UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)




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


For the
fiscal year ended December 31, 2009





OR




 ̈
            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
            (I.R.S.
      Employer Identification No.)of
      incorporation or organization)7226
      Lee DeForest Drive, Suite 209
            21046Columbia,
      MD
            (Zip
      Code)(Address
      of principal executive offices)





Registrant’s
telephone number, including area code


(410)-423-7438





Securities
registered pursuant to Section 12(b) of the Exchange Act:





Title of each class
                  
                  Name of each exchange on
                    which registeredCommon
      stock, $.0001 par value per share
                  
                  
                  NASDAQ Capital Market





Securities
registered pursuant to Section 12(g) of the Exchange Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   Yes  ̈ No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.   Yes  ̈ No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈





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




Large
      accelerated filer  ̈
            Accelerated
      filer  ̈
            Non-accelerated
      filer   ̈
            [Do not check if a smallerSmaller
      reporting company x
            
            
            reporting
      company]




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





The
aggregate market value of the registrant’s voting and non-voting common stock
held by non-affiliates of the registrant (without admitting that any person
whose shares are not included in such calculation is an affiliate) as of June
30, 2009 was approximately$6,375,699 based
on 5,592,718 shares
held by such non-affiliates at the closing price of a share of common stock of
$1.14 as reported on The NASDAQ Capital Market on such date.




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




Common
Stock, par value $0.0001 per share, outstanding as of March 19, 2010 was
13,361,763shares.










DOCUMENTS
INCORPORATED BY REFERENCE





The
following documents (or parts thereof) are incorporated by reference into the
following parts of this Annual Report on Form 10-K: Certain
information required in Part III of this Annual Report on Form 10-K will
be incorporated from the Registrant’s Proxy Statement for the
2010 Annual Meeting of Stockholders to be filed within 120 days of the end
of the fiscal year ended December 31, 2009.




2




TABLE
OF CONTENTS




PagePART
      IItem
      1.
                Business
                
                6Item
      1A.
                Risk
      Factors
                
                17Item
      1B.
                Unresolved
      Staff Comments
                
                26Item
      2.
                Properties
                
                26Item
      3.
                Legal
      Proceedings
                
                26Item
      4.
                (Removed
      and Reserved)
                
                26PART
      IIItem
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                
                27Item
      6.
                Selected
      Financial Data
                
                28Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                
                28Item
      7A.
                Quantitative
      and Qualitative Disclosures about Market Risk
                
                41Item
      8.
                Financial
      Statements and Supplementary Data
                
                42Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                
                43Item
      9A(T).
                Controls
      and Procedures
                
                43Item
      9B.
                Other
      Information
                
                44PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                
                44Item
      11.
                Executive
      Compensation
                
                44Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                
                44Item
      13.
                Certain
      Relationships and Related Transactions and Director
      Independence
                
                44Item
      14.
                Principal
      Accounting Fees and Services
                
                44PART
      IVItem
      15.
                Exhibits,
      Financial Statement Schedule
                
                44Signatures
                
                48




3




Unless
the context otherwise requires, when we use the words “Fortress,” ”FIGI,” “we,”
“us,” “our company,” or “the Company” in this Annual Report on Form 10-K,
we are referring to Fortress International Group, Inc., a Delaware corporation,
and its subsidiaries, unless it is clear from the context or expressly stated
that these references are only to Fortress International Group,
Inc.




SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




Some of
the statements in this Annual Report on Form 10-K constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements can be identified by the use of forward-looking
terminology, including the words “believes,” “estimates,” “anticipates,”
“expects,” “intends,” “may,” “will” or “should,” or, in each case, their
negative or other variations or comparable terminology. You should read
such statements carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial position, or
state other forward-looking information. The factors listed in Item 1A of Part I
of this Annual Report on Form 10-K captioned “Risk Factors,” as well as any
cautionary language in this Annual Report on Form 10-K, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements,
including but not limited to, statements concerning:





·
            our mission-critical services
      business, its advantages and our strategy for continuing to pursue our
      business;





·
            expectations as to our future
      revenue, margin, expenses, cash flows and capital
      requirements;





·
            expectations as to our
      materialization of our
backlog;





·
            the quoting of our common stock
      on the OTC bulletin board;





·
            the amount of cash available to
      us to execute our business
strategy;





·
            continued compliance with
      government regulations;





·
            statements about industry
      trends;





·
            geopolitical events and
      regulatory changes; and





·
            other statements of expectations,
      beliefs, future plans and
strategies.







4




These
forward-looking statements are subject to risks and uncertainties, including
financial, regulatory, industry growth and trend projections, that could cause
actual events or results to differ materially from those expressed or implied by
the statements. The most important factors that could prevent us from achieving
our stated goals include, but are not limited to, our failure to:





·
            deliver services and products
      that meet customer demands and generate acceptable
      margins;





·
            increase sales volume by
      attracting new customers, retaining existing customers and growing the
      overall number of customers to minimize a significant portion of our
      revenues being dependent on a limited number of
      customers;





·
            manage the risks relating to
      revenues and backlog under customer contracts, many of which can be
      cancelled on short notice;





·
            manage and meet contractual terms
      of complex projects;





·
            react to the uncertainty related
      to current economic
conditions;





·
            attract and retain qualified
      management and other
personnel;





·
            increase demand for our services
      and products;





·
            meet all of the terms and
      conditions of our debt obligations;
and





·
            generate sufficient cash flows to
      support operations and implement our strategic
  plan.




Any or
all of our forward-looking statements in this Annual Report on Form 10-K
may turn out to be wrong. They can be affected by inaccurate assumptions we
might make or by known or unknown risks and uncertainties. Many factors
mentioned in our discussion in this Annual Report on Form 10-K will be
important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary
materially.





Except as
required by applicable law and regulations, we undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise. Further disclosures that we make on
related subjects in our additional filings with the Securities and Exchange
Commission should be consulted. For further information regarding the risks and
uncertainties that may affect our future results, please review the information
set forth below under “Item 1A. RISK FACTORS.”


5


PART
I





Item 1.     BUSINESS





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.In 2005, we closed our
initial public offering, including an over-allotment of 7,800,000 units, with
each unit consisting of one share of our common stock and two warrants each to
purchase additional shares of common stock, which resulted in gross proceeds of
$46.8 million.





On
January 19, 2007, we acquired all of the outstanding membership interests
of each of VTC, LLC and Vortech, LLC (“TSS/Vortech”) pursuant to a
Second Amended and Restated Membership Interest Purchase Agreement dated
July 31, 2006, as amended by the Amendment to the Second Amended and
Restated Membership Interest Purchase Agreement dated January 16, 2007 (the
“Purchase Agreement”). In connection with the acquisition we simultaneously
changed our name to Fortress International Group, Inc.




After our
initial acquisition of TSS/Vortech, management continued an acquisition strategy
to expand our geographic footprint, add complementary services and diversify and
expand our customer base. We acquired substantially all of the assets
of Comm Site of South Florida, Inc. (“Comm Site”) on May 7, 2007, 100% of
the outstanding and issued capital stock of Innovative Power Systems, Inc.
and Quality Power Systems, Inc. (“Innovative”) on September 24, 2007, and 100%
of the membership interests of Rubicon Integration, LLC (“Rubicon”) on November
30, 2007. On January 2, 2008, we purchased 100% of the outstanding and issued
capital stock of SMLB, Ltd.





On
December 29, 2009, in an effort to preserve cash resources and enhance liquidity
while maintaining a similar set of professional services subsequently, the
Company disposed of substantially all of the assets and liabilities of Rubicon,
LLC to its former owners and current management.  The disposition
resulted in consideration of approximately $2.0 million.




Our
principal executive offices are located at 7226 Lee DeForest Drive, Suite 209,
Columbia, Maryland 21046 and our telephone number is 410-423-7300. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K , proxy statements for our annual stockholder’s meetings and all amendments
to those reports, are available to you free of charge through the Securities and
Exchange Commission’s (“SEC”) website at www.sec.gov or on our website
at www.thefigi.com as
soon as reasonably practicable after such materials have been electronically
filed with, or furnished to, the SEC. Copies of these reports and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at the SEC Headquarters, Public Reference Section, 100 F
Street, N.E., Washington D.C. 20549 on official business days during the hours
10:00 a.m. to 03:00 p.m. or by calling the SEC at 1-800-SEC-0330. Copies are
also available upon request and without charge by contacting us at Fortress
International Group, Inc., 7226 Lee DeForest Drive, Suite 209, Columbia,
Maryland 21046.




Our
Business





We
consult, plan, design, build and maintain mission-critical facilities such as
data centers, trading floors, call centers, network operation centers,
communication facilities, laboratories and secure bunkers and we offer expertise
for electrical, mechanical, telecommunications, security, fire protection and
building automation systems that are critical to the mission-critical facilities
lifeblood.




We
provide a single source solution for highly technical mission-critical
facilities and the infrastructure systems that are critical to their
function. Our services include information technology strategic initiatives that
drive efficiencies through the cost of operating a data center, energy and green
initiatives, real estate consulting options, capital solutions, technology
consulting, engineering and design management, construction management, system
installations, operations management, and facilities management and
maintenance.




With
respect to these critical infrastructure systems that are part of the
mission-critical facility, we focus on physical security, network security,
redundancies for uninterruptible power supply systems, electrical switch gear,
stand-by power generators, heat rejection and cooling systems, fire protection
systems, monitoring and control systems, and security systems, as well as the
physical environment that houses critical operations. We help our customers to
plan for, prevent or mitigate against the consequences of attacks, power outages
and natural disasters. We provide our services, directly and indirectly, to
both government and private sector customers.




We have
obtained a facility clearance from the United States Department of Defense. This
clearance enables us to access and service restricted government projects. In
addition to the facility clearance, we have successfully cleared approximately
one-third of our employees, allowing them individual access to restricted
projects and facilities.




6





Prior
Growth Through Acquisitions




Beginning
in 2006 and continuing into 2008, we implemented a plan to grow our business,
diversify our customer base, and gain additional operational scale. To mitigate
business volume fluctuations and customer concentration, we added selling,
general and administrative personnel, enabling us to bid and quote up to
approximately several hundred million in revenues across our service
offerings. We acquired five businesses during the fiscal years 2007 and
2008 that have provided complementary services, extended our geographical
footprint and added key customers and personnel. In late 2008 and 2009, our
strategic growth through acquisitions was suspended due to the downturn in the
economy.  In the future, we expect to continue our growth initiatives
both internally and through potential acquisitions of smaller specialized
mission-critical engineering or IT services firms (primarily in the United
States), subject to an improved economic outlook and our ability to obtain
financing, if necessary.




On
January 19, 2007, we acquired all of the outstanding membership interests of
each of VTC, LLC, doing business as Total Site Solutions, and Vortech, LLC, or
TSS/Vortech. TSS/Vortech provides comprehensive services for the planning,
design, and development of mission-critical facilities and information
infrastructure . The closing consideration consisted of (i) $11.5 million in
cash, including acquisition costs of $1.8 million and net of cash acquired of
$1.1 net of a working capital adjustment per the terms of the purchase
agreement,  (ii) the assumption of $0.2 million of debt of TSS/Vortech,
(iii) 2,602,813 shares of our common stock, of which 2,534,988 shares were
issued to the selling members, 67,825 shares were issued to Evergreen Capital
LLC as partial payment of certain outstanding consulting fees, and 574,000
shares were designated for issuance to employees of TSS/Vortech under our 2006
Omnibus Incentive Compensation Plan and (iv) $10.0 million in two convertible
promissory notes of $5.0 million each, bearing interest at 6%. 
Simultaneously with the acquisition of TSS/Vortech, we changed our name from
“Fortress America Acquisition Corporation” to our current name, “Fortress
International Group, Inc.”





