607,318
              )
              
              (2,376,648
              )
              
              (7,907,528
              )
              
              (3,940,297
              )
              
              (281,153
              )Income
                  tax expense (benefit)
              
              
              387,000
              
              
              182,316
              
              
              387,000
              
              
              (349,325
              )
              
              -Net
                  loss
              
              $
              (5,994,318
              )
              $
              (2,558,964
              )
              $
              (8,294,528
              )
              $
              (3,590,972
              )
              $
              (281,153
              )Per
                  Common Share (Basic and Diluted):Basic
                  and diluted net loss
              
              $
              (0.50
              )
              $
              (0.21
              )
              $
              (0.69
              )
              $
              (0.31
              )
              $
              -Weighted
                  average common shares outstanding-basic and diluted
              
              
              12,093,895
              
              
              12,013,491
              
              
              12,083,483
              
              
              11,592,599
              
              
              -




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


2


FORTRESS
      INTERNATIONAL GROUP, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Successor
                (Fortress
                  International Group, Inc.)
              
              Predecessor
                  (TSS/Vortech)For
                  the periodJanuary
                  1,Six
                  Months Ended
              
              throughJune
                  30, 2008
              
              June
                  30, 2007
              
              January
                  19, 2007(unaudited)
              
              (unaudited)
              
              (audited)Cash
                  Flows from Operating Activities:Net
                  loss
              
              $
              (8,294,528
              )
              $
              (3,590,972
              )
              $
              (281,153
              )Adjustments
                  to reconcile net loss to net cash provided by(used
                  in) operating activities:Depreciation
                  and amortization
              
              
              238,456
              
              
              152,676
              
              
              33,660Amortization
                  of intangibles
              
              
              1,673,434
              
              
              1,210,235
              
              
              -Impairment
                  loss on goodwill
              
              
              1,217,000
              
              
              -
              
              
              -Allowance
                  for doubtful accounts
              
              
              89,795
              
              
              -
              
              
              -Stock
                  and warrant-based compensation
              
              
              1,012,417
              
              
              465,433
              
              
              -Benefit
                  from income taxes
              
              
              -
              
              
              (840,000
              )
              
              -Other
                  non-cash income, net
              
              
              9,858
              
              
              490,675
              
              
              -Changes
                  in operating assets and liabilities, net of effects of
                  acquisitions:Contract
                  and other receivables
              
              
              1,385,817
              
              
              (2,715,688
              )
              
              3,698,863Costs
                  and estimated earnings in excess of billings on uncompletedcontracts
              
              
              (453,637
              )
              
              158,177
              
              
              (1,078,505
              )Prepaid
                  expenses and other current assets
              
              
              (300,593
              )
              
              (508,619
              )
              
              (108,618
              )Due
                  from affiliates
              
              
              -
              
              
              -
              
              
              519,923Other
                  assets
              
              
              44,964
              
              
              (307,665
              )
              
              (42,968
              )Accounts
                  payable and accrued expenses
              
              
              2,139,835
              
              
              354,887
              
              
              (1,861,306
              )Billings
                  in excess of costs and estimated earnings onuncompleted
                  contracts
              
              
              398,344
              
              
              (589,807
              )
              
              419,676Other
                  liabilities
              
              
              -
              
              
              (586,283
              )
              
              (643,571
              )Net
                  cash provided by (used in) operating activities
              
              
              (838,838
              )
              
              (6,306,951
              )
              
              656,001Cash
                  Flows from Investing Activities:Purchase
                  of property and equipment
              
              
              (192,291
              )
              
              (172,350
              )
              
              (127,602
              )Sale
                  of investments held in trust
              
              
              -
              
              
              44,673,994
              
              
              -Purchase
                  of TSS/Vortech, net of cash acquired
              
              
              -
              
              
              (9,677,683
              )
              
              -Purchase
                  of SMLB, net of cash acquired
              
              
              (2,094,561
              )
              
              -
              
              
              -Purchase
                  of Comm Site of South Florida, Inc, net of cash acquired
              
              
              -
              
              
              (135,000
              )
              
              -Deferred
                  acquistion costs
              
              
              (21,785
              )
              
              (981,357
              )
              
              -Net
                  cash provided by (used in) investing activities
              
              
              (2,308,637
              )
              
              33,707,604
              
              
              (127,602
              )Cash
                  Flows from Financing Activities:Payments
                  on notes payable
              
              
              (77,238
              )
              
              (32,450
              )
              
              (6,281
              )Payment
                  of Rubicon seller notes
              
              
              (1,517,753
              )
              
              -
              
              
              -Payment
                  on promissory note payable to officer
              
              
              -
              
              
              (20,000
              )
              
              -Payment
                  to shareholders electing to redeem their shares inconnection
                  with the TSS/Vortech acquisition
              
              
              -
              
              
              (4,339,014
              )
              
              -Repurchase
                  of treasury stock
              
              
              (28,114
              )
              
              (1,909,560
              )
              
              -Members'
                  distributions
              
              
              -
              
              
              -
              
              
              (1,561,639
              )Net
                  cash used in financing activities
              
              
              (1,623,105
              )
              
              (6,301,024
              )
              
              (1,567,920
              )Net
                  increase (decrease) in cash
              
              
              (4,770,580
              )
              
              21,099,629
              
              
              (1,039,521
              )Cash,
                  beginning of period
              
              
              13,172,210
              
              
              7,347
              
              
              2,361,838Cash,
                  end of period
              
              $
              8,401,630
              
              $
              21,106,976
              
              $
              1,322,317Supplemental
                  disclosure of cash flow information:Cash
                  paid for interest
              
              $
              240,167
              
              $
              267,797
              
              $
              368Cash
                  paid for taxes
              
              
              -
              
              
              593,166
              
              
              -Supplemental
                  disclosure of non-cash Investing Activities:Issuance
                  of common stock in connection with the acquistion of
                  TSS/Vortech
              
              
              -
              
              
              14,211,359
              
              
              -Issuance
                  of common stock in connection with the acquisition of SMLB,
                  LTD
              
              
              500,000
              
              
              -
              
              
              -Promissory
                  notes payable issued in connection with the acquistion of TSS/Vortech
              
              
              -
              
              
              10,000,000
              
              
              -Promissory
                  notes payable issued in connection with the acquistion of Rubicon
              
              
              439,241
              
              
              -
              
              
              -Promissory
                  notes payable issued in connection with the acquistion of SMLB,
                  LTD
              
              
              15,248
              
              
              -
              
              
              -


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




3




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




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




The
      consolidated financial statements are for the three and six months ended
      June 30, 2008 and 2007 for Fortress International Group, Inc. (the
“Successor Company”, “Fortress” or the “Company”) and are for the period from
      January 1, 2007 to January 19, 2007 (the acquisition date) for VTC, L.L.C.
      t/a
      Total Site Solutions and Vortech, L.L.C. (collectively the “Predecessor Company”
or “TSS/Vortech”).  The results of operations attributable to each
      acquisition are included in the consolidated financial statements from the
      date
      of acquisition.





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




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





***Nature
      of Business and Organization***




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





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





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





On
      January 19, 2007, the Company acquired all of the outstanding interest in
      TSS/Vortech in exchange for a combination of cash, the Company’s common stock,
      and issuance of two convertible notes (See Note 9). The acquisition
      fundamentally transformed the Company from a firm primarily investing capital
      to
      an operating business. Concurrent with the acquisition, the Company changed
      its
      name to Fortress International Group, Inc.




After
      acquiring TSS/Vortech and during 2007, the Company continued its expansion
      through the acquisitions of  Comm Site of South Florida, Inc. (“Comm
      Site”), Innovative Power Systems, Inc. and Quality Power Systems, Inc.
      (“Innovative”) and Rubicon Integration, L.L.C. (“Rubicon”). On January 2, 2008,
      the Company acquired SMLB, Ltd. to continue its footprint expansion with
      complementary service offerings. As applicable, the Company also acquired these
      companies’ operating subsidiaries. The results of operations, cash flows and
      financial position attributable to these acquisitions are included in the
      consolidated financial statements from the respective dates of their acquisition
      (See Note 3). All intercompany transactions have been eliminated in
      consolidation.