Following
our initial acquisition of TSS/Vortech, we continued with our acquisition
strategy to expand our geographic footprint, add complementary services and
diversify and expand our customer base.




On May 7,
2007, we purchased substantially all of the assets of Comm Site of South
Florida, Inc. for $150,000 in cash.




On
September 24, 2007, we entered into a stock purchase agreement with Innovative
Power Systems, Inc., Quality Power Systems, Inc., or, collectively, Innovative,
and the stockholders of Innovative. Based in Virginia, Innovative installs,
tests and services specialized uninterruptible power supply systems and backup
power supply systems for data centers and mission-critical facilities throughout
the Washington D.C. metropolitan area. Pursuant to the stock purchase agreement,
we acquired 100% of the issued and outstanding capital stock of Innovative for
the aggregate consideration consisting of (i) $1,614,452 in cash, including
acquisition costs of $112,420, and net of cash acquired of
$244,968, subject to certain adjustment as provided in the purchase
agreement, (ii) a promissory note for the aggregate amount of $300,000 plus
interest accruing at 6% annually from the date of the issuance of the promissory
note (payable in three years, based on a five-year amortization schedule, as
described in note), (iii) 25,155 shares of our common stock, and (iv) additional
earn-out amounts if Innovative achieves certain targeted earnings for each of
the calendar years 2007-2010, as further described in the purchase
agreement.




In 2008,
Innovative achieved 2008 earnings targets established in the purchase agreement,
entitling the sellers to additional purchase consideration of $0.4 million which
was paid in the second quarter of 2009 per terms of the purchase
agreement.





In 2009,
Innovative achieved 2009 earnings targets established in the purchase agreement,
entitling the sellers to additional purchase consideration of $0.2 million.
Subject to terms and conditions outlined in the purchase agreement, the payment
is due in the second quarter of 2010.





On November
30, 2007, we entered into a membership interest purchase agreement with Rubicon
Integration, LLC, or Rubicon, a Delaware limited liability company based in
Virginia, and each of the members of Rubicon. Rubicon provides consulting,
owners’ representation and equipment integration services for mission-critical
facilities to corporate customers across the United States. Pursuant to the
purchase agreement, we acquired 100% of the membership interests of Rubicon for
the aggregate consideration consisting of (i) $4,745,524 in cash, including
acquisition costs of $198,043 and net of cash acquired of $42,660, (ii) 204,000
shares of our common stock valued at $1,080,800, (iii) contingent consideration
in the form of two unsecured promissory notes in the maximum amount of
$1,500,000 and $2,000,000, respectively, plus interest accruing at 6% annually
from November 30, 2007, the date of the issuance, payable to the sellers upon
the achievement of certain operational and financial targets for December 2007
and for the calendar year 2008, respectively, and (iv) additional earn-out
amounts, contingent upon the achievement of certain earnings targets by Rubicon
for each of the calendar years 2008-2009.




In 2007,
Rubicon achieved certain 2007 earnings targets established in the purchase
agreement, entitling the sellers to the first contingently issuable note of
$1,517,753, which was due on January 31, 2008. In accordance with terms of the
agreement, an additional working capital adjustment of $90,141 was paid to
the sellers on January 31, 2008.





In 2008,
Rubicon received contingently issuable notes totaling $2.0 million by achieving
or exceeding certain financial targets defined in the purchase
agreement.  Approximately $0.4 million had been paid at December 31,
2008, while the remainder was paid in January 2009.





Additionally
in 2008, Rubicon achieved certain 2008 earnings targets established in the
purchase agreement, entitling the sellers to an earn-out payment estimated at
$0.5 million at December 31, 2008.  In 2009, we delivered the
calculation and finalized the 2008 earn-out with the sellers, which resulted in
the issuance of an additional $0.8 million of consideration in the form of $0.5
million note and payment for the balance. In 2009, Rubicon achieved certain 2009
earnings targets established in the amended purchase agreement, entitling the
sellers to an earn-out payment of $0.2 million




As we
sought additional liquidity and to maintain a similar service offering, on
December 29, 2009, we sold substantially all of the assets and liabilities of
Rubicon for consideration totaling $2.0 million consisting of 0.8 million in
cash proceeds, net of transaction costs, $0.6 million note receivable and $0.4
million in forgiveness of actual obligations and potential liabilities related
to the 2008 and 2009 earn-outs. Additionally, we are entitled to contingent
consideration in the form of an earn-out equal to 7.5% of gross profit on
designated projects during a one year period commencing on the close
date.  At December 31, 2009, the Company had not recorded any
contingent consideration associated with the earn-out as it’s not reasonably
assured and estimable.




On
January 2, 2008, we entered into a stock purchase agreement with SMLB, Ltd, or
SMLB, an Illinois corporation which provides professional construction
management services for mission-critical facilities, and each of the
stockholders of SMLB, for the acquisition of SMLB. Pursuant to the purchase
agreement we acquired 100% of the issued and outstanding capital stock of SMLB
for an aggregate consideration consisting of (i) $2,000,000 in cash, subject to
certain adjustment to be determined within 60 days of the closing of the
acquisition, (ii) an unsecured promissory note for an aggregate amount of
$500,000, plus interest accruing at 6% annually from the date of the issuance,
(iii) an aggregate of 96,896 shares of common stock of the Company, to be held
in escrow pursuant to a certain indemnity escrow agreement, and (iv) additional
earn-out amounts, contingent upon the achievement of certain operational and
financial targets by SMLB for each of the calendar years 2008 and 2009 and
subject to satisfaction of any outstanding indemnification obligations by the
sellers. The note referred to above was reduced for working
capital adjustments in accordance with terms of the purchase agreement. The
adjusted note is payable in three years, based on a five-year amortization
schedule, with $24,118 plus accrued interest payable on each of January 2, 2009
and January 2, 2010 and the balance of $72,336 plus accrued interest payable on
January 2, 2011. The January 2, 2009 scheduled payment was not made, as the note
was adjusted in the fourth quarter of 2008.





As indicated above, we suspended
our strategic plan to grow our business through acquisitions because of the
downturn in the economy.  Currently, we are not actively evaluating
the disposition of any material assets and liabilities.




7





Mission-Critical
IT Industry




IT
facilities and other high technology environments are much more complex than
standard facilities and require a larger capital investment. Errors and delays
in the planning, design, construction or installation of such facilities can
involve significant costs. As a result, companies, building owners and managers
are increasingly seeking project managers and construction firms with
specialized expertise and experience in designing, building and maintaining
critical IT infrastructure and systems.




We pursue
opportunities in the growing mission-critical IT market in both the government
and private sectors through our single source solution offerings. We believe
there are significant barriers to entry for new competitors in the
mission-critical IT market, including customer requirements for firms with
substantial IT project experience, deep and broad professional and IT
construction management offerings and, for homeland defense and intelligence
agency work, facility and security clearances. Through our facilities
integration services, we have the ability, directly and through subcontractor
relationships, to provide all services and coordinate the efforts of all
personnel involved in a mission-critical project, to meet crucial occupancy
deadlines, and to complete all required services with minimal
disruption.




We
believe energy initiatives are significant to the overall industry with a
growing focus on corporate citizenship with regard to the environment and
opportunities to increase profitability. We believe the macro trend of rising
energy costs adds further incentive to incorporate green initiatives as
potential returns to customers are greater, while the payback periods on their
investments is shortened. We address this growing trend with a specialized focus
on green initiatives and a thorough understanding of the Leadership in Energy
and Environmental Design (LEEDS) Certification which is a third party
certification and benchmark for the design, construction and operation of high
performance green buildings. We understand the LEEDS design requirements and
their contribution to the environment and potential profitability
enhancements.




Service
Offerings




The
company has developed a menu of unique consulting and service options to assist
and partner with owners of mission-critical facilities to develop
strategies that enable them to cope with the complexities facing
mission-critical facility infrastructure systems. These solutions begin with
strategies for the IT assets that are being housed in the facility, through
power, cooling and heat rejection issues and disaster recovery backup systems.
We help them develop total cost of ownership models that enable them to design
and build the most efficient data centers based on their available capital. Our
solutions involve all aspects of the life cycle of the data center and are
described in more detail below.




8











Technology
Consulting





Energy and Green
Solutions.  We have developed services that can identify energy
savings for the customer on both the supply side from utility sources and demand
side in terms of consumption of an existing data center.





Supply
side services include:


·
            Competitive utility rate analysis
      in deregulated areas;


·
            Obtaining energy certificates and
      carbon offset certificates for capital expenditures on both renewable
      energy based initiatives as well as replacement initiatives;
      and


·
            Participation in demand response
      programs.





Demand
side initiatives include:


·
            Energy
    audits;


·
            Facility consolidation;
      and


·
            Performance based contracting
      initiatives that create capital from energy savings on replacement
      projects.





IT
Solutions. These services are partially performed by our in-house staff
and done in conjunction with our teaming partners and include:


·
            Data center strategic
      planning;


·
            Data center
      optimization;


·
            Virtualization and consolidation
      of servers and storage devices;
and


·
            Data center relocation planning
      and implementation.





Real Estate
Solutions. These services include:


·
            Assisting customers with disposal
      and acquisition of mission-critical
  assets;


·
            Site assessments, evaluation and
      selection;




9




·
            Conceptual design and in depth
      budget and cost analysis;


·
            Financial modeling and market
      research;


·
            Utility
      assessment;


·
            Telecommunication service
      assessment;


·
            Cost and payback analysis;
      and


·
            Phased investment strategy for
      development of speculative
space.





Capital
solutions. These services include:


·
            Finding sale and lease back
      alternatives for our
customers;


·
            Matching customers up with
      leasing partners to finance major equipment
    purchases;


·
            Finding equity partners for our
      customers developing speculative projects;
  and


·
            Performance contract financing
      for gy related capital
projects.




Design and
Engineering/Planning and Programming.





This
phase represents the initiation of project development and typically includes
establishing project goals and a preliminary budget and schedules, setting
technical parameters and requirements, and determining project team members and
the overall level of effort required of the team. When developing
mission-critical facilities, the planning and programming phase is often
considered the most important because this is where the project receives its
initial emphasis, motivation and direction.




Design
and engineering service offerings typically include critical power and
mechanical load calculations, schematic design of electrical, mechanical,
communications, fire protection and security systems, mechanical design and
engineering, high and medium voltage electrical design and engineering,
communications and security systems design and engineering, physical
vulnerability assessments, force protection design and bomb blast analyses, fire
protection system design and engineering, facility systems equipment selection,
and facility commissioning and testing.




Construction
Management




Activities
during this phase include detailed preparations required for a successful
construction process. Work performed during the construction management phase
includes project management, value engineering and design management, bid
negotiation, subcontractor pre-qualification and negotiation, long-lead
equipment procurement, issuance of equipment and construction contracts, and
refinement of project budget and schedule. Our project managers mobilize the
required expertise for the project, utilizing in-house superintendents and
quality control and safety professionals, as well as qualified subcontractors
and support personnel, some of which have historically been provided by
affiliated entities. Our project managers supervise work by project team
members, including all aspects of the following: architecture and construction,
electric power systems, heat rejection and cooling, energy management and
controls, cooling tower systems, security systems, voice, data and network
cabling, fire and life safety systems, and process piping and plumbing systems.
Our project managers remain responsible for all aspects of the project until
project completion and customer delivery.


10


The
installation portion of the project is typically of the longest duration when
compared to other project phases. In addition, this portion has the largest
number of outside influences that can impact project goals and objectives, such
as weather, non-performance of subcontractors, equipment deliveries, unexpected
project changes from the owner, and influence from local authorities and utility
providers. Therefore, experience, skill and mission focus are critical during
the project installation period.




Facilities
Management




We
provide a comprehensive maintenance and service contract designed to insure that
the multiple systems critical to sustaining on-line applications in
technologically intensive facilities remain operational and functional. Typical
services during the facilities maintenance and service phase include overall
management of facility maintenance program, on-site staffing of technical
engineering positions ( e.g., electricians, HVAC
mechanics, control technicians and voice/data technicians), and management of
non-technical subcontracted services ( e.g., security, landscaping,
janitorial, pest control, snow removal, carpentry, painting and general
maintenance services). We seek to provide on-site maintenance services, not only
to gain additional project revenue, but also to obtain hands-on involvement in
any new facility planning, design and construction initiatives that the customer
undertakes.





In
addition to on-site services the company has a 24X7 National
Operations Center in Elkridge, Maryland that has the capability of
monitoring remotely our data center service contract customers’ facilities for
systems operations and emergency events that could lead to outages. Temperature
levels, humidity, electrical connectivity, power usage and fire alarm conditions
are among the items monitored. In addition the system maintains all site
documentation for repairs and maintenance performed on each critical piece of
equipment covered under our service contract agreement. The information is
useful to our customers for determination of why failures occur and enables them
to make critical decisions on repair or replacement strategies based on the
operating histories maintained on the item.





Our
service contracts with our customers are typically one to three years in
duration with cancelation clauses for non performance.  They are
typically billed monthly and the value covers an estimated cost for the
performance of scheduled maintenance tasks required to be performed at various
usage or time intervals as well as testing schedules to be performed to insure
the equipment functions properly under assumed electrical load or outage
conditions. The contracts also have pricing formulas for labor rates and
material markups for unscheduled work performed due to either emergency service
needs or equipment failures. In some cases our pricing is subject to adjustments
for outages caused by our lack of performance.





Strategy




Our
strategies for growth include the following:




·
            Focus on
      selling consulting services.Our past experience in
      selling project-related services has demonstrated the importance of
      focusing on the sale of consulting business. Focusing on the top of the
      Solutions Path offers the following advantages applicable to government,
      government-related and commercial
  customers:





·
            Develop a customer relationship
      at the initiation of a project, therefore maximizing the sales
      opportunity;





·
            Because consulting engagements
      are less expansive than project-wide engagements, purchase authority often
      resides at lower levels of management, which increases probability of
      closure;





·
            Limit exposure to competition
      since the fee is relatively low and the services are in specialized areas
      where we can demonstrate our technical depth and expertise in
      mission-critical facilities to the
  customer;





·
            Increase the probability of
      conversion (selling subsequent phases) because the customer is comfortable
      with the performance and price of initial services;
    and





·
            Position us on the “customer’s
      side of the table,” which teams us with the customer on a
      consolidated mission and distinguishes us from typical contractors
      and firms associated with equipment
  suppliers.




11




·
            Maintaining
      and Enhancing Key Alliances.Maintaining key alliances is
      also crucial to sales development and growth and often provides us with
      introductions to the customers of our alliance partners. These alliances
      reside with IT consulting firms, specialty mission-critical engineering
      firms, application service providers and internet service providers. Key
      alliance opportunities also reside in other firms within the market sector
      such as equipment manufacturers, product suppliers, property management
      firms, developers, IT system integrators and firmware providers. In
      addition, we seek to maintain alliances and enter into teaming or
      partnering relationships with minority contracting firms and hub zone
      companies. These firms are natural alliance partners and can provide us
      with valuable entry into government contracting relationships. In turn, we
      can provide these contractors and hub zone companies with valuable
      mission-critical design, engineering, and contracting experience to which
      they might not otherwise have access. We have entered into several key
      strategic alliances with large IT corporations to provide engineering,
      design, and construction management
  services.





·
            Strategic
      Acquisitions.Though
      our acquisitions we have expanded our customer base, allowed us to
      offer a broader scope of services and supported our current growth in
      technology consulting projects. In the future, subject to an improved
      economy, we may further pursue strategic acquisitions that
      cost-effectively add new customers, regional coverage, specific federal
      agency contracting experience, or complementary expertise to accelerate
      our access to existing or new
markets.


·
            Established a
      National Operations Center.A significant part of our
      strategy for growth in our facilities management services business was the
      establishment and maintenance of a National Operations Center (“NOC”) to
      service customers on a nationwide basis. Our NOC was completed in 2008 and
      is fully functioning for its intended purpose.  A NOC is a
      central location for monitoring the customer’s critical infrastructure
      systems, addressing alarm conditions within these systems, and controlling
      certain systems via remote
interface.





·
            Marketing
      Initiatives.We have expanded our current localized marketing campaign
      to a regional and national level. This will involved intensifying the
      marketing of our consulting and engineering services to private sector end
      users, major government contractors, and existing and potential alliance
      partners on regional and national basis through a focused marketing
      program, involving:




·
            Selected media
      advertising;





·
            Trade show
      attendance;





·
            Conducting technical seminars in
      local target markets; and





·
            Producing a marketing campaign
      for distribution at a national
level.




12





Contracts
and Customers




Our
customers include United States government and homeland defense agencies and
private sector businesses that in some cases are the end user of the facility or
in other cases are providing a facility to a government end user. We categorize
contracts where a government agency is the ultimate end user of the facility as
government-related contracts.




The price
provisions of the contracts we undertake can be grouped into three broad
categories: (i) fixed-price, (ii) guaranteed maximum price (cost plus
fee) and (iii) time and materials.




In a
fixed-price contract, we must fully absorb cost overruns, notwithstanding the
difficulty of estimating all of the costs we will incur in performing these
contracts and in projecting the ultimate level of revenues that we may
achieve. Our failure to anticipate technical problems, estimate costs accurately
or control costs during the performance of a fixed-price contract may reduce the
profitability of a fixed-price contract or cause a loss.




In a
guaranteed maximum price contract, we share our cost information with the
customer and earn a negotiated fee. In addition, a contingency fee is included
for changes and errors in pricing. As the project progresses to the point where
both the customer and we are comfortable with final pricing of the project, a
maximum price is agreed to with savings reverting back to the customer. Due to
the fact that the risk is shared with the customer on these projects, the profit
margins are less than those earned on other contract types.




In
time-and-materials contracts, we are reimbursed for labor at fixed hourly rates
and for materials used at an agreed upon mark up on cost. Profit margins depend
on the negotiated bill rate with the customer less our labor and benefit
costs.




For the
years ended December 31, 2009 and December 31, 2008, revenues from
guaranteed maximum price contracts represented approximately 31% and 30% of our
revenues, respectively. Most government contracts, including our contracts with
the federal government, are subject to termination at will by the government, to
government audits and to continued appropriations.




We do
have some customer concentration as we earned approximately 20% and 31% of our
total revenue from three and two customers for the years ended December 31, 2009
and 2008, respectively.





Historically,
we are not subject to any significant regulation by state, federal or foreign
governments. In the future, as we seek to directly contract services with
the federal government versus perform on a subcontractor basis, we may be
subject to audit and oversight of federal government agencies.





Backlog




We
believe an indicator of our future performance is our backlog of uncompleted
projects under contract or awarded. Our backlog represents our estimate of the
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 contract.




Backlog
is not a measure defined in generally accepted accounting principles, and our
methodology for determining backlog may not be comparable to the methodology
used by 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 has not yet been authorized.





As of
December 31, 2009, our backlog was approximately $47.1 million, compared to
approximately $58.7 million at December 31, 2008.  In the first
quarter of 2010, a large developer customer sold its property and cancelled its
remaining contract commitment under the original
agreement.  Accordingly, we removed the project totaling $12.4
million, net of acquirer’s assumed and assigned contract of $3.2 million, from
our December 31, 2009 backlog, which primarily accounts for the decrease in
backlog from the prior year.




At
December 31, 2009, we have authorizations to proceed with work for approximately
$39.9 million, or 85% of our total backlog of $47.1 million. Additionally,
approximately $32.5 million, or 82% of our total backlog, relates to three
customers at December 31, 2009.  We estimate that approximately 89%
of our backlog will be recognized during our 2010 fiscal year. This
estimate is based on the compilation of monthly backlog reports that the project
management regularly prepares which present backlog per contract,
our management’s estimate of future revenue based on known contracts and
historical trends and our projection of the amount of such backlog expected to
be recognized in the following 12 months.





We adjust
backlog to reflect project cancellations, deferrals and revisions in scope and
cost (both upward and downward) known at the reporting date. Future contract
modifications or cancellations may increase or reduce backlog and future
revenues. We generally do not track and therefore have not disclosed whether the
contracts included in our backlog are fully funded, incrementally funded, or
unfunded. Our customers may enter into contracts with us for our services;
however, authorization for us to perform those services may be dependent on the
customer’s ability to finance the project either internally or externally
through investors. Most of our customer contracts are terminable at will by the
customer consistent with industry practice. As a result, no assurances can be
given that the amounts included in backlog will ultimately be
realized.  See Item 1A. “Risk Factors” for additional risk factors
relating to our backlog.




13




Sales and
Marketing




The
marketing approach employed by us emphasizes expertise in IT hardware
systems, energy consultants, real estate consultants and facilities programming
and planning, which enables involvement at the critical early stages in projects
where a full range of services are needed. This marketing approach allows the
customer to contract for comprehensive facilities integration services or to
contract separately for each individual project phase. Our marketing
program seeks to capitalize on our industry standing, including our
existing relationships, relationships added through
acquisitions and our reputation based on our performance on completed
projects. We also seek to enhance our name recognition through the use of
trade shows, technical seminars, direct mailings, and the media.





The
decline in the economy beginning in late 2008 and continuing through 2009 has
impacted our ability to fund a larger sales force and various media events and
advertising during 2009 so major cutbacks were implemented in our sales force
and marketing programs. To offset the cutbacks we engaged senior staff and
management to drive our sales efforts to reduce SG&A. With the leaner
organization and participation of senior management in the sales process, our
sales efforts have been adequate despite the reduced demand due to the
recession.  As our cash flow improves we anticipate we will bring back
certain marketing activities that give us the fastest and greatest return,
specifically trade show events and technical seminars, and we will focus more
effort in the sale of recurring revenue opportunities to build up our facilities
and service divisions





Maintaining
key alliances is also crucial to sales development and growth and often provides
us with introductions to the customers of our alliance partners. These alliances
reside with IT consulting firms, specialty mission-critical engineering firms,
application service providers and internet service providers. Key alliance
opportunities also reside in other firms within the market sector such as
equipment manufacturers, product suppliers, property management firms,
developers, IT system integrators and firmware providers. In addition, we seek
to maintain alliances and enter into teaming or partnering relationships with
minority contracting firms and hub zone companies. These firms are natural
alliance partners and can provide us with valuable entry into government
contracting relationships. In turn, we can provide these contractors and hub
zone companies with valuable mission-critical design, engineering, and
contracting experience to which they might not otherwise have access. We have
entered into several key strategic alliances with large IT Corporations to
provide engineering, design, and construction management services.




The
process for acquiring business may require us to participate in a competitive
request-for-proposal process, with the primary difference among potential
customers being that the process for direct government and government-related
customers is significantly more formal and complex than for private sector
customers as a result of government procurement rules and regulations that
govern the contracting process.




Competition




The
mission-critical IT solutions market is large, fragmented and highly
competitive. We compete for contracts based on our strong customer
relationships, successful past performance record, significant technical
expertise, specialized knowledge and broad service offerings. We often compete
against divisions of both the large design contractors and construction
contractors, as well as against numerous small- to medium-sized specialized or
regional information technology consulting firms. Some of these competitors are
large, well-established companies that have broader geographic scope and greater
financial and other resources than us. These larger, more established
competitors include Washington Group International, Inc. (a division of URS
Corporation), Dycom Industries, Inc., Mastec Inc., Hill International Inc.,
Hewlett Packard Company, Holder Construction Company, Nova Construction, Syska
Hennesey, Whiting Turner and Clark Construction. Although these large
construction and engineering companies have greater financial and other
resources, we do not believe they offer as complete of a line of
mission-critical IT services as us. We expect competition in the
mission-critical IT technology services sector to increase in the
future.