***Recently
      Issued Accounting Pronouncements***





In
      May
      2008, the Financial Accounting Standards Board ("FASB") issued SFAS No.
      163, “Accounting for Financial Guarantee Insurance Contracts” (“SFAS 163”). SFAS
      163 requires recognition of a claim liability prior to an event of default
      when
      there is evidence that credit deterioration has occurred in an insured financial
      obligation. SFAS 163 clarifies how FAS 60 applies to financial guarantee
      insurance contracts, including the recognition and measurement to be used to
      account for premium revenue and claim liabilities and requires expanded
      disclosures about financial guarantee insurance contracts. SFAS 163 is
      effective January 1, 2009. The Company does not expect the adoption of SFAS
      163 to have a material effect on its consolidated results of operations and
      financial condition.





4


FORTRESS
        INTERNATIONAL GROUP, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


In
      May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
      Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the
      sources of accounting principles and the framework for selecting the principles
      used in the preparation of financial statements of nongovernmental entities
      that
      are presented in conformity with generally accepted accounting principles (the
      GAAP hierarchy). SFAS No. 162 will become effective 60 days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, “The Meaning of Present Fairly in
      Conformity With Generally Accepted Accounting Principles.” The Company does not
      expect the adoption of SFAS 162 to have a material effect on its
      consolidated results of operations and financial condition.


In April
              2008, FASB issued a Staff Position (FSP) No. FAS 142-3, “Determination of the
              Useful Life of Intangible Assets,” (“FSP 142-3”) which amends the factors a
              Company should consider when developing renewal assumptions used to
              determine
              the useful life of an intangible asset under SFAS 142. FSP 142-3 replaces
              the
              previous useful life criteria with a new requirement-that an entity
              consider its
              own historical experience in renewing similar arrangements. In issuing
              FSP
              142-3, the FASB hopes to improve the consistency between the useful
              life of a
              recognized intangible asset and the period of expected cash flows used
              to
              measure the fair value of the asset. FAS 142-3 is effective January
              1, 2009. The
              Company is currently assessing the potential impact that adoption of
              FAS 142-3
              may have on its financial statements.
  In
          March
          2008, the FASB issued Statement of Financial Accounting Standards SFAS
          No. 161, “ Disclosures
          about Derivative Instruments and Hedging Activities, an amendment of FASB
          Statement No. 133”*,* (“SFAS
          No. 161”) which requires additional disclosures about the objectives of the
          derivative instruments and hedging activities, the method of accounting
          for such
          instruments under SFAS No. 133 and its related interpretations, and a
          tabular disclosure of the effects of such instruments and related hedged
          items
          on our financial position, financial performance, and cash flows. SFAS
          No. 161 is effective beginning January 1, 2009. The Company is
          currently assessing the potential impact that adoption of SFAS No. 161 may
          have on its financial statements. **
 
 In
        December 2007, the FASB issued SFAS No. 160, “ Noncontrolling
        Interests in Consolidated Financial Statements, an amendment of ARB
        No. 51”, (“SFAS
        No. 160”) which changes the accounting and reporting for minority interests.
        Minority interests will be recharacterized as noncontrolling interests and
        will
        be reported as a component of equity separate from the parent’s equity, and
        purchases or sales of equity interests that do not result in a change in
        control
        will be accounted for as equity transactions. In addition, net income
        attributable to the noncontrolling interest will be included in consolidated
        net
        income on the face of the income statement and, upon a loss of control, the
        interest sold, as well as any interest retained, will be recorded at fair
        value
        with any gain or loss recognized in earnings. SFAS No. 160 is effective for
        us beginning January 1, 2009 and will apply prospectively, except for the
        presentation and disclosure requirements, which will apply retrospectively.
        The
        Company does not expect the adoption of SFAS No. 160 to have a material effect
        on its consolidated results of operation of financial condition.


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




5




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS






**(2)**
            **Accounts
                Receivable**




During
        the three and six months ended June 30, 2008, the Company has recognized
        a $0.7
        million loss on customer contract. The Company has not recorded any revenue
        related to this contract since we were not able to conclude revenue was
        reasonably assured. We will recognize revenue based on cash collections related
        to this customer. The amount written off was $1,309,000 of which $824,000
        will
        be recognized upon cash collection and the remaining $485,000 reduced unsecured,
        promissory notes payable issued to sellers of SMLB (seller note). The note
        reduction was pursuant to the working capital adjustment per terms of the
        original purchase agreement. Contract costs totaling $0.7 million were fully
        recognized in the three and six months ending June 30, 2008. In the event
        the
        $1,309,000 receivable is subsequently collected, the Company will recognize
        revenue of $824,000 and the seller note will be increased $485,000.


As
      of
      June 30, 2008, accounts receivable is $1,429,074 due from a customer that the
      Company has offered extended payment terms. This amount was recognized as
      revenue during the three months ended June 30, 2008. The customer has executed
      a
      promissory note in the same amount bearing interest at 8% per annum with
      payments of interest only due monthly and the balance in full is due on December
      15, 2008.





**(3)**
            **Acquisitions**




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




**2008
      Acquisition**




**SMLB,
      Ltd.**





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





All
      of
      the shares issued to the selling members were placed into escrow to secure
      the
      rights of Fortress under the acquisition. These shares will be released subject
      to certain conditions under the agreements twelve months from the acquisition
      date. During the second quarter 2008, the unsecured promissory note of $500,000
      was reduced to $15,248 based on a working capital adjustment per the purchase
      agreement.





The
      Company paid a premium (i.e., goodwill) over the fair value of the net tangible
      and preliminarily identified intangible assets acquired for a number of reasons,
      including SMLB’s complementary experience, key customer relationships in an
      expanded market, and service offerings in the mission-critical facility
      industry. The Company recorded goodwill totaling $2.7 million associated with
      the SMLB acquisition, which is not expected to be deductible for income tax
      purposes.




6


FORTRESS
        INTERNATIONAL GROUP, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


The
      adjusted fair values of the assets acquired and the liabilities assumed for
      SMLB
      is as follows:


**SMLB**Cash
              
              $
              2,000,000Common
                  stock
              
              
              462,775Promissory
                  notes to sellers
              
              
              15,248Acquistion
                  costs
              
              
              151,133Total
                  purchase price
              
              
              2,629,156AssetsCash
                  and equivalents
              
              
              56,573Contracts
                  and other receivables
              
              
              387,612Total
                  current assets
              
              
              444,185Goodwill
              
              
              2,693,060Identifiable
                  intangibles, net
              
              
              271,000Total
                  assets
              
              
              3,408,245LiabilitiesAccounts
                  payable and accrued expenses
              
              
              137,310Income
                  taxes payable
              
              
              131,662Billings
                  in excess of costs
              
              
              510,117Total
                  current liabilities
              
              
              779,089Allocated
                  purchase price
              
              $
              2,629,156


7




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**2007
      Acquisitions**




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





During
      the first quarter of 2008, the Company finalized its purchase price allocation
      associated with Rubicon, resulting in an increase in the value of customer
      relationship intangibles of $1.0 million and a corresponding decrease in
      goodwill.





During
      the second quarter of 2008, Rubicon achieved certain 2008 revenue bookings
      targets through June 30, 2008, which entitled the sellers under the purchase
      agreement to an unsecured promissory note of $0.4 million and resulted in a
      corresponding increase in goodwill (see Notes 2 and 9). The Company recorded
      goodwill totaling $3.4 million associated with Rubicon transaction, which is
      expected to be deductible for income tax purposes.






*Purchase
      Price Allocation*




Under
      business combination accounting, the purchase price for each of the acquired
      companies, Rubicon and SMLB, was allocated to the net tangible and identifiable
      intangible assets based on their estimated fair values as of the acquisition
      dates. The allocation of the purchase price was based upon valuations performed
      for each acquired company. Subject to adjustment associated with working capital
      requirements and contingent consideration issuable upon achievement of certain
      financial targets, we finalized the Rubicon valuation in the
      first quarter of 2008 and SMLB during the second quarter 2008.




The
      valuations indicated that the estimated fair value of the assets acquired was
      less than the total of the purchase price paid and the liabilities assumed
      in
      the transactions. As a result, the excess purchase price was assigned to
      goodwill for each acquisition. The Company recorded goodwill associated with
      its
      acquisitions of SMLB and Rubicon totaling $6.1 million of which $3.4 million
      is
      expected to be deductible for income tax purposes.




*Tangible
      and Other Intangible Long-Lived Assets*




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




The
      value
      of the components of intangible assets as of June 30, 2008 are as
      follows:


SMLB
              
              Rubicon
              
              Innovative
              
              TSS/Vortech
              
              TotalIntangible
                  asset:Trade
                  name
              
              $
              36,000
              
              $
              460,000
              
              $
              60,000
              
              $
              4,930,000
              
              $
              5,486,000In-place
                  contracts
              
              
              230,000
              
              
              50,000
              
              
              350,000
              
              
              406,200
              
              
              1,036,200Customer
                  relationships
              
              
              -
              
              
              2,970,000
              
              
              560,000
              
              
              14,100,000
              
              
              17,630,000Non
                  competition agreement
              
              
              5,000
              
              
              685,000
              
              
              50,600
              
              
              -
              
              
              740,600Total
                  Intangible
              
              
              271,000
              
              
              4,165,000
              
              
              1,020,600
              
              
              19,436,200
              
              
              24,892,800Accumulated
                  amortization
              
              
              (109,903
              )
              
              (574,601
              )
              
              (283,644
              )
              
              (3,268,026
              )
              
              (4,236,174
              )Intangible
                  assets, net
              
              $
              161,097
              
              $
              3,590,399
              
              $
              736,956
              
              $
              16,168,174
              
              $
              20,656,626


8




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





*Impairment*





The
      Company has not realized the anticipated revenue from customers acquired in
      our
      acquisitions and has experienced continued operating losses during the six
      months ended June 30, 2008. The Company conducted analyses of the operations
      in
      order to identify any impairment in the carrying value of the goodwill related
      to the business. Analyzing the business using both an income approach and a
      market approach determined that the carrying valued exceeded the current fair
      value of the business, resulting in goodwill impairment of $1.2 million for
      the
      three and six months ended June 30, 2008. At June 30, 2008, the adjusted
      carrying value of goodwill was $21.8 million.





For
      the
      three months ended June 30, 2008 and June 30, 2007, amortization expense
      totaling $0.8 million and $0.7 million, respectively, has been included in
      the
      accompanying consolidated statement of operations related to the above
      intangibles of which $0.2 million and $0.1 million, respectively, is included
      in
      cost of revenue.





For
      the
      six months ended June 30, 2008 and June 30, 2007, amortization expense totaling
      $1.7 million and $1.2 million, respectively, has been included in the
      accompanying consolidated statement of operations related to the above
      intangibles of which $0.3 million and $0.2 million, respectively, is
      included in cost of revenue.




Proforma
      Results




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


Three
                  Months
              
              Six
                  MonthsEnded
              
              EndedJune
                  30, 2007
              
              June
                  30, 2007Proforma
                  revenue
              
              $
              17,434,883
              
              $
              28,748,137Proforma
                  operating loss
              
              
              (1,773,704
              )
              
              (3,655,038
              )Proforma
                  pre-tax loss
              
              
              (1,671,150
              )
              
              (3,613,305
              )Proforma
                  net loss
              
              
              (1,139,509
              )
              
              (3,081,664
              )Pro
                  forma basic and diluted net loss per share
              
              $
              (0.09
              )
              $
              (0.25
              )Weighted
                  average common shares
              
              
              12,242,646
              
              
              12,370,827





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


9




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**(4)**
            **Basic
                and Diluted Net Loss per
                Share**





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


SuccessorThree
                  Months Ended
              
              Six
                    Months EndedJune
                  30,
              
              June
                  30,
              
              June
                  30,
              
              June
                  30,2008
              
              2007
              
              2008
              
              2007Net
                  loss
              
              $
              (5,994,318
              )
              $
              (2,558,964
              )
              $
              (8,294,528
              )
              $
              (3,590,972
              )Basic
                  and diluted weighted average common shares
              
              
              12,093,895
              
              
              12,013,491
              
              
              12,083,483
              
              
              11,592,599Net
                  loss per share
              
              $
              (0.50
              )
              $
              (0.21
              )
              $
              (0.69
              )
              $
              (0.31
              )





As
      of June 30, 2008, there were unvested restricted stock, options to purchase
      units and warrants outstanding to purchase a total of 18,165,634 shares of
      common stock and convertible unsecured promissory notes convertible into
      1,000,000 shares of common stock. These were excluded in the computation of
      diluted net loss per common share for the three and six months ended June 30,
      2008, as their inclusion would be anti-dilutive.





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





10




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS






**(5)**
            **Employee
                Benefit Plans**





*Restricted
      Stock*




During
      the six months ended June 30, 2008 and June 30, 2007, the Company granted
      132,000 and 574,000 restricted common shares, respectively, under the 2006
      Omnibus Incentive Compensation Plan (“Plan”). During the six months ended June
      30, 2008, the weighted average fair value of grants was $4.53 per share. During
      the three month period ended June 30, 2008 and June 30, 2007, non-cash
      compensation expense totaling $687,332 and $263,074, respectively, has been
      included in the accompanying consolidated statement of operations related to
      vesting of awards, of which $96,792 and $0, respectively, is in cost of revenue.





During
      the six months ended June 30, 2008 and June 30, 2007, non-cash compensation
      expense totaling $1,012,417 and $465,433, respectively, has been included in
      the
      accompanying consolidated statement of operations related to vesting of awards,
      of which $225,767 and $0, respectively, is in cost of revenue. There was no
      other restricted stock activity.





**(6)**
            **Common
                Stock Repurchases**




During
      the three and six months ended June 30, 2008, the Company repurchased 5,990
      treasury shares with an aggregate value of $28,114 associated with vesting
      restricted stock of an employee. The Company paid the employees’ related
      taxes associated with the employees' vested stock and decreased the shares
      issued to the employee by a corresponding value, resulting in a share issuance
      net of taxes to employee. The value of the shares netted for employee taxes
      represents treasury stock repurchased in the second quarter 2008.





Prior
      to
      the consummation of the acquisition of TSS/Vortech, the Company announced and
      implemented a common stock repurchase program under which it may purchase up
      to
      3,000,000 shares of common stock. Currently the Board of Directors has
      authorized the repurchase of up to 500,000 shares under this program. 
During the six months ended June 30, 2007, the Company repurchased 354,775
      of
      the Company’s common shares valued in aggregate at $1.9 million. The plan was
      suspended in the third quarter of 2007; accordingly, there has been no activity
      under the plan in the 2008.





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





**(7)**
            **Options
                to Purchase Units and
                Warrants**





At
      June
      30, 2008 and December 31, 2007, there were outstanding options to purchase
      units
      and warrants to purchase 17,810,300 of common shares. Both the option to
      purchase units and warrants have a cashless exercise feature, whereby the holder
      may elect to receive a net amount of shares and forego the payment of the strike
      price.





In
      February 2007, the Company entered into a one year agreement with an advisor
      in
      which we were obligated to issue a warrant for the purchase of 125,000 shares
      of
      our common stock, in exchange for consulting services. The fair value of these
      warrants was determined using the Black-Scholes model and is recognized over
      the
      term of the agreement. For the three and six months ended June 30, 2008, the
      computed Black-Scholes value of the warrant remained unchanged and decreased
      $141,422, respectively, resulting in a corresponding decrease in selling,
      general and administrative expense for the six months ended June 30,
      2008.





**(8)**
            **Income
                Taxes**




The
      Company accounts for income taxes in accordance with SFAS No. 109, *Accounting
      for Income Taxes (“SFAS No. 109”).* APB No.
      28 *Interim
      Financial Reporting* and FASB
      Interpretation No. 18, *Accounting
      for Income Taxes in Interim Periods* .
      Deferred income taxes are provided for the temporary differences between the
      financial reporting and tax basis of the Company’s assets and liabilities using
      enacted tax rates in effect for the year in which the differences are expected
      to reverse.




The
      Company’s provision for deferred taxes reflects the establishment of a full
      valuation allowance against deferred tax assets as of June 30, 2008. SFAS 109
      requires management to evaluate its deferred tax assets on a regular basis
      to
      reduce them to an amount that is realizable on a more likely than not basis.




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. For the year ended December 31, 2007, the Company recorded a
      partial valuation allowance against its deferred tax assets, as the
      Company concluded that under relevant accounting standards, it is more
      likely than not that a portion of deferred tax assets will be not be realizable.




11




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




Under
      SFAS 109, the Company evaluated available evidence to determine whether a full
      or partial valuation allowance of deferred tax assets should be recorded. As
      of
      June 30, 2008, cumulative losses in recent periods is evidence to support the
      need for a valuation allowance. Such evidence outweighs projections of future
      taxable income that may support the realization of deferred tax assets.
      Accordingly, the Company has decided to increase its valuation allowance by
      $387,000, recording a charge to deferred tax expense in the three months
      ended June 30, 2008.