14




Executive
Officers




Set
forth below is information as of March 19, 2010, about our executive officers,
as determined in accordance with the rules of the SEC.




Name
                  
                  Age
                  
                  Position with the CompanyHarvey
      L. Weiss
                  
                  67
                  
                  Vice-Chairman
      of the BoardThomas
      P. Rosato
                  
                  58
                  
                  Chief
      Executive Officer and DirectorGerard
      J. Gallagher
                  
                  53
                  
                  President,
      Chief Operating Officer and DirectorTimothy
      C. Dec
                  
                  51
                  
                  Chief
      Financial Officer




Harvey L.
Weiss , age 67, has served as our Vice-Chairman of the Board since
December 2008 and prior to that he served as Chairman of the Board from the
closing of our acquisition of TSS/Vortech on January 19, 2007. From our
inception through the closing of TSS/Vortech, Mr. Weiss had served as our Chief
Executive Officer, President and a member of our Board. He has over 40
years of experience in the information technology and security market place.
From 2002 to August 1, 2004, Mr. Weiss was the Chief Executive Officer and
President of System Detection, Inc., a software security company. From 2000 to
2002, he served as President of Engineering Systems Solutions, Inc., a security
and biometrics integration firm. During 1999, Mr. Weiss was the Chief Executive
Officer and President of Global Integrity Corporation, a SAIC subsidiary
specializing in information security and served as a Director until the company
was sold in 2002. From 1996 to 1998, until sold to Network Associates, Inc, Mr.
Weiss was President of the Commercial Division, Secretary and Director of
Trusted Information Systems, Inc., a NASDAQ-listed security network company.
Prior to that time, from 1994 to 1996, Mr. Weiss served as President of Public
Sector Worldwide Division for Unisys Corporation. From 1991 to 1993, Mr. Weiss
was the Vice President of Sales and the President and Chief Operating Officer of
Thinking Machines Corporation, a massively parallel processing company. Prior to
that time, he served in various senior capacities including Vice
President of Digital Equipment Corporation's Government Systems Group. Mr.
Weiss serves on the Board of Vision Technologies Inc., an engineering and
manufacturing company for electro-optical and thermal imaging camera
systems, was a member of the Brookings Institution Council, and is a trustee of
Capitol College. Mr. Weiss received a Bachelor of Science in Mathematics from
the University of Pittsburgh and attended the Massachusetts Institute of
Technology Sloane School Program for Senior Executives.





Thomas P.
Rosato , age 58, became a Director and our Chief Executive Officer upon
our acquisition of TSS/Vortech on January 19, 2007. Mr. Rosato has over 30 years
of experience in mission-critical service businesses. Since 2002, he has served
as the co-founder and chairman of TSS and the co-founder and chairman of
Vortech. From 1998 to 2001, Mr. Rostato served as the President - Group
Maintenance of America/Encompass Services Corporation, National Accounts
Division. From 1995 to 1998, he served as the founder and President of
Commercial Air, Power & Cable, Inc. From 1980 to 1995, he served in various
capacities at Com-Site Enterprises, most recently as Chief Financial Officer and
Chief Operating Officer. Mr. Rosato started his career in 1973 as a certified
public accountant at Coopers & Lybrand. Mr. Rosato received a Bachelor of
Business Administration in Accounting from Temple University in
1973.




15




Gerard J.
Gallagher , age 53, became a Director and our President and Chief
Operating Officer upon our acquisition of TSS/Vortech on January 19, 2007. Mr.
Gallagher has more than 25 years of experience in mission-critical fields. Since
2002, he has served as the co-founder and President of TSS and the co-founder
and President of Vortech. From 1998 to 2001, Mr. Gallagher served as the
President of the Total Site Solutions division of Encompass Services Corp. From
1997 to 1998, he served as the President of the Total Site Solutions division of
Commercial Air, Power & Cable, Inc. From 1991 to 1997, he served as the
Chief Facilities Operations and Security Officer of the International Monetary
Fund. From 1980 to 1991, Mr. Gallagher served in various capacities at Com Site
Enterprises, most recently as Senior Vice President of Engineering and Sales.
Mr. Gallagher received a Bachelor of Science in Fire Science from the University
of Maryland and a Bachelor of Science in Organizational Management (Summa Cum
Laude) from Columbia Union College.





Timothy C.
Dec , age 51, was appointed as Chief Financial Officer of the Company,
effective August 20, 2007. Prior to his appointment and since June 2006, Mr. Dec
was the Chief Financial Officer of Presidio Networked Solutions Inc., the
nation’s largest independent value-added solutions provider that offers a wide
range of Cisco-centric network infrastructure and collaborative solutions. From
1999 until May 2006, Mr. Dec was Senior Vice President, Chief Accounting Officer
& Treasurer of Broadwing Corporation, a NASDAQ listed telecommunications
company.  From 1997 to 1999, Mr. Dec was Director of Accounting and
Administration for Thermo Trilogy Corporations, a subsidiary of AMEX listed
Thermo Electron Company. Earlier in his career, Mr. Dec held finance and
accounting related positions at North American Vaccine, Inc. an AMEX listed
company engaged in the research, development and manufacturing of vaccines,
privately held general contractor Clark Construction and Intertek Services
International, LTD, a division of Inchcape Group, a multinational public company
based in London, England. Mr. Dec holds a Bachelor of Science degree in
Accounting from Mount Saint Mary’s University in Emmitsburg, Maryland, and a
Masters of Business Administration from American University in Washington DC. He
is a Certified Public Accountant.




The
employment of our officers is subject to the terms and conditions of their
respective employment agreements.




Employees




At
December 31, 2009, we had approximately 113 full-time employees. We
have obtained facility clearance from the United States Department of Defense.
In addition to the facility clearance, we have successfully cleared
approximately one third of our employees, allowing them individual access to
restricted projects and facilities. Our future success will depend significantly
on our ability to attract, retain and motivate qualified personnel. We are not a
party to any collective bargaining agreement and we have not experienced
any strikes or work stoppages. We consider our relationship with our
employees to be satisfactory.





16





Item 1A.   RISK FACTORS




Our
business involves a number of risks, some of which are beyond our control. The
risks and uncertainties described below are not the only ones we face. Such
factors could have a significant impact on our business, operating results and
financial condition. We believe the most significant of these risks and
uncertainties are as follows:




Actual or
potential conflicts of interest are likely to develop between us and
Messrs. Rosato and Gallagher.




Thomas P.
Rosato and Gerard J. Gallagher, the selling members of TSS/Vortech, continue to
own significant businesses other than TSS/Vortech that are not owned or
controlled by us. We will have ongoing business relationships with certain of
these businesses of the selling members. This will likely create actual or
potential conflicts of interest between the selling members, who are executive
officers and members of our Board of Directors and thus in a position to
influence corporate decisions, and us.




We
have a history of net losses, and we may experience net losses in the
future.




We have
incurred significant net losses since our inception. For example, our net losses
for the years ended December 31, 2009 and 2008 were approximately
$18.8 million and $32.9 million, respectively. Although we have made
efforts to align costs with sales and gross margin volume in, there can be no
guarantee that we will be successful in achieving, sustaining or increasing
profitability in 2010 or beyond. The severity of the current economic downturn
and rapidly changing competitive marketplace has created a volatile and
challenging business climate, which continue to negatively impact our customers
and their spending and investment decisions. We may not be able to generate the
level of revenue necessary to achieve and maintain sustainable profitability,
particularly as we continue to incur significant sales and marketing and
administrative expenses. Any failure to maintain and grow our  revenue
volumes would adversely affect our business, financial condition and operating
results.





17




As
a result of our acquisitions, we have substantial amounts of goodwill and
intangible assets, and changes in future business conditions could cause these
assets to become impaired, requiring substantial write-downs that would
adversely affect our operating results.




Our
acquisitions were accounted for as purchases and involved purchase
prices well in excess of tangible asset values, resulting in the creation of a
significant amount of goodwill and other intangible assets. Since
December 31, 2006, we completed the acquisitions of
TSS/Vortech, Comm Site , Innovative, Rubicon, and SMLB. Under generally
accepted accounting principles, we do not amortize goodwill and intangible
assets acquired in a purchase business combination that are determined to have
indefinite useful lives, but instead review them annually (or more frequently if
impairment indicators arise) for impairment. To the extent we determine that
such an asset has been impaired, we will write-down its carrying value on our
balance sheet and book an impairment charge in our statement of
operations.  In 2009 and 2008, we conducted such analyses that
resulted in impairment loss on goodwill of $0.3 million and $15.8 million,
respectively. Additionally during the year ended December 31, 2009, we
evaluated our customer relationships in light of the bookings below anticipated
levels, resulting in impairment of approximately $9.9 million. At December 31,
2009 and 2008, our net carrying value of goodwill and other indefinite lived
intangibles was $3.8 million and $3.7 million, respectively. Finally in
2008, to consolidate our product offerings under a single brand name Fortress
International Group, Inc., we abandoned acquired trade names resulting in an
impairment loss of approximately $5.0 million in 2008.




We
amortize intangible assets with estimable useful lives over their respective
estimated useful lives to their estimated residual values, and also review them
for impairment. If, as a result of acquisitions or otherwise, the amount of
intangible assets being amortized increases, so will our depreciation and
amortization charges in future periods.




Recent
global economic trends could adversely affect our business, liquidity and
financial results.





Recent
global economic conditions, including disruption of financial markets, could
adversely affect our business and results of operations, primarily, through
limiting our access to credit and debt and equity financing and disrupting our
clients’ businesses. The reduction in financial institutions’ willingness or
ability to lend has increased the cost of capital and reduced the availability
of credit. Although we currently believe that the financial institutions with
whom we do business will be able to fulfill their commitments to us, there is no
assurance that those institutions will be able to continue to do so, which could
have a material adverse impact on our business.  In addition,
continuation or worsening of general market conditions in the United States or
other national economies important to our businesses may adversely affect our
clients’ level of spending, ability to obtain financing, and ability to make
timely payments to us for our services, which could require us to increase our
allowance for doubtful accounts, negatively impact our days sales outstanding
and adversely affect our results of operations.





We
derive a significant portion of our revenues from a limited number of
customers.




We derive
and believe that we will continue to derive in the near term, a significant
portion of our revenues from a limited number of customers. To the extent that
any significant customer uses less of our services or terminates its
relationship with us, our revenues could decline significantly, which would have
an adverse effect on our financial condition and results of
operations.  Our three and two largest customers accounted for
approximately 20% and 31% of our total revenues for the years ended
December 31, 2009 and 2008, respectively.  Additionally, during
the fourth quarter 2009, a customer, comprising 58% of our total backlog at
December 31, 2009, entered into a definitive merger agreement.  We are
unable determine if the merger agreement will close, or if it does, the affect
it may have on continued business with our customer.




Most
of our contracts may be canceled on short notice, so our revenue and
potential profits are not guaranteed.




Most of
our contracts are cancelable on short notice by the customer either at its
convenience or upon our default. If one of our customers terminates a
contract at its convenience, then we typically are able to recover only costs
incurred or committed, settlement expenses and profit on work completed prior to
termination, which could prevent us from recognizing all of our potential
revenue and profit from that contract. If one of our customers terminates the
contract due to our default, we could be liable for excess costs incurred by
the customer in re-procuring services from another source, as well as other
costs. Many of our contracts, including our service agreements, are periodically
open to public bid. We may not be the successful bidder on its existing
contracts that are re-bid. We also provide an increasing portion of our
services on a non-recurring, project-by-project basis. We could experience a
reduction in our revenue, profitability and liquidity if:




·
            our customers cancel a
      significant number of
contracts;





·
            we fails to win a significant
      number of its existing contracts upon re-bid;
  or





·
            we complete the required work
      under a significant number of our non-recurring projects and cannot
      replace them with similar
projects.




18




Our
backlog varies and is subject to unexpected adjustments and cancellations and
is, therefore, not guaranteed to be recognized as revenue.




We cannot
assure that the revenues attributed to uncompleted projects under contract will
be realized or, if realized, will result in profits. Included in our backlog is
the maximum amount of all uncompleted contracts and task order contracts,
or a lesser amount if we do not reasonably expect to be issued task orders for
the maximum amount of such contracts. We perform services only when purchase
orders are issued under the associated contracts.




The
backlog amounts are estimates, subject to change or cancellation, and
accordingly, the actual customer purchase orders to perform work may vary
significantly in scope and amount from the backlog amounts. Accordingly, we
cannot provide any assurance that we will in fact be awarded the maximum amount
of such contracts or be awarded any amount at all. Our backlog as of
December 31, 2009 and 2008 was approximately $47.1 million and
$58.7 million, respectively. This decline in our backlog is
attributable to a $12.4 million contract cancellation arising from a significant
customer’s sale of its project in first quarter 2010.




The
majority of our projects are accounted for on the percentage-of-completion
method, and if actual results vary from the assumptions made in estimating
percentage-of-completion, our revenue and income could be reduced.




We
generally recognize revenue on our projects on the percentage-of-completion
method. Under the percentage-of-completion method, we record revenue as work on
the contract progresses. The cumulative amount of revenue recorded on a contract
at a specified point in time is that percentage of total estimated revenue that
incurred costs to date bear to estimated total expected contract costs. The
percentage-of-completion method therefore relies on estimates of total expected
contract costs. Contract revenue and total cost estimates are reviewed and
revised periodically as the work progresses. Adjustments are reflected in
contract revenue in the fiscal period when such estimates are revised. Estimates
are based on management’s reasonable assumptions and experience, but are only
estimates. Variation between actual results and estimates on a large project or
on a number of smaller projects could be material. We immediately recognize the
full amount of the estimated loss on a contract when our estimates indicate such
a loss. Any such loss would reduce our revenue and income.




We
submit change orders to our customers for work we perform beyond the scope of
some of our contracts. If our customers do not approve these change orders, our
results of operations could be adversely impacted.




We
typically submit change orders under some of our contracts for payment of work
performed beyond the initial contractual requirements. The applicable customers
may not approve or may contest these change orders and we cannot assure you that
these claims will be approved in whole, in part or at all. If these claims are
not approved, our net income and results of operations could be adversely
impacted.




We
may not accurately estimate the costs associated with services provided under
fixed-price contracts, which could impair our financial
performance.




A portion
of our revenue is derived from fixed price contracts. Under these contracts, we
set the price of our services and assume the risk that the costs associated with
our performance may be greater than we anticipated. Our profitability is
therefore dependent upon our ability to estimate accurately the costs associated
with our services. These costs may be affected by a variety of factors, such as
lower than anticipated productivity, conditions at the work sites differing
materially from what was anticipated at the time we bid on the contract, and
higher than expected costs of materials and labor. Certain agreements or
projects could have lower margins than anticipated or losses if actual costs for
contracts exceed our estimates, which could reduce our profitability and
liquidity.




Failure
to properly manage projects may result in costs or claims.




Our
engagements often involve relatively large scale, highly complex projects. The
quality of our performance on such projects depends in large part upon our
ability to manage the customer relationship, to manage effectively the project
and to deploy appropriate resources, including third-party contractors and our
own personnel, in a timely manner. Any defects, errors or failure to meet
customers’ expectations could result in claims for substantial damages against
us. We currently maintain comprehensive general liability, umbrella, and
professional liability insurance policies. We cannot be certain that the
insurance coverage we carry to cover such claims will be adequate to protect us
from the full impact of such claims. Moreover, in certain instances, we
guarantee customers that we will complete a project by a scheduled date or
that the project will achieve certain performance standards. If the project
experiences a performance problem, we may not be able to recover the additional
costs we will incur, which could exceed revenues realized from a project.
Finally, if we underestimate the resources or time we need to complete a project
with capped or fixed fees, our operating results could be seriously
harmed.


19


We
may choose, or be required, to pay our subcontractors even if our customers
do not pay, or delay paying, us for the related services.




We use
subcontractors to perform portions of our services and to manage work flow. In
some cases, we pay our subcontractors before our customers pay us for the
related services. If we choose, or are required, to pay our subcontractors
for work performed for customers who fail to pay, or delay paying us for the
related work, we could experience a decrease in profitability and
liquidity.




We
operate in a highly competitive industry, which could reduce our growth
opportunities, revenue and operating results.




The
mission-critical IT industry in which we operate is highly competitive. We often
compete with other IT consulting and integration companies, including several
that are large domestic companies that may have financial, technical and
marketing resources that exceed our own. Our competitors may develop the
expertise, experience and resources to provide services that are equal or
superior in both price and quality to our services, and we may not be able to
maintain or enhance our competitive position. Although our customers
currently outsource a significant portion of these services to us and our
competitors, we can offer no assurance that our existing or prospective
customers will continue to outsource specialty contracting services to us in the
future.




The industries we
serve have experienced and may continue to experience rapid technological,
structural and competitive changes that could reduce the need for our services
and adversely affect our revenues.




The
mission-critical IT industry is characterized by rapid technological change,
intense competition and changing consumer and data center needs. We generate a
significant portion of our revenues from customers in the mission-critical IT
industry. New technologies, or upgrades to existing technologies by customers,
could reduce the need for our services and adversely affect our revenues and
profitability. Improvements in existing technology may allow companies to
improve their networks without physically upgrading them. Reduced demand for our
services or a loss of a significant customer could adversely affect our results
of operations, cash flows and liquidity.





A reduction in
spending due to the economic downturn could result in a decrease in demand for
our services.




If
federal, state or local government or private enterprise spending on
mission-critical related capital expenditures decreases, the demand for services
like those provided by us would likely decline. This decrease could reduce our
opportunity for growth, increase our marketing and sales costs, and reduce the
prices we can charge for services, which could reduce our revenue and operating
results.




We
may be unable to obtain sufficient bonding capacity to support certain service
offerings.




Some of
our contracts require performance and payment bonds. Bonding capacity for
construction projects has become increasingly difficult to obtain, and bonding
companies are denying or restricting coverage to an increasing number of
contractors. Companies that have been successful in renewing or obtaining
coverage have sometimes been required to post additional collateral to secure
the same amount of bonds which would reduce availability under any credit
facility. We may not be able to maintain a sufficient level of bonding capacity
in the future, which could preclude us from being able to bid for certain
contracts and successfully contract with certain customers. In addition, even if
we are able to successfully renew or obtain performance or payment bonds in the
future, we may be required to post letters of credit in connection with the
bonds.




20




We
may be unable to hire and retain sufficient qualified personnel; the loss of any
of our key executive officers may adversely affect our
business.




We
believe that our future success will depend in large part on our ability to
attract and retain highly skilled, knowledgeable, sophisticated and qualified
managerial, professional and technical personnel. Our business involves the
development of tailored solutions for customers, a process that relies heavily
upon the expertise and services of employees. Accordingly, our employees are one
of our most valuable resources. Competition for skilled personnel, especially
those with security clearance, is intense in our industry. Recruiting and
training these personnel require substantial resources. Our failure to attract
and retain qualified personnel could increase our costs of performing our
contractual obligations, reduce our ability to efficiently satisfy our
customers’ needs, limit our ability to win new business and constrain our future
growth.




Our
business is managed by a small number of key executive officers, including
Mr. Weiss, our Vice-Chairman, Mr. Rosato, our Chief Executive Officer,
Mr. Gallagher, our President and Chief Operating Officer, and Mr. Dec, our
Chief Financial Officer. The loss of any of these key executive officers could
have a material adverse effect on our business.




A portion of our business depends upon
obtaining and maintaining required security clearances, and our failure to
do so could result in termination of certain of our contracts or
cause us to be unable to bid or rebid on certain
contracts.




Some
United States government projects require our employees to maintain various
levels of security clearances, and we may be required to maintain certain
facility security clearances complying with United States government
requirements.




Obtaining
and maintaining security clearances for employees involve a lengthy process, and
it is difficult to identify, recruit and retain employees who already hold
security clearances. If our employees are unable to obtain or retain security
clearances or if such employees who hold security clearances terminate their
employment, the customer whose work requires cleared employees could terminate
the contract or decide not to renew it upon expiration. To the extent we are not
able to engage employees with the required security clearances for a particular
contract, we may not be able bid on or win new contracts, or effectively re-bid
on expiring contracts, which could adversely affect our business.




In
addition, we expect that some of the contracts on which we will bid will
require us to demonstrate our ability to obtain facility security
clearances and perform work with employees who hold specified types of security
clearances. A facility security clearance is an administrative determination
that a particular facility is eligible for access to classified information or
an award of a classified contract. Although contracts may be awarded prior to
the issuance of a facility security clearance, in such cases the contractor is
processed for facility security clearance at the appropriate level and must meet
the eligibility requirements for access to classified information. A contractor
or prospective contractor must meet certain eligibility requirements before it
can be processed for facility security clearance. Our ability to obtain and
maintain facility security clearances has a direct impact on our ability to
compete for and perform United States government projects, the performance of
which requires access to classified information.





Our
failure to comply with the regulations of the United States Occupational Safety
and Health Administration and other state and local agencies that oversee safety
compliance could reduce our revenue, profitability and liquidity.




The
Occupational Safety and Health Act of 1970, as amended, or OSHA, establishes
certain employer responsibilities, including maintenance of a workplace free of
recognized hazards likely to cause death or serious injury, compliance with
standards promulgated by the Occupational Safety and Health Administration and
various record keeping, disclosure and procedural requirements. Various
standards, including standards for notices of hazards, safety in excavation and
demolition work, may apply to our operations. We have incurred, and will
continue to incur, capital and operating expenditures and other costs in the
ordinary course of our business in complying with OSHA and other state and
local laws and regulations.




21





Our
quarterly revenue, operating results and profitability will vary.




Our
revenue, operating results and profitability may fluctuate significantly and
unpredictably in the future. In particular, the changes in contract mix that is
inherent to our business may significantly affect our results.




Factors
that may contribute to the variability of our revenue, operating results or
profitability include:





·
            Fluctuations in revenue earned on
      contracts;





·
            Commencement, completion and
      termination of contracts, especially contracts relating to our major
      customers;





·
            Declines in backlog that are not
      replaced;





·
            Additions and departures of key
      personnel;





·
            Strategic decisions by us and our
      competitors, such as acquisitions, divestitures, spin-offs, joint
      ventures, strategic investments and changes in business
      strategy;





·
            General economic
      conditions;





·
            Contract mix and the extent of
      subcontractor use; and





·
            Any seasonality of our
      business.




Therefore,
period-to-period comparisons of our operating results may not be a good
indication of our future performance. Our quarterly operating results may not
meet the expectations of securities analysts or investors, which in turn may
have an adverse affect on the market price of our common stock.




If
we are unable to engage appropriate subcontractors or if our subcontractors fail
to perform their contractual obligations, our performance as a prime contractor
and ability to obtain future business could be materially and adversely
impacted.




Our
contract performance may involve the engagement of subcontracts to other
companies upon which we rely to perform all or a portion of the work we are
obligated to deliver to our customers. Our inability to find and engage
appropriate subcontractors or a failure by one or more of our subcontractors to
satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform
the agreed-upon services may materially and adversely affect our ability to
perform our obligations as a prime contractor.