The
      Company is expected to record future deferred tax expense, primarily as the
      result of tax amortization resulting from the purchase of TSS/Vortech. Under
      SFAS 109, tax amortization on indefinite lived assets (goodwill and other
      intangibles) may not be offset by deferred tax assets that are not currently
      realizable, primarily deferred tax assets relating to net operating loss
      carryovers, because of valuation allowances.




The
      Company’s effective tax rate is based upon the rate expected to be applicable to
      the full fiscal year. The rate differs from those used in the three months
      ended
      June 30, 2007 primarily due to changes in the valuation allowance subsequent
      to
      that date.





Effective
      January 1, 2007, the Company was required to adopt FASB Interpretation No.
      48, *Accounting
      for Uncertainty in Income Taxes* (“FIN
      48”). The Company evaluates its uncertain tax positions on a quarterly basis and
      has not identified any changes in uncertain tax positions during the reporting
      period.





Management
      is in the process of evaluating the various tax positions associated with the
      acquisition of SMLB and is of the opinion that any deferred tax liabilities
      that
      would ultimately result from uncertain tax positions related to this acquisition
      is not anticipated to be material.





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





All
      of
      the Company's prior federal and state income tax filings since inception remain
      open under statutes of limitation.  Innovative Power System Inc.'s statutes
      of limitation are open from the 2002 tax year forward for both federal and
      Virginia purposes.  Quality Power Systems Inc.'s statutes of
      limitation are open from the 2003 tax year forward for both federal and Virginia
      purposes. SMLB’s statutes of limitation are open from the 2006 tax year forward
      for both federal and Illinois purposes.


12




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**(9)**
            **Notes
                Payable**




June
                  30,
              
              December
                  31,2008
              
              2007Convertible,
                  unsecured promissory note, due 2012 (6.0%)
              
              $
              7,500,000
              
              $
              7,500,000Unsecured
                  promissory note, due 2011 (6.0%)
              
              
              349,919
              
              
              394,611Unsecured
                  promissory note, due 2008 (6.0%)
              
              
              -
              
              
              1,517,753Unsecured
                  promissory note, due 2011 (6.0%)
              
              
              15,248
              
              
              -Unsecured
                  promissory note, due 2008 (6.0%)
              
              
              439,241
              
              
              -Vehicle
                  notes
              
              
              54,057
              
              
              86,603Total
                  debt
              
              
              8,358,465
              
              
              9,498,967Less
                  current portion
              
              
              1,252,227
              
              
              1,650,306Total
                  debt, less current portion
              
              $
              7,106,238
              
              $
              7,848,661




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





In
      connection with the acquisition of Innovative, on September 24, 2007, the
      Company issued an unsecured promissory note with the sellers in the amount
      of $300,000. The note bears interest at six percent per year and has a three
      year term. Quarterly principal installments of $15,000 plus interest are due
      commencing December 31, 2007, with a final balloon payment of $120,000 due
      on
      December 31, 2010. Based on achieving certain earnings targets through December
      31, 2007 and net of a purchase price adjustment associated with working capital,
      the Innovative sellers received an additional promissory note of $64,611 at
      December 31, 2007. The additional unsecured promissory note is in similar
      form to the unsecured promissory note issued at closing, bearing interest
      at six percent per year and has a three year term. Quarterly principal
      installments of $3,231 plus interest commenced March 31, 2008 with a final
      balloon payment of $25,844 due on March 31, 2011.





In
      connection with the Rubicon acquisition, the Company was obligated to issue
      unsecured promissory notes totaling $1.5 million and $2.0 million contingent
      on
      Rubicon achieving certain earnings targets for the month ended December 31,
      2007
      and certain revenue bookings targets for 2008, respectively. Rubicon exceeded
      earnings targets for the month ended December, 31 2007, resulting in the
      issuance of a promissory note totaling $1.5 million which was paid in the first
      quarter of 2008.





Of
      the
      $2.0 million contingent note, approximately $0.4 million was issued at June
      30,
      2008 based on Rubicon’s achievement of revenue bookings targets through that
      date. The issued note bears interest at six percent per annum from the
      acquisition date and was paid on July 31, 2008. At December 31, 2008, the
      Company may be required to issue up to $1.6 million or the balance on the note
      contingent on Rubicon achieving certain revenue bookings targets in the second
      half of 2008. Any contingent note issuance would be due on January 31, 2009
      and
      will have earned interest at six percent per annum from the purchase
      date through payment. At June 30, 2008, revenue bookings were not determinable
      beyond a reasonable doubt, the remaining $1.6 million contingent note has not
      been issued.





In
      connection with the acquisition of SMLB, on January 2, 2008, the Company issued
      unsecured promissory notes with an aggregate value of $500,000 to the sellers.
      The note bears interest at six percent per year and has a three year term.
      During the three months ended June 30, 2008, the Company reduced the seller
      notes to $15,248 based on a $484,752 working capital adjustment in
      accordance with the terms of the purchase agreement. Principal installments
      net of the adjustment of $3,050, $3,050 and $9,148, plus accrued
      interest, are due on January 2, 2009, January 2, 2010 and January 2,
      2011, respectively. The Company may prepay the notes any time at its election
      without penalty.





**(10)**  **Related
      Party Transactions**





Our
      Audit
      Committee in accordance with its written charter reviews and approves in advance
      all related party transactions greater than $25,000 and follows a pre-approved
      process for contracts with related parties for less than $25,000.




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





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





**Chesapeake
      Systems, L.L.C.** (Chesapeake Systems) is 9% owned and significantly indebted to the Company’s
      Chief Executive Officer. Chesapeake Systems is a manufacturers’ representative
      and distributor of mechanical and electrical equipment and purchased certain
      assets of Chesapeake Tower Systems, Inc. in February 2007.


13




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**Chesapeake
      Mission Critical, L.L.C.** (Chesapeake MC) is 9% owned each by the Company’s Chief Executive Officer and
      its President. Additionally, it is significantly indebted to the Company’s Chief
      Executive Officer. Chesapeake MC is a manufacturers’ representative and
      distributor of electrical equipment and purchased certain assets of Chesapeake
      Tower Systems, Inc. in February 2007.





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




**CS
      Technology, Inc.** CS
      Technology, Inc. (CST) is majority owned by a nephew of the Company’s Chief
      Executive Officer. CST is in the Technology Consulting business and is a
      customer of the Company.





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





**L.H.
      Cranston Acquisition Group, Inc** . L.H.
      Cranston Acquisition Group, Inc. is 25% owned by the Company’s Chief Executive
      Officer. L.H. Cranston Acquisition Group is a mechanical, electrical and
      plumbing contractor that acts, directly or through its subsidiary L.H. Cranston
      and Sons, Inc., as subcontractor to the Company on a project-by-project
      basis.





**Telco
      P&C, LLC.** Telco
      P&C, LLC (Telco) is 55% owned by the Company’s Chief Executive Officer.
      Telco is a specialty electrical installation company that acts as a
      subcontractor to the Company. The Company has also acted as a subcontractor
      to
      Telco as needed. CTS purchased 100% of Telco’s membership interests in the first
      quarter of 2008.





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





**TPR
      Group Re Three LLC.** As of
      November 1, 2006, 50% of TPR Group Re Three, LLC (TPR Group Re Three) is
      owned by each of the Company’s Chief Executive Officer and its President.
      TPR Group Re Three leases office space to the Company under the terms of a
      real property lease to TSS/Vortech.





The
      following table sets forth transactions the Company has entered into with the
      above related parties for the successor three and six months ended June 30,
      2008
      and 2007 and for the predecessor for the period from January 1, 2007 through
      January 19, 2007.





14




FORTRESS
      INTERNATIONAL GROUP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


Successor
              
              PredecessorPeriod
                  fromThree
                  Months
              
              Six
                  Months
              
              January
                  1, 2007Ended
              
              Ended
              
              Ended
              
              Ended
              
              throughJune
                  30, 2008
              
              June
                  30, 2007
              
              June
                  30, 2008
              
              June
                  30, 2007
              
              January
                  19, 2007**Revenue**CTS
                  Services, LLC
              
              $
              6,229
              
              $
              30,896
              
              $
              112,278
              
              $
              68,826
              
              $
              1,800Chesapeake
                  Systems, LLC
              
              
              -
              
              
              52,287
              
              
              -
              
              
              52,716
              
              
              -Chesapeake
                  Mission Critical, LLC
              
              
              23,439
              
              
              27,216
              
              
              53,003
              
              
              27,216
              
              
              -CS
                  Technology, Inc.
              
              
              75,921
              
              
              -
              
              
              75,921
              
              
              -
              
              
              -Total
              
              $
              105,589
              
              $
              110,399
              
              $
              241,202
              
              $
              148,758
              
              $
              1,800**Cost
                  of Revenue**CTS
                  Services, LLC
              
              $
              434,396
              
              $
              230,964
              
              $
              793,019
              
              $
              470,392
              
              $
              82,032Chesapeake
                  Systems, LLC
              
              
              133,021
              
              
              160,304
              
              
              147,931
              
              
              160,304
              
              
              -Chesapeake
                  Mission Critical, LLC
              
              
              14,018
              
              
              29,400
              
              
              53,317
              
              
              37,625
              
              
              -Chesapeake
                  Tower Systems, Inc.
              
              
              -
              
              
              -
              
              
              -
              
              
              56,501
              
              
              8,225S3
                  Integration, LLC
              
              
              109
              
              
              130,743
              
              
              37,515
              
              
              218,922
              
              
              -LH
                  Cranston & Sons, Inc.
              
              
              7,500
              
              
              121,100
              
              
              7,500
              
              
              131,877
              
              
              -Telco
                  P&C, LLC
              
              
              10,069
              
              
              4,519
              
              
              10,069
              
              
              10,952
              
              
              -Total
              
              $
              599,113
              
              $
              677,030
              
              $
              1,049,351
              
              $
              1,086,573
              
              $
              90,257**Selling,
                  general and administrative**Office
                  rent paid to Chesapeake Tower Systems, Inc.
              
              $
              60,826
              
              $
              53,641
              
              $
              118,334
              
              $
              100,951
              
              $
              16,016Office
                  rent paid to TPR Group Re Three, LLC
              
              
              97,691
              
              
              90,494
              
              
              195,382
              
              
              191,478
              
              
              26,472Vehicle
                  repairs to Automotive Technologies, Inc.
              
              
              -
              
              
              -
              
              
              -
              
              
              4,442
              
              
              656Total
              
              $
              158,517
              
              $
              144,135
              
              $
              313,716
              
              $
              296,871
              
              $
              43,144
  June
                  30,
              
              December
                  31,**Accounts
                  receivable/(payable)**
              
              2008
              
              2007CTS
                  Services, LLC
              
              $
              40,569
              
              $
              44,821CTS
                  Services, LLC
              
              
              (548,606
              )
              
              (2,969,671
              )Chesapeake
                  Systems, LLC
              
              
              -
              
              
              611Chesapeake
                  Systems, LLC
              
              
              (133,021
              )
              
              (873
              )Chesapeake
                  Mission Critical, LLC
              
              
              23,320
              
              
              104,397Chesapeake
                  Mission Critical, LLC
              
              
              (14,018
              )
              
              (18,950
              )CS
                  Technology, Inc.
              
              
              75,921
              
              
              -Telco
                  P&C, LLC
              
              
              (10,069
              )
              
              (8,000
              )LH
                  Cranston & Sons, Inc.
              
              
              (17,500
              )
              
              (11,575
              )S3
                  Integration, LLC
              
              
              5,043
              
              
              (60,556
              )**Total
                  accounts receivable**
              
              $
              144,853
              
              $
              149,829**Total
                  accounts (payable)**
              
              $
              (723,214
              )
              $
              (3,069,625
              )





**(11)**  **Subsequent
      Event**





In
      August
      2008, the Company began evaluating a plan to restructure expenses to better
      align them with the current operating revenues and gross margins as certain
      customers have delayed their spending. The Company’s plan seeks to reduces
      operating costs associated with professional fees, sales and marketing, and
      personnel and related costs.


15





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





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





This
      Quarterly Report on Form 10-Q, including, without limitation, Management’s
      Discussion and Analysis of Financial Condition and Results of Operations,
      contains ‘‘forward-looking statements’’ within the meaning of Section 27A
      of the Securities Act, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”). We intend the
      forward-looking statements to be covered by the safe harbor for forward-looking
      statements in such sections of the Exchange Act. The forward-looking information
      is based on various factors and was derived using numerous assumptions. All
      statements, other than statements of historical fact, that address activities,
      events or developments that we intend, expect, project, believe or anticipate
      will or may occur in the future are forward-looking statements. Such statements
      are based upon certain assumptions and assessments made by our management in
      light of their experience and their perception of historical trends, current
      conditions, expected future developments and other factors they believe to
      be
      appropriate. These forward-looking statements are usually accompanied by words
      such as “believe,” “anticipate,” “plan,” “seek,” “expect,” “intend” and similar
      expressions.





Forward-looking
      statements necessarily involve risks and uncertainties, and our actual results
      could differ materially from those anticipated in the forward looking statements
      due to a number of factors, including those set forth in Part I,
      Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended
      December 31, 2007, as updated and supplemented by Part II,
      Item 1A “Risk Factors” of our Quarterly Reports on Form 10-Q, and elsewhere
      in this report. These factors, as well as other cautionary statements made
      in
      this Quarterly Report on Form 10-Q, should be read and understood as being
      applicable to all related forward-looking statements wherever they appear
      herein. The forward-looking statements contained in this Quarterly Report on
      Form 10-Q represent our judgment as of the date hereof. We encourage you to
      read
      those descriptions carefully. We caution you not to place undue reliance on
      the
      forward-looking statements contained in this report. These statements, like
      all
      statements in this report, speak only as of the date of this report (unless
      an
      earlier date is indicated) and we undertake no obligation to update or revise
      the statements except as required by law.




**Business
      Formation and Overview**




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




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




Building
      on the TSS/Vortech business, management continued an acquisition strategy to
      expand our geographical footprint, add complementary service, and diversify
      and
      expand our customer base. During 2007, we acquired substantially all of the
      assets of Comm Site of South Florida, Inc., 100% of the outstanding stock of
      Innovative Power Solutions, Inc. and Quality Power Solutions, Inc. and 100%
      of
      the membership interests of Rubicon Integration, L.L.C.




On
      January 2, 2008, we continued our acquisition strategy with the purchase of
      100% of the outstanding stock of SMLB, Ltd., which provides consulting, facility
      management, and equipment integration services for the mission-critical
      facilities in the Chicago area. The closing consideration consisted of (i)
      $2,000,000 in cash, subject to certain adjustment to be determined subsequent
      to
      the closing of the acquisition, as provided in the purchase agreement, (ii)
      96,896 shares of our common stock valued at approximately $500,000,
      (iii) $500,000 in unsecured promissory notes bearing interest at 6% per
      annum (this note was adjusted to $15,248 as SMLB has not met the working capital
      requirement established in the purchase agreement), and (iv) additional earn-out
      amounts up to a maximum of $600,000, contingent upon the achievement of certain
      earnings targets by SMLB for each of the calendar years 2008-2009.





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





***Contract
      Backlog***





We
      believe 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 out our backlog into the following three categories:
      (i) technology consulting consisting of services related to consulting and/or
      engineering design contracts; (ii) construction management, and (iii) facility
      management.




Backlog
      is not a measure defined in generally accepted accounting principles, and our
      methodology for determining backlog may not be comparable to the methodology
      of
      other companies in determining their backlog. Our backlog is generally
      recognized under two categories: (1) contracts for which work authorizations
      have been or are expected to be received on a fixed-price basis, guaranteed
      maximum price basis and time and materials basis and (2) contracts awarded
      to us
      where some, but not all, of the work have not yet been authorized. At June
      30,
      2008, we have authorizations to proceed with work for approximately $58.9
      million or 26% of our total backlog of $224.1 million. At December 31, 2007,
      we
      had authorizations to proceed with work for approximately $32.4 million or
      19%
      of our total backlog of $172.9 million. Additionally, approximately $155.5
      and
      $118.0 million or 69% and 68% of our backlog relates to a single customer at
      June 30, 2008 and December 31, 2007, respectively.


16




As
      of
      June 30, 2008, our backlog was approximately $224.1 million, compared to
      approximately $172.9 million at December 31, 2007. We believe that approximately
      20% of the backlog at June 30, 2008 will be recognized during the next six
      months. The following table reflects the value of our backlog in the above
      three
      categories as of June 30, 2008 and December 31, 2007, respectively.


June
                  30,
              
              December
                  31,2008
              
              2007Technology
                  consulting
              
              $
              5.0
              
              $
              3.9Construction
                  management
              
              
              204.8
              
              
              154.1Facilities
                  management
              
              
              14.3
              
              
              14.9Total
              
              $
              224.1
              
              $
              172.9


17




**Critical
      Accounting Policies and Estimates**





Our
      financial statements have been prepared in accordance with generally accepted
      accounting principles in the United States of America (“GAAP”). The preparation
      of these financial statements requires that management make estimates and
      assumptions that affect the amounts reported in the financial statements and
      the
      accompanying notes. Actual results could differ significantly from those
      estimates.