In
extreme cases, a subcontractor’s performance deficiency could result in the
customer terminating the contract for default with us. A default termination
could expose us to liability for excess costs of reprocurement by the customer
and have a material adverse effect on our ability to compete for future
contracts and task orders.




22




International
operations expose us to legal, political and economic risks in different
countries and currency exchange rate fluctuations could adversely affect our
financial results.




Revenues
attributable to our international operations comprised less than 1% of our total
revenues for the years ended 2009 and 2008.  During the year ended
December 31, 2009, we reserved accounts receivable and wrote-off other assets
totaling $0.5 million associated with an international customer that was unable
to secure additional funding.   There are risks inherent in doing
business internationally, including:




•
              lack of developed legal systems
      to enforce contractual
rights;
 
 •
              greater risk of uncollectible
      accounts and longer collection
cycles;
 
 •
              currency exchange rate
      fluctuations;
 
 •
              imposition of governmental
      controls;
 
 •
              political and economic
      instability;
 
 •
              changes in U.S. and other
      national government policies affecting the markets for our
      services;
 
 •
              changes in regulatory practices,
      tariffs and taxes;
 
 •
              potential non-compliance with a
      wide variety of non-U.S. laws and regulations;
  and
 
 •
              general economic and political
      conditions in these foreign
markets.




Any of
these factors could have a material adverse effect on our business, results of
operations or financial condition.




Because
we do not currently intend to pay dividends on our common stock, stockholders
will benefit from an investment in our common stock only if it appreciates in
value.




We have
never declared or paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in the operations and
expansion of our business. As a result, we do not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the
declaration and payment of cash dividends will be at the discretion of our board
of directors and will depend on factors our board of directors deems relevant,
including, among others, our results of operations, financial condition and cash
requirements, business prospects, and the terms of our credit facilities and
other financing arrangements. Accordingly, realization of a gain on
stockholders’ investments will depend on the appreciation of the price of our
common stock. There is no guarantee that our common stock will appreciate in
value or even maintain the price at which stockholders purchased their
shares.




The
significant number of our outstanding options to purchase units and
convertible notes may place a ceiling on, or otherwise adversely affect the
value of our common stock.




Unvested
restricted stock, convertible unsecured promissory notes, and options to
purchase units were outstanding at December 31, 2009 to purchase 925,601,
366,667 and 700,000 shares of common stock, respectively.  We have
13,361,763 outstanding shares of common stock as of March 19,
2009.  These dilutive securities represent a very significant
market overhang that may limit the value of our common stock, at least in
the near term and unless and until we can substantially grow our
business.




23




Our
insiders hold a significant portion of our outstanding common
stock.  Future sales of common stock by these insiders may have an
adverse effect on the market price of our common stock.




Our
officers and directors hold approximately 5.2 million shares of commons
stock or 41% of our outstanding common shares as of December 31, 2009. Stock
sales by our directors and officers are subject to compliance with
our Code of Conduct and preapproval process from the Chief Financial
Officer.  Sales of a substantial number of these shares in the public
market could decrease the market price of our common stock. In addition, the
perception that such sales might occur may cause the market price of our common
stock to decline. Future issuances or sales of our common stock could have an
adverse effect on the market price of our common stock.





Increased
scrutiny of financial disclosure could adversely affect investor confidence and
any restatement of earnings could increase litigation risks and limit our
ability to access the capital markets.




Congress,
the Securities and Exchange Commission other regulatory authorities and the
media are intensely scrutinizing a number of financial reporting issues and
practices. If we were required to restate our financial statements as a result
of a determination that we had incorrectly applied generally accepted accounting
principles, that restatement could adversely affect our ability to access the
capital markets or the trading price of our securities. The recent scrutiny
regarding financial reporting has also resulted in an increase in litigation.
There can be no assurance that any such litigation against us would not
materially adversely affect our business or the trading price of our
securities.




24





Section
404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our
internal controls over financial reporting for fiscal 2007 and beyond and will
require an independent registered public accounting firm to report on the
effectiveness of these controls for fiscal 2010 and beyond. Any delays or
difficulty in satisfying these requirements could adversely affect our future
results of operations and our stock price.





Section
404 of the Sarbanes-Oxley Act of 2002 requires us to document and test the
effectiveness of our internal controls over financial reporting in accordance
with an established internal control framework and to report on our conclusion
as to the effectiveness of our internal controls for our year ending
December 31, 2009 and subsequent years.  It will also require our
independent registered public accounting firm to test, evaluate and report on
effectiveness of our internal controls for our ending December 31, 2010. It
may cost us more than we expect to comply with these control and
procedure-related requirements.




Our management,
including our Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of our internal controls over financial reporting as of
December 31, 2009. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission’s Internal Control-Integrated Framework.





As a
result of this assessment, we have determined that our internal control over
financial reporting was ineffective as of December 31, 2009.  We had
neither the resources, nor the personnel, to provide an adequate control
environment.  The following material weaknesses in our internal control
over financial reporting existed at December 31, 2009:  (i) we did not have
the ability to properly or completely segregate duties; (ii) we lacked formal
documentation of policies and procedures that were in place; and (iii) controls
are inadequate to reasonably assume compliance with generally accepted
accounting principles related to revenue.





During
2010 we will address the material weaknesses identified as of December 31,
2009.  We plan to continue working with a certified public accounting firm
to assist us in our documentation and testing of internal controls over
financial reporting in 2010. Any failure to implement required new and
improved controls, or difficulties encountered in their implementation, could
harm our operating results or cause us to fail to meet our reporting
obligations.




This
Annual Report on Form 10-K does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report on Form 10-K.




Our Securities
Will Be Delisted From The NASDAQ Capital
Market.




On
September 25, 2009, we received notice from the Nasdaq Listing Qualifications
Department that our common stock had failed to maintain a minimum bid price of
US $1.00 per share over a period of 30 consecutive trading days, as required by
Nasdaq Listing Rule 5550(a)(2). In accordance with Listing Rule 5810(c)(3)(A),
we were provided with a grace period of 180 calendar days, or until March 24,
2010, to regain compliance with this requirement. To regain compliance, our
common stock must have achieved a closing bid price of at least US $1.00 for a
minimum of ten consecutive trading days. On March 25, 2010 we received an
additional notice that our shares would be delisted on April 6, 2010 as we had
not regained compliance.  On March 10, 2010, our Board of
Directors unanimously voted to voluntarily delist common stock from the
NASDAQ Capital Market pursuant to NASDAQ Stock Market Rule
5840(j).  In connection therewith, we notified NASDAQ on March 12,
2010 of our intention to file a Form 25, Notification of Removal from
Listing and/or Registration with the SEC on or about March 22,
2010.  We filed the Form 25 on that date, and anticipates that the
Form 25 will become effective 10 days following its filing or approximately
April 1, 2010.  We are working with several market makers and it
is anticipated that the common stock will be quoted on OTC Bulletin Board
(“OTCBB”) , a centralized electronic quotation service for over-the-counter
securities operated by NASDAQ, following the delisting of the common stock from
NASDAQ.  We expect that the common stock will continue to trade on
OTCBB so long as market makers demonstrate an interest in trading in the common
stock.  We will continue to file periodic reports with the SEC
pursuant to the requirements of Section 12(g) of the Securities Exchange Act of
1934, as amended.  However, there is no assurance that a regular
trading market for our common stock will be initiated or sustainable on the OTC
BB.




Our
Shares are Thinly Traded and May Not be Readily Marketable




Our
shares are not widely traded, and daily trading volume is generally very low
compared with most publicly traded companies. As a result, you may not be able
to readily resell your shares in the company.




Our
common stock may be characterized as a “penny stock” under applicable SEC
regulation.




The
common stock may be characterized as “penny stock” under SEC regulations. As
such, broker-dealers dealing in the common stock may be subject to the
disclosure rules for transactions involving penny stocks, which generally
require that, prior to a purchase, the broker-dealer determine if purchasing the
common stock is suitable for the applicable purchaser. The broker-dealer must
also obtain the written consent of the applicable purchasers to purchase the
common stock and disclose the best bid and offer prices available for the common
stock and the price at which the broker-dealer last purchased or sold the common
stock. These additional burdens imposed upon broker-dealers may discourage them
from effecting transactions in the common stock, which could make it difficult
for an investor to sell his, her or its shares at any given time.




25




Item1B.
            UNRESOLVED STAFF
      COMMENTS





None.





Item
      2.
            PROPERTIES





Our
principal executive offices are located at 7226 Lee DeForest Drive, Suite 209,
Columbia, Maryland 21046. We have both cancelable and non-cancelable operating
leases and do not own any real property. Our subsidiaries operate from leased
administrative offices and shop facilities, none of which are material to
the company’s operations. We believe that our facilities are adequate for our
current operations and additional or replacement facilities would be available
if necessary.





Item
      3.
            LEGAL
      PROCEEDINGS





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





Item
      4.
              (Removed and
      Reserved)




26





PART
II





Item 5.
            MARKET FOR REGISTRANT’S COMMON
      EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES





Market
Information





Our common
stock, warrants, and units began trading on The NASDAQ Capital Market (NASDAQ)
on August 1, 2007 under the symbols “FIGI,” “FIGIW,” and “FIGIU,” respectively.
Prior and up to trading on the NASDAQ, our common stock, warrants, and
units were traded on the OTCBB under the symbols “FAAC,” “FAACW,”
and “FAACU,” respectively. Each warrant entitled the holder to purchase one
share of common stock at an exercise price of $5.00. On March 22, 2010, we filed
a Form 25 with the Securities and Exchange Commission and notified NASDAQ of the
voluntary delisting of our common stock from the NASDAQ Capital
Market.  We are working with several market makers and it is
anticipated that the common stock will be quoted on the OTCBB following the
delisting of the common stock from NASDAQ.  The company expects that
the common stock will continue to trade on OTCBB so long as market makers
demonstrate an interest in trading in the common stock.  The closing
price per share of our common stock, as reported by NASDAQ on March 19, 2010 was
$0.68. The following table sets forth, for the periods indicated, the high and
low sales prices for the common stock, warrants and units, as reported by
NASDAQ:





Common Stock
                          
                          
                          Warrants
                          
                          
                          UnitsHigh
                          
                          
                          Low
                          
                          
                          High
                          
                          
                          Low
                          
                          
                          High
                          
                          
                          LowYear ended December 31,
      2009First
      Quarter
                          
                          $
                          2.00
                          
                          
                          $
                          0.61
                          
                          
                          $
                          0.40
                          
                          
                          $
                          0.09
                          
                          
                          $
                          2.16
                          
                          
                          $
                          0.43Second
      Quarter
                          
                          $
                          1.51
                          
                          
                          $
                          0.62
                          
                          
                          $
                          0.16
                          
                          
                          $
                          0.01
                          
                          
                          $
                          5.50
                          
                          
                          $
                          0.15Third
      Quarter
                          
                          $
                          1.18
                          
                          
                          $
                          0.50
                          
                          
                          $
                          0.04
                          
                          
                          $
                          0.01
                          
                          
                          $
                          1.24
                          
                          
                          $
                          0.70Fourth
      Quarter
                          
                          $
                          0.97
                          
                          
                          $
                          0.41
                          
                          
                          
                          *
                          
                          
                          
                          *
                          
                          
                          
                          *
                          
                          
                          
                          *Year ended December 31,
2008First
      Quarter
                          
                          $
                          4.85
                          
                          
                          $
                          3.85
                          
                          
                          $
                          0.55
                          
                          
                          $
                          0.36
                          
                          
                          $
                          6.00
                          
                          
                          $
                          4.75Second
      Quarter
                          
                          $
                          5.04
                          
                          
                          $
                          2.35
                          
                          
                          $
                          0.44
                          
                          
                          $
                          0.13
                          
                          
                          $
                          5.57
                          
                          
                          $
                          2.55Third
      Quarter
                          
                          $
                          2.70
                          
                          
                          $
                          1.20
                          
                          
                          $
                          0.13
                          
                          
                          $
                          0.02
                          
                          
                          $
                          2.55
                          
                          
                          $
                          1.30Fourth
      Quarter
                          
                          $
                          1.74
                          
                          
                          $
                          0.80
                          
                          
                          $
                          0.04
                          
                          
                          $
                          0.01
                          
                          
                          $
                          1.74
                          
                          
                          $
                          0.65




* On July 13, 2009, both our
units and warrants, including those attached to the option to purchase units,
totaling 17,110,300 shares expired and ceased trading.