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




*Revenue
      Recognition*




The
      Company recognizes revenue when pervasive evidence of an arrangement exists,
      the
      contract price is fixed or determinable, services have been rendered or goods
      delivered and collectability is reasonably assured. The Company's revenue is
      derived from the following types of contractual arrangements: fixed-price
      contracts, time and material contracts and cost-plus-fee contracts (including
      guaranteed maximum price contracts). The Company’s primary source of revenue is
      from fixed price contracts and we apply Statement of Position (SOP) 81-1, *“Accounting
      for Performance of Construction-Type and Certain Production-Type
      Contracts* ”,
      recognizing revenue on the percentage-of-completion method using costs incurred
      in relation to total estimated project costs.




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


18





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




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




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





Additionally,
      in the event the collection of revenue is not reasonably assured, we recognize
      revenue when we are paid for the service. We expense any related contracted
      costs as they are incurred.





*Allowance
      for Doubtful Accounts*





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




As
      of June 30, 2008, included in accounts receivable is
      $1.4 million due from a customer that that we have offered extended payment
      terms. This amount was recognized as revenue in the three months ended June
      30,
      2008. The customer has executed a promissory note in the same amount bearing
      interest at 8% per annum with payments of interest only due monthly and the
      balance in full is due on December 15, 2008.




*Non-cash
      Compensation*




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




*Goodwill
      and Other Purchased Intangible Assets*




Goodwill
      represents the excess of costs over fair value of net assets of businesses
      acquired. Other purchased intangible assets include the fair value of items
      such
      as customer contracts, backlog and customer relationships. SFAS No. 142, *Goodwill
      and Other Intangible Assets* (*“*SFAS No. 142*”*), establishes financial accounting and
      reporting for acquired goodwill and other intangible assets. Goodwill and
      intangible assets acquired in a purchase business combination and determined
      to
      have an indefinite useful life are not amortized, but rather tested for
      impairment on an annual basis or purchased intangible assets with a definite
      useful life are amortized on a straight-line basis over their estimated useful
      lives. 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. Certain techniques require us to make
      estimates and assumptions about the future financial performance of the acquired
      businesses that may change in the future.





Our
      intangible assets consist of trade name, in-place contracts, customer
      relationships, and non-competition agreements with amortizable lives of 1-8
      years for the finite lived intangibles. The Company annually tests for the
      impairment of goodwill pursuant to the requirements of SFAS No. 142 and of
      the
      other purchased intangible assets pursuant to the requirements of SFAS No.
      144, *“Accounting
      for the Impairment or Disposal of Long-Lived Assets.”* If
      events or changes in circumstances indicate that an asset value might be
      impaired, we will test during the interim period in which those changes occur.
      Through the second quarter 2008, we continued to incur operating losses and
      revised our forecasted revenues as certain of our acquisitions have not
      delivered originally anticipated revenues. As a result of the decline in
      performance, during the interim period we evaluated the carrying value of
      goodwill and other long-lived intangible assets for impairment. Utilizing a
      third party firm we determined the carrying value of goodwill was in excess
      of
      the fair value, resulting in an aggregate impairment on goodwill of
      approximately $1.2 million.




19




*Income
      Taxes*




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




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




Effective
      January 1, 2007, we were required to adopt FASB Interpretation
      No. 48, Accounting
      for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a more-likely-than-not threshold of
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. This interpretation also provides guidance
      on de-recognition of income tax assets and liabilities, classification of
      current and deferred tax assets and liabilities, accounting for interest and
      penalties associated with tax positions, accounting for income taxes in interim
      periods and income tax disclosures. Since inception and through January 1,
      2007, the adoption date of this standard, we were in essence a “blank
      check” company with no substantive operations. Management concluded that the
      adoption of FIN 48 had no material effect on our financial position or
      results of operations. As of June 30, 2008, we do not have any
      material gross unrecognized tax benefit liabilities. However, management is
      still in the process of evaluating the various tax positions associated with
      the
      acquisition of SMLB and is of the opinion that any deferred tax liabilities
      that
      would ultimately result from uncertain tax positions related to these entities
      may be covered by indemnification provisions provided in the acquisition
      agreement or may result in an adjustment to goodwill.




*Use
      of Estimates*




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





*Recently
      Issued Accounting Pronouncements*


In
        May
        2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
        Insurance Contracts” (“SFAS 163”), SFAS 163 requires recognition of a claim
        liability prior to an event of default when there is evidence that credit
        deterioration has occurred in an insured financial obligation. SFAS 163
        clarifies how FAS 60 applies to financial guarantee insurance contracts,
        including the recognition and measurement to be used to account for premium
        revenue and claim liabilities and requires expanded disclosures about financial
        guarantee insurance contracts. SFAS 163 is effective for us January 1, 2009.
        We
        do not expect the adoption of SFAS 163 to have a material effect on our
        consolidated results of operations and financial condition.
 
 In
        May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
        Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the
        sources of accounting principles and the framework for selecting the principles
        used in the preparation of financial statements of nongovernmental entities
        that
        are presented in conformity with generally accepted accounting principles
        (the
        GAAP hierarchy). SFAS No. 162 will become effective 60 days
        following the SEC’s approval of the Public Company Accounting Oversight Board
        amendments to AU Section 411, “The Meaning of Present Fairly in
        Conformity With Generally Accepted Accounting Principles.” We do not expect the
        adoption of SFAS 162 to have a material effect on our consolidated results
        of operations and financial condition.






In
      April
      2008, FASB issued a Staff Position (FSP) No. FAS 142-3, “Determination of the
      Useful Life of Intangible Assets,” (“FSP 142-3”) which amends the factors a
      Company should consider when developing renewal assumptions used to determine
      the useful life of an intangible asset under SFAS 142. FSP 142-3 replaces the
      previous useful life criteria with a new requirement-that an entity consider
      its
      own historical experience in renewing similar arrangements. In issuing FSP
      142-3, the FASB hopes to improve the consistency between the useful life of
      a
      recognized intangible asset and the period of expected cash flows used to
      measure the fair value of the asset. FAS 142-3 is effective January 1, 2009.
      We
      are currently assessing the potential impact that adoption of FAS 142-3 may
      have
      on our financial statements.




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




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





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




20




**Consolidated
      Statements of Operations**


PredecessorSuccessor
                (Fortress International Group, Inc.)
              
              (TSS/Vortech)For
                  the periodJanuary
                  1,Three
                  Months Ended
              
              Six
                  Months Ended
              
              throughJune
                  30, 2008
              
              June
                  30, 2007
              
              June
                  30, 2008
              
              June
                  30, 2007
              
              January
                  19, 2007(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (audited)Results
                  of Operations:Revenue
              
              $
              20,149,876
              
              $
              10,862,307
              
              $
              39,581,956
              
              $
              19,539,244
              
              $
              1,412,137Cost
                  of revenue
              
              
              18,038,179
              
              
              9,424,029
              
              
              34,059,068
              
              
              16,629,595
              
              
              1,108,276Gross
                  profit
              
              
              2,111,697
              
              
              1,438,278
              
              
              5,522,888
              
              
              2,909,649
              
              
              303,861Operating
                  expenses:Selling,
                  general and administrative
              
              
              5,657,424
              
              
              3,424,040
              
              
              10,428,454
              
              
              6,061,980
              
              
              555,103Depreciation
              
              
              123,217
              
              
              97,245
              
              
              238,456
              
              
              152,676
              
              
              33,660Amortization
                  of intangibles
              
              
              619,436
              
              
              567,108
              
              
              1,401,498
              
              
              1,007,562
              
              
              -Impairment
                  loss on goodwill
              
              
              1,217,000
              
              
              -
              
              
              1,217,000
              
              
              -
              
              
              -Total
                  operating costs
              
              
              7,617,077
              
              
              4,088,393
              
              
              13,285,408
              
              
              7,222,218
              
              
              588,763Operating
                  loss
              
              
              (5,505,380
              )
              
              (2,650,115
              )
              
              (7,762,520
              )
              
              (4,312,569
              )
              
              (284,902
              )Interest
                  income (expense), net
              
              
              (101,938
              )
              
              273,467
              
              
              (145,008
              )
              
              372,272
              
              
              3,749Loss
                  from operations before income taxes
              
              
              (5,607,318
              )
              
              (2,376,648
              )
              
              (7,907,528
              )
              
              (3,940,297
              )
              
              (281,153
              )Income
                  tax expense (benefit)
              
              
              387,000
              
              
              182,316
              
              
              387,000
              
              
              (349,325
              )
              
              -Net
                  loss
              
              $
              (5,994,318
              )
              $
              (2,558,964
              )
              $
              (8,294,528
              )
              $
              (3,590,972
              )
              $
              (281,153
              )




**Results
      of operations for the successor company for the three months ended June 30,
      2008
      compared with the three months ended June 30, 2007.**





*Revenue.* Revenue
      increased $9.2 million to $20.1 million for the three months ended June 30,
      2008
      from $10.9 million for the three months ended June 30, 2007. The
      increase was primarily driven by $6.2 million from our construction
      management services and the inclusion of $3.0 million of revenue associated
      with the acquisitions of Innovative, Rubicon, and SMLB.





*Cost
      of Revenue.* Cost of
      revenue increased $8.6 million to $18.0 million for the three months ended
      June
      30, 2008 from $9.4 million for the three months ended June 30, 2007. The
      increase was primarily driven by $5.4 million from our construction
      management services and the inclusion of $3.2 million of cost of revenue
      associated with the acquisitions of Innovative, Rubicon, and SMLB.




*Gross
      Margin Percentage.* Gross
      margin percentage decreased by 2.7% to 10.5% for the three months ended June
      30,
      2008 compared to 13.2 % for the three months ended June 30, 2007. Excluding
      the
      effect of gross margin contribution associated with the acquisitions of
      Innovative, Rubicon and SMLB, gross margin percentage increased to 13.8%
      for the three months ended June 30, 2008 from 13.2% for the three months ended
      June 30, 2007. The overall decline in gross profit was primarily
      attributable to the $0.7 million estimated loss on a contract we acquired as
      part of our acquisition of SMLB. Exclusive of any unanticipated contract losses
      in the future, we expect our total gross margin percentage to approximate 14.0%.





*Selling,
      general and administrative expenses* .
      Selling, general and administrative expenses increased $2.3 million to $5.7
      million for the three months ended June 30, 2008 from $3.4 million for the
      three
      months ended June 30, 2007. The increase was primarily driven by professional
      fees of approximately $0.7 million that we expensed associated with an abandoned
      acquisition, the inclusion of $0.7 million of selling, general and
      administrative expenses associated with the acquisitions of Innovative, Rubicon,
      and SMLB and an increase in our average compensation and related benefit
      costs.





As
      we
      have experienced delays in the timing of revenues associated with certain
      customers and margins have contracted, the Company is evaluating a plan to
      restructure expenses to align with current operating revenues. The plan seeks
      to
      reduce operating costs associated with professional fees, sales and marketing,
      and personnel and related costs.





*Depreciation.* Depreciation remained consistent at $0.1 million for the three months
      ended June 30, 2008 compared to $0.1 million for the three months
      ended June 30, 2007.




*Amortization
      of intangible assets.* Amortization expense remained consistent at $0.6 million for the three months
      ended June 30, 2008 as compared to $0.6 million for the three months ended
      June
      30, 2007.





*Impairment
      loss on intangibles.* We
      have
      not realized the anticipated revenue from customers acquired in our acquisitions
      and have experienced continued operating losses in the three months ended June
      30, 2008. We conducted analyses of the operations in order to identify any
      impairment in the carrying value of the goodwill and other intangibles related
      to our business. Analyzing our business using both an income approach and a
      market approach determined that the carrying value exceeded the current fair
      value of our business, resulting in goodwill impairment of $1.2 million for
      the
      three months ended June 30, 2008. At June 30, 2008, the adjusted carrying value
      of goodwill was $21.8 million.




21





*Interest
      income (expense), net.* Our
      interest income (expense), net decreased $0.4 million to ($0.1) million for
      the
      three months ended June 30, 2008 from $0.3 million for the three months ended
      June 30, 2007. The decrease in interest income was due to a lower average
      invested balance in the three months ended June 30, 2008 as compared to June
      30,
      2007.





*Income
      tax expense (benefit).* Income
      tax expense increased $0.2 million to $0.4 million for the three months ended
      June 30, 2008 from $0.2 million for the three months ended June 30, 2007. The
      tax expense was associated with the increase in our deferred tax asset
      valuation allowance as the full net operating losses (NOL’s) may not be fully
      realized in future periods.





**Results
      of operations for the successor company for the six months ended June 30, 2008
      compared with the six months ended June 30, 2007.**





*Revenue.* Revenue
      increased $20.1 million to $39.6 million for the six months ended June 30,
      2008
      from $19.5 million for the six months ended June 30, 2007. The increase was
      primarily driven by $10.0 million is attributable to an increase in revenue
      from
      our construction management services and the inclusion of $8.7 million of
      revenue associated with the acquisitions of Innovative, Rubicon, and
      SMLB and the inclusion of approximately $1.4 million of revenue associated
      with TSS/Vortech.





*Cost
      of Revenue.* Cost of
      revenue increased $17.5 million to $34.1 million for the six months ended June
      30, 2008 from $16.6 million for the six months ended June 30, 2007. The
      increase was driven by the increase in revenue primarily from our
      construction management services, the inclusion of $7.2 million of cost of
      revenue associated with the acquisitions of Innovative, Rubicon, and
      SMLB and the inclusion of approximately $1.1 million of cost of revenue
      associated with TSS/Vortech results being included for an additional nineteen
      days or a full quarter in 2008.




*Gross
      Margin Percentage.* Gross
      margin percentage decreased 0.9% to 14.0% for the six months ended June 30,
      2008
      compared to 14.9% for the six months ended June 30, 2007. The decline in gross
      profit was primarily attributable to a $0.7 million estimated loss on a
      contract we acquired as part of our acquisition of SMLB.





*Selling,
      general and administrative expenses* .
      Selling, general and administrative expenses increased $4.3 million to $10.4
      million for the six months ended June 30, 2008 from $6.1 million for the six
      months ended June 30, 2007. The increase was primarily driven by $1.3
      million of selling, general and administrative expenses associated with the
      acquisitions of Innovative, Rubicon and SMLB, $0.7 million that we
      expensed associated with an abandoned acquisition, the inclusion of
      approximately $0.6 million of selling, general and administrative expenses
      associated with TSS/Vortech’s results being included for an additional nineteen
      days or full quarter in 2008 and
      an
      increase in average compensation and related benefit costs.





As
      we
      have experienced delays in the timing of revenues associated with certain
      customers and margins have contracted, the Company is evaluating a plan to
      restructure expenses to align with current operating revenues. The plan seeks
      to
      reduce operating costs associated with professional fees, sales and marketing,
      and personnel and related costs.





*Depreciation.* Depreciation remained consistent at $0.2 million for the six months
      ended June 30, 2008 compared to $0.2 million for the six months ended
      June 30, 2007.




*Amortization
      of intangible assets.* Amortization expense increased $0.4 million to $1.4 million for the six months
      ended June 30, 2008 from $1.0 million for the six months ended June 30, 2007.
      The increase in amortization expense was primarily attributable to a
      higher amortizable intangible base in 2008, associated with the
      acquisitions of Innovative, Rubicon and SMLB.




*Impairment
      loss on intangibles.* We
      have
      not realized the anticipated revenue from customers acquired in our acquisitions
      and have experienced continued operating losses in the current year. We
      conducted analyses of the operations in order to identify any impairment in
      the
      carrying value of the goodwill and other intangibles related to our business.
      Analyzing our business using both an income approach and a market approach
      determined that the carrying value exceeded the current fair value of our
      business, resulting in goodwill impairment of $1.2 million for the six months
      ended June 30, 2008. At June 30, 2008, the adjusted carrying value of goodwill
      was $21.8 million.





*Interest
      income (expense), net.* Our
      interest income (expense), net decreased $0.5 million to ($0.1) million for
      the
      six months ended June 30, 2008 from $0.4 million for the six months ended June
      30, 2007. The decrease in interest income was due to a lower average invested
      balance in the six months ended June 30, 2008 as compared to six months ended
      June 30, 2007.





*Income
      tax expense (benefit).* Income
      tax expense increased $0.7 million to $0.4 million for the six months ended
      June
      30, 2008 from ($0.3) million for the six months ended June 30, 2007. The tax
      expense is associated with the increase in our deferred tax asset valuation
      allowance as the full net operating losses (NOL’s) may not be fully realized in
      future periods. For the six months ended June 30, 2007, income tax benefit
      was
      $0.3 million reflecting the value of a NOL carry back to prior periods at an
      effective rate of 34% federal tax rate, which was applicable for the full
      year.