Stockholders





As of
March 19, 2010, there were 92 stockholders of record of our 13,361,763
outstanding shares of common stock (does not reflect persons or entities that
hold their shares of common stock in nominee or “ street ” name through various
brokerage firms).





Dividends





We have
not paid dividends to our stockholders since our inception and do not plan
to pay cash dividends in the foreseeable future. We currently intend to
retain earnings, if any, to finance our growth.




Issuer
Purchases of Equity Securities


The table set forth below shows all
repurchases of securities by us during the quarter ended December 31,
2009:
  Total
      Shares
                        
                        
                        Approximate
      DollarAverage
                        
                        
                        Purchased
      as Part of
                        
                        
                        Amount
      of Shares YetMonthly
      Period During the Three
                        
                        Total
      Shares
                        
                        
                        Price
      Paid
                        
                        
                        Publically
      Announced
                        
                        
                        To
      Be Purchased UnderMonths
      Ended December 31, 2009
                        
                        Purchased
      (a)
                        
                        
                        per
      Share
                        
                        
                        Plans
                        
                        
                        PlansOctober
      1, 2009- December 31, 2009
                        
                        
                        8,123
                        
                        
                        $
                        0.56
                        
                        
                        
                        -
                        
                        
                        
                        -November
      1, 2009- November 30, 2009
                        
                        
                        24,389
                        
                        
                        
                        0.56
                        
                        
                        
                        -
                        
                        
                        
                        -December
      1, 2009-December 31, 2009
                        
                        
                        37,548
                        
                        
                        
                        0.63
                        
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        
                        70,060
                        
                        
                        $
                        0.60
                        
                        
                        
                        -
                        
                        
                        
                        -
 (a)
              All
      of these shares were acquired from associates to satisfy tax withholding
      requirements upon the vesting of restricted
  stock.


27





Item 6.
            SELECTED FINANCIAL
      DATA





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




Item 7.
            MANAGEMENT’S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





You
should read the following discussion and analysis in conjunction with our
financial statements and the related notes included elsewhere in this Annual
Report on Form 10-K. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth under “Risk Factors” and elsewhere in this Annual Report on
Form 10-K.





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 performs
services in the homeland security industry.  On July 20,
2005, we closed our initial public offering of 7,800,000 units (including
underwriters exercise of an over-allotment option), resulting in proceeds net of
fees to us of approximately $43.2 million.





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





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





Beginning
in the first half of 2009, the Company experienced a lack of closed contracts
and continued customer delays and in response revised its financial forecast. In
addition to efforts taken to cut costs to align with revised forecasted
revenues, the Company engaged an investment bank to evaluate financial
alternatives including raising additional capital and the potential sale of
divisions.  As a result of this process, on December 29, 2009 we sold
substantially all of the assets and liabilities of Rubicon to its management and
former owners.





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


28





There are
several legislative factors that we anticipate will drive demand for our
services.  Legislation such as Sarbanes Oxley compliance for publicly
traded companies, HIPPA laws regarding protection and availability of data for
healthcare organizations and the government’s critical infrastructure protection
program for industries that are vital to our economy have resulted in such
companies having the need to invest to protect their networks, assure the
reliability of those networks, and maintain their ability to perform
transactions that are financial or informational in nature. With respect to
these critical infrastructure systems, we focus on physical security, network
security, redundancies for uninterruptible power supply systems, electrical
switch gear, stand-by power generators, heat rejection and cooling systems, fire
protection systems, monitoring and control systems, and security systems, as
well as the physical environment that houses critical operations. We help our
customers plan for, prevent or mitigate against the consequences of attacks,
power outages and natural disasters. We provide our services, directly and
indirectly, to both government customers and private sector
customers.





A certain portion of our
business relate to government entities’ mission-critical facilities requiring
the relocation, renovation and upgrade of facilities to protect information
networks and data processing centers. We have obtained a facility clearance from
the United States Department of Defense. This clearance enables the companies to
access and service restricted government projects. In addition to the facility
clearance, TSS has successfully cleared over one-third of its employees,
allowing them individual access to restricted projects and facilities. Several
additional employees are currently in the process for clearance.





Our
customers include United States government and homeland defense agencies and
private sector businesses that in some cases are the end user of the facility or
in other cases are providing a facility to a government end user. We categorize
contracts where a government agency is the ultimate end user of the facility as
government-related contracts.





Our
revenues are derived from fees for our professional services as well as revenues
earned under construction management contracts and facility management contracts
with varying terms.





Competition
in Current Economic Environment





Our
industry has been and may be further adversely impacted by the current economic
environment and tight credit conditions.  We have seen larger
competitors seek to expand their services offerings including a focus in the
mission-critical market.  These larger competitors have an
infrastructure and support greater than ours and accordingly, we have begun
to experience some price pressure as some companies are willing to take on
projects at lower margins. With certain customers, we have experienced a
delay in spending, or deferral of projects to an indefinite commencement date
due to the economic uncertainty or lack of access to capital.





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





Although
we will closely monitor our proposal pricing and the volume of the work, we
cannot be certain that our current margins will be
sustained.  Furthermore, given the environment, and that the volume of
our contracts further decreased, we are taking additional measures to reduce our
operating costs through additional reductions in general, administrative and
marketing cost, reductions in personnel and related costs, including the
possibility of terminating our regulatory reporting requirement. For further
information see “Liquidity and
Capital Resources ” below.


29





Operations
Overview





We
contract with our customer under three primary contract types: cost-plus-fee
(guaranteed maximum price), time-and-materials, and fixed-price contracts.
Cost-plus-fee (guaranteed maximum price) contracts are typically lower risk
arrangements and thus yield lower profit margins than time-and-materials and
fixed-price arrangements which generate higher profit margins generally,
relative to their higher risk. Where customer requirements are clear, we prefer
to enter into time-and-materials and fixed-price arrangements rather than
cost-plus-fee contracts.





Most of
our revenue is generated based on services provided either by our employees or
subcontractors. To a lesser degree, the revenue we earn includes reimbursable
travel and other costs to support the project. Thus, once we are awarded new
business, the key to delivering the revenue is through hiring new employees to
meet customer requirements, retaining our employees, and ensuring that we deploy
them on direct-billable jobs. Therefore, we closely monitor hiring success,
attrition trends, and direct labor utilization. Since we earn higher profits
from the labor services that our employees provide compared with subcontracted
efforts and other reimbursable costs, we seek to optimize our labor content on
the contracts we are awarded.





Cost of
revenue includes labor, or the salaries and wages of our employees, plus fringe
benefits; the costs of subcontracted labor and outside consultants, equipment
and materials, and other direct costs such as travel incurred to support
contract efforts. Since we earn higher profits on our own labor services, we
expect the ratio of cost of services to revenue to decline when our labor
services mix increases relative to subcontracted labor or third-party material.
Conversely, as subcontracted labor or third-party material purchases for
customers increase relative to our own labor services, we expect the ratio of
cost of services to revenue to increase. As we continue to bid and win larger
contracts, our own labor services component could decrease. Typically, the
larger contracts are broader in scope and require more diverse capabilities,
thus resulting in more subcontracted labor. In addition, we can face hiring
challenges in staffing larger contracts. While these factors could lead to a
higher ratio of cost of services to revenue, the economics of these larger jobs
are nonetheless generally favorable because they increase income, broaden our
revenue base and have a favorable return on invested capital.





Depreciation
and amortization expenses are affected by the level of our annual capital
expenditures and the amount of identified intangible assets related to
acquisitions. We do not presently foresee significant changes in our capital
expenditure requirements. If we make any strategic acquisitions, the
amortization of identified intangible assets may increase as a percentage of our
revenue.





Our
operating income, or revenue minus cost of revenue, selling, general and
administrative expenses, and depreciation and amortization, and thus our
operating margin, or the ratio of operating income to revenue, is driven by the
mix and execution on our contracts, and how we manage our costs, and the
amortization charges resulting from acquisitions in 2008.





Our
cash position is driven primarily by the level of net income, working capital in
accounts receivable, capital expenditures and acquisition
activities.


30


Contract
Backlog





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





Backlog
is not a measure defined in generally accepted accounting principles in the
United States of America, 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 has not yet
been authorized.





As of
December 31, 2009, our backlog was approximately $47.1 million, compared to
approximately $58.7 million at December 31, 2008.   In the first
quarter of 2010, a large developer customer sold its property and cancelled its
remaining contract commitment under the original
agreement.  Accordingly, we removed the project totaling $12.4
million, net of acquirer’s assumed and assigned contract of $3.2 million, from
our December 31, 2009 backlog, which primarily accounts for the decrease in
backlog from the prior year.





At
December 31, 2009, we have authorizations to proceed with work for approximately
$39.9 million, or 85% of our total backlog of $47.1 million. Approximately,
$32.5 million, or 82% of our total backlog, related to three customers at
December 31, 2009.    Additionally, during the fourth quarter 2009, a
customer, comprising 58% of our total backlog at December 31, 2009, entered into
a definitive merger agreement.  We are unable determine if the merger
agreement will close, or if it does, the affect it may have on continued
business with our customer.   At December 31, 2008, we had
authorizations to proceed with work for approximately $47.1 million or 91% of
our total backlog of $58.7 million.  Approximately, $36.0 million, or
61% of our backlog related to three customers at December 31, 2008.





We
believe that approximately 89% of the backlog at December 31, 2009 will be
recognized over the next twelve months. The following table reflects the value
of our backlog in the above three categories as of December 31, 2009 and
December 31, 2008, respectively (in millions).





December
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008*Technology
      consulting
                    
                    $
                    1.4
                    
                    
                    $
                    4.0Construction
      management
                    
                    
                    33.8
                    
                    
                    
                    44.2Facilities
      management
                    
                    
                    11.9
                    
                    
                    
                    10.5Total
                    
                    $
                    47.1
                    
                    
                    $
                    58.7





*The 2008 amount was restated to
exclude approximately $4.5 million in construction management backlog associated
with Rubicon LLC, which substantially all assets and liabilities were sold
December 29, 2009.





Related
Party Transactions





We have in
the past, and continue to have, transactions with related
parties. Such transactions are reviewed by the audit committee of our
Board of Directors in accordance with our audit committee charter. We
believe that all of our related party transactions are completed at arm’s length
terms.  For a discussion of certain relationships and related party
transactions, see Note 15 — Related Party Transactions of the Notes to
Consolidated Financial Statements. The table below summarizes our related party
transactions (in millions):





For the Year Ended December
    31,2009
                  
                  
                  2008Revenue
                  
                  $
                  0.4
                  
                  
                  $
                  0.3Cost
      of revenue
                  
                  
                  2.9
                  
                  
                  
                  4.2Selling,
      general and administrative
                  
                  
                  0.6
                  
                  
                  
                  0.7




31





CRITICAL
ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (US GAAP). The preparation of
the financial statements included elsewhere in this Annual Report on Form 10-K
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-materials 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 ASC 605-35 Construction-Type and
Production-Type Contracts, recognizing revenue on the percentage-of-completion
method using costs incurred in relation to total estimated project
costs.