22




**Financial
      Condition, Liquidity and Capital Resources**




We
      have
      historically incurred net losses and have used our cash and investments to
      fund
      our operating and investing activities. We believe that operational
      improvements, strategic investments and complementary acquisitions will improve
      the cash flows of our business. Our efforts are continuing and may include
      further acquisitions and realignment of our sales, general and administrative
      expenses. We cannot be sure, however, as to the amount and timing of the
      associated financial impact. Cash flows for the six months ended June 30, 2008
      and 2007 and for the period January 1, through January 19, 2007 (Predecessor)
      are as follows:


Successor
                (Fortress
                  International Group, Inc.)
              
              Predecessor(TSS/Vortech)For
                  the periodFor
                  the six
              
              For
                  the six
              
              January
                  1,months
                  ended
              
              months
                  ended
              
              throughJune
                  30, 2008
              
              June
                  30, 2007
              
              Janaury
                  19, 2007Net
                  cash provided by (used in) operating activities
              
              $
              (838,838
              )
              $
              (6,306,951
              )
              $
              656,001Net
                  cash provided by (used in) investing activities
              
              
              (2,308,637
              )
              
              33,707,604
              
              
              (127,602
              )Net
                  cash provided by (used in) financing activities
              
              
              (1,623,105
              )
              
              (6,301,024
              )
              
              (1,567,920
              )Net
                  increase (decrease) in cash
              
              $
              (4,770,580
              )
              $
              21,099,629
              
              $
              (1,039,521
              )




Cash
      and
      cash equivalents decreased $4.8 million to $8.4 million at June 30, 2008 from
      $13.2 million at December 31, 2007. The decrease was primarily attributable
      to
      $0.8 million from operating activities, $2.1 million for the purchase of SMLB
      and $1.5 million for the repayment of promissory notes issued in connection
      with
      the Rubicon acquisition.





*Operating
      Activity*





Net
      cash
      used in operations decreased $5.5 million to $0.8 million for the six months
      ended June 30, 2008 from $ 6.3 million used in operations for the six months
      ended June 30, 2007. The decline in cash used in operating cash flows is
      primarily attributable to working capital as follows:





*Increase
      in net loss.* Net loss
      increased $4.7 million to $8.3 million for the six months ended June 30, 2008
      from $3.6 million for the six months ended June 30, 2007. The increase in net
      loss was primarily attributable to a $2.8 million increase in non-cash
      items primarily the impairment loss on goodwill and identified intangibles,
      provision for income taxes, amortization of intangibles and equity-based
      compensation expense. Excluding non-cash items from net loss, net loss increased
      $2.0 million to $4.1 million for the six month ended June 30, 3008 from $2.1
      million for the six months ended June 30, 2007.




*Increase
      in working capital.* Net
      changes in operating assets and liabilities decreased approximately $4.7
      million primarily due to trade receivables and payables, which accounts for
      the improvement or decline in cash used by operating activities. The
      decrease is primarily attributable to managing our trade accounts receivable
      and
      corresponding payables.





*Investing
      Activity*





Net
      cash
      used in investing increased $36.0 million to $2.3 million used in investing
      activities for the six months ended June 30, 2008 from $33.7 million provided
      by
      investing activities for the six months ended June 30, 2007. The increase was
      primarily attributable to our transition to an operating Company in the first
      quarter of 2007 and the release of investments held in trust for general
      operating purposes.




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




*Acquisitions.* Net cash
      used to acquire businesses decreased $7.6 million to $2.1 million for the
      six months ended June 30, 2008 from $9.7 million for the six months ended June
      30, 2007. In the first quarter of 2008, we acquired SMLB, Ltd. which had a
      significantly lower enterprise value and in turn lower cash purchase price
      component as compared to TSS/Vortech acquisition, which occurred in the first
      quarter of 2007. The remainder of the increase is associated primarily with
      deferred acquisition costs incurred as we continued to pursue potential
      acquisitions.




*Financing
      Activity*




Net
      cash
      used in financing decreased $4.7 million to $1.6 million for the six months
      ended June 30, 2008 from $6.3 million for the six months ended June 30, 2007.
      The decrease in cash used in financing activities was attributable fundamentally
      to different activity as described in the following:




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





·
            *Repurchase
                of common stock.*During the first quarter of 2007, we used $6.2 million to repurchase
                our
                common stock associated with the election of conversion rights
                by our dissenting shareholders in connection with our acquisition of
                TSS/Vortech and $1.3 million in a share buyback program. The share
                buyback
                program was suspended in the third quarter of 2007; however,
                during 2008 the Company repurchased 5,990 shares for employee taxes
                associated with net issuance of vesting restricted
                stock.


23





*Acquisition
      Related-Non-Cash Activities*





During
      the six months ended June 30, 2008, we issued total unsecured promissory
      notes totaling $0.5 million as purchase consideration. In connection with the
      acquisitions of SMLB, we initially issued $0.5 million of unsecured promissory
      notes that were reduced in the second quarter 2008 to $15,248 pursuant to the
      working capital requirements per the original purchase agreement. Consistent
      with the Rubicon purchase agreement in exchange for achieving specified
      financial targets at June 30, 2008, we issued an additional $0.4 million of
      unsecured promissory notes. These unsecured promissory notes bear interest
      at 6%
      from the acquisition date through June 30, 2008 payment date.





For
      a
      discussion of our acquisitions, see Note 3 of the Notes to Consolidated
      Financial Statements-Acquisitions.





*Liquidity*





In
      August
      2008, we were evaluating a plan to restructure expenses to realign them with
      the
      current operating revenues and gross margins as certain customers have delayed
      their spending. Our plan seeks to reduces operating costs associated with
      professional fees, sales and marketing, and personnel and related costs.





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





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





At
      June
      30, 2008, we do not have any off balance sheet arrangements.





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





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


24


**Item
      4T. Controls and Procedures.**




Our
      management performed an evaluation under the supervision and with the
      participation of our Chief Executive Officer (principal executive
      officer) and our Chief Financial Officer (principal financial officer)
      of the effectiveness of our disclosure controls and procedures (as defined
      in
      Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended)
      as of June 30, 2008. Based upon that evaluation, our Chief Executive Officer
      and
      Chief Financial Officer have concluded that as of June 30, 2008, our disclosure
      controls and procedures were ineffective. There have been no significant changes
      in the control environment during the second quarter of 2008.





**Changes
      in Internal Control over Financial Reporting**




There
      were no other changes in the Company’s internal control over financial reporting
      for the second quarter of 2008 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.




**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings.**





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




**Item
      1A. Risk Factors**





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, 2007 and
      subsequent quarterly reports, 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 as well as adversely affect the value of
      an
      investment in our common stock.





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





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




The
      table
      set forth below shows all repurchases of securities by us during the quarter
      ended June 30, 2008:





Monthly
                Period During Quarter Ended June 30, 2008
            
            Total
                Shares
              Purchased
            
            Average
                Price Paid per Share
            
            Total
                Shares
              Purchased
                as Part of Publicly Announced Plans
            
            Approximate
                Dollar Amount of Shares Yet To Be Purchase Under PlansApril
                1, 2008 - April 30, 2008
            
            
            1,994
            
            $
            4.40
            
            
            N/A
            
            
            N/AMay
                1, 2008 - May 31, 2008
            
            
            3,996
            
            $
            4.84
            
            
            N/A
            
            
            N/AJune
                1, 2008 - June 30, 2008
            
            
            -
            
            
            -
            
            
            N/A
            
            
            N/ATotal
            
            
            5,990
            
            $
            4.69





The
      Company repurchased 5,990 shares for employee taxes associated with net issuance
      of vesting restricted stock.


25





**Item
      3. Defaults upon Senior Securities.**





Not
      applicable.




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





Not
      applicable.




**Item
      5. Other Information.**




Not
      applicable.




**Item
      6. Exhibits.**




ExhibitNumber
            
            Description31.1*
            
            Certificate
                of Fortress International Group, Inc. Chief Executive Officer pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
            
            Certificate
                of Fortress International Group, Inc. Chief Financial Officer pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002.32.1‡
            
            Certificate
                of Fortress International Group, Inc. Chief Executive Officer and
                Chief
                Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.





*
      Filed
      herewith.


‡
      Furnished herewith.


26




**SIGNATURES**




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





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




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




27