Revenue
from fixed price contracts is recognized on the percentage of completion method,
measured by the percentage of total costs incurred to date to estimated total
costs for each contract. This method is used because management considers cost
incurred and costs to complete to be the best available measure of progress in
the contracts. Contract costs include all direct materials, subcontract and
labor costs and those indirect costs related to contract performance, such as
indirect labor, payroll taxes, employee benefits and supplies.





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





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





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





Allowance
for Doubtful Accounts





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





As of
December 31, 2009, accounts receivables of $1.3 million are due from two
customers to whom we have offered extended payment terms. Of the $1.3 million,
$1.0 million was collected in the first quarter of 2010, while the remaining
$0.3 million has been included in our allowance for doubtful accounts at
December 31, 2009.


.


Non-cash
Compensation





We apply
the expense recognition provisions of ASC 718 Compensation-Stock Compensation
..  The recognition of the value of the instruments results in
compensation or professional expenses in  our financial statements.
The expense differs from other compensation and professional expenses in that
these charges are typically settled through the issuance of common stock, 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.


32





Goodwill and Other Purchased
Intangible Assets





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





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





In 2009
and 2008, we experienced several events potentially indicating impairment
including a reduction in forecasted revenues and a decline in our market price
eventually determined to be other than temporary.  Accordingly, we
conducted such analyses that resulted in impairment loss on goodwill of $0.3
million and $15.9 million for the year ended December 31, 2009 and 2008,
respectively.  At December 31, 2009, the residual carrying value of
goodwill is $3.8 million.





Additionally,
in an effort to rationalize our marketing effort and consolidate our product
offerings under a single brand name Fortress International Group, Inc, we
abandoned acquired trade names resulting in impairment loss of approximately
$5.0 million during the year ended December 31, 2008.





Long-Lived
Assets (Excluding Goodwill)





In
accordance with the provisions of ASC 360-10-35 Impairment or Disposal of
Long-Lived Assets in accounting for long-lived assets such as property,
equipment and intangible assets subject to amortization, we review the
assets for impairment. If circumstances indicate the carrying value of the asset
may not be fully recoverable, a loss is recognized at the time impairment exists
and a permanent reduction in the carrying value of the asset is recorded. In
2009 as a result of the revised forecast, we recorded an impairment loss of
approximately $9.9 million associated with finite lived customer relationship
and non competition intangibles.   We believe that the total
carrying values of our long-lived assets of $0.9 million as of December 31,
2009 is fully realizable.





Income
Taxes





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





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





Effective
January 1, 2007, we were required to adopt ASC 740 Income Taxes,
which prescribes a more-likely-than-not threshold of financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on de-recognition of
income tax assets and liabilities, classification of current and deferred tax
assets and liabilities, accounting for interest and penalties associated with
tax positions, accounting for income taxes in interim periods and income tax
disclosures. Management has concluded that the adoption of ASC 740 had no
material effect on our financial position or results of operations. As of
December 31, 2009, we do not have any material gross unrecognized
tax benefits or liabilities.


33


Recently Issued Accounting
Pronouncements




In June
2009, SFAS 167, Amendments to
FASB Interpretation No. 46(R), (ASC 810) was issued. The objective
of SFAS 167 is to amend certain requirements of FIN 46 (revised December 2003),
Consolidation of Variable
Interest Entities, or FIN 46(R) to improve financial reporting by
enterprises involved with variable interest entities and to provide more
relevant and reliable information to users of financial statements. SFAS 167
carries forward the scope of FIN 46(R), with the addition of entities previously
considered qualifying as special-purpose entities, as the concept of these
entities was eliminated in SFAS 166, Accounting for Transfers of
Financial Assets (ASC 860).SFAS 167 nullifies ASC
860-10-50 (FASB Staff Position FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities).The principal
objectives of these new disclosures are to provide financial statement users
with an understanding of:




a.
            The significant judgments and
      assumptions made by an enterprise in determining whether it must
      consolidate a variable interest entity and/or disclose information about
      its involvement in a variable interest
  entity;





b.
            The nature of restrictions on a
      consolidated variable interest entity’s assets and on the settlement of
      its liabilities reported by an enterprise in its statement of financial
      position, including the carrying amounts of such assets and
      liabilities;





c.
            The nature of, and changes in,
      the risks associated with an enterprise’s involvement with the variable
      interest entity; and





d.
            How an enterprise’s involvement
      with the variable interest entity affects the enterprise’s financial
      position, financial performance and cash
  flows.




SFAS 167
is effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009. Early adoption is
prohibited. The provisions of SFAS 167 need not be applied to immaterial items.
We have reviewed and evaluated the provisions of SFAS 167 and have concluded
that the adoption of this standard will have no significant impact on our
results of operations or financial position.




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





On
June 30, 2009, Accounting Standards Update No. 2009-01, Topic 105—Generally Accepted
Accounting Principles amendments based on Statement of Financial Accounting
Standards No. 168—The FASB Accounting Standards CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles, was issued. This Accounting Standards
Update amends the ASC for the issuance of Statement of Financial Accounting
Standard No. 168, The
FASB Accounting Standards CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles(SFAS 168).This Accounting Standards
Update includes SFAS 168 in its entirety, including the Accounting Standards
Update instructions contained in Appendix B of the Statement. The Codification
is the source of authoritative U.S. Generally Accepted Accounting Principles
recognized by the FASB to be applied by non-governmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
SFAS 168, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification will become non-authoritative. SFAS
168 is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. Following SFAS 168, the Board will not
issue new standards in the form of Statements, FASB Staff Positions or Emerging
Issues Task Force Abstracts. Instead, it will issue Accounting Standards
Updates. The GAAP hierarchy will be modified to include only two levels of GAAP:
authoritative and non-authoritative.


34





Results
of Operations





Year
ended December 31, 2009 compared to the year ended December 31,
2008





Revenue. Revenue decreased
$38.6 million to $48.1 million for the year ended December 31, 2009 from $86.7
million for the year ended December 31, 2008.  The decrease was
primarily driven by a $31.6 million decrease in our construction management
services and $7.0 million aggregate decrease in our technology consulting and
facilities management services.  The decrease in construction
management services is primarily attributable to decline in bookings due to
delay in beginning projects and the cancellation of other projects.





Cost of Revenue. Cost of
revenue decreased $33.6 million to $40.2 million for the year ended December 31,
2009 from $73.8 million for the year ended December 31, 2008. The decrease was
driven by a $28.6 million decrease in our construction management services and
an aggregate decrease of $5.0 million of technology consulting and facilities
management services.





Gross Margin Percentage.
Gross margin percentage increased 1.5% to 16.4% for the year ended December 31,
2009, compared to 14.9% for the year ended December 31, 2008. The increase in
gross margin was primarily attributable to a more significant proportion of
total revenue being comprised of engineering services in the current
year.





Selling, general and administrative
expenses.  Selling, general and administrative expenses
decreased $5.3 million to $12.3 million for the year ended December 31, 2009
from $17.6 million for the year ended December 31, 2008. The decrease is
primarily driven by $2.7 million decrease in salaries and related employee
expenses due to a reduction in headcount and variable compensation, $1.2 million
decrease in acquisition related costs, and $1.4 million decrease in marketing,
traveling and other expense.  We incurred no acquisition related costs
during the year ended December 31, 2009.





We have
continued to experience delays in the timing of revenues associated with certain
customers and contracted work is at lower margins than the prior
year.  Accordingly, during the year ended December 31, 2009, the
company instituted 10% reduction in salaries for employees and further reduced
headcount.  We continue to evaluate our selling, general and
administrative costs with the objective of achieving profitability based on our
revised forecasted business.   In January 2010, we reinstated 50%
of the reduction in salaries for nonexecutive employees.  If the
reinstatement would have been in effect for the fourth quarter 2009 salary
expense would have been higher $0.1 million.





Depreciation and
amortization. Depreciation and amortization decreased $0.1 million
to $0.4 million for the year ended December 31, 2009 from $0.5 million
for the year ended December 31, 2008.





Amortization of intangible
assets. Amortization expense decreased $0.8 million to $0.9 million for
the year ended December 31, 2009 from $1.7 million for the year ended December
31, 2008. The decrease in expense correlates to the decrease in average
amortizable carrying values of finite lived intangibles, as the net amortizable
carrying amount of finite lived intangibles totaled zero and $10.9 million at
December 31, 2009 and December 31, 2008, respectively. The decrease in carrying
value was primarily attributable to an impairment loss of $10.1 million on
finite lived customer intangibles during the second quarter of
2009.





Impairment loss on
intangibles. Impairment loss on goodwill and other intangibles decreased
$10.5 million to $10.3 million for the year ended December 31, 2009 from $20.8
million for the year ended December 31, 2008.  The decrease in the
expense is primarily attributable to a aggregate decline of $20.4 million in the
impairment loss on goodwill of and trademark intangibles, offset in part by the
impairment of customer related intangibles of $9.9 million in
2009.  We have not realized the anticipated revenue from customers
acquired in our acquisitions and have experienced continued operating losses in
the current year.





Throughout
2008, we continued to incur operating losses, revised our forecasted revenues as
certain of our acquisitions have not delivered originally anticipated revenues
and experienced other than temporary market decline in our equity
value.  The business incurred additional setbacks in the first half of
2009, as bookings were below forecasted levels as our customers cancelled or
delayed planned projects.





Based on
the preceding performance and environment in both 2009 and 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 $0.3 million and $15.9 million for the year ended
December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, the
adjusted carrying value of goodwill was $3.8 million and $3.9 million,
respectively.


35





Based on
the lack of new contracts and revision in anticipated revenue from acquired
customers and the general operating condition of the Company, we evaluated
long-lived customer relationship intangible assets and determined that the
carrying value exceeded the undiscounted cash flows during the year ended
2009.  Accordingly, we performed a fair value assessment based on
discounted cash flows, resulting in an impairment loss of $9.9 million for the
year ended December 31, 2009.  At December 31, 2009, the adjusted net
carrying value of other intangibles was zero.  No impairment of
customer relationship intangibles was recorded in 2008.





In the
fourth quarter of 2008, we elected to abandon certain acquired trade names in a
plan to market under a single name, Fortress International Group, Inc, resulting
in an impairment loss of $5.0 million during the year ended December 31,
2008.  No impairment on trade name intangibles was recorded in
2009.  At December 31, 2009 and 2008 the carrying value of our
remaining trade name was $0.1 million.





Interest income (expense),
net. Our interest income (expense), net remained consistent at ($0.2
million) for the year ended December 31, 2009 compared to ($0.2million) for the
year ended December 31, 2008.  The consistency corresponds to
consistent average debt balance and interest rates over both
periods.





Income tax expense (benefit).
Income tax expense (benefit) decreased $0.1 million to zero for the year ended
December 31, 2009 from ($0.1) million for the year ended December 31,
2008.




Loss from discontinued operations,
net of tax.  In 2009, loss from operations of discontinued
businesses, net of tax reflected the operations of Rubicon, a provider of
construction management and equipment integration, which was sold in
December 2009.  We received $2.0 million in consideration
for substantially all of the assets and liabilities of the
business.  See Note 5-Discontinued Operations in the footnotes to our
financial statements for a further discussion.




Gain from disposal of discontinued
business, net of tax. We recorded a gain on the
sale of substantially all of the assets and liabilities of Rubicon of
approximately $0.3 million for the year ended December 31,
2009.







36




Liquidity
and Capital Resources


Overview





For the Twelve Months Ended December
      31,2009
                              
                              
                              2008
                              
                              
                              ChangeNet
      loss
                              $
                              (18,793,152
                              )
                              
                              $
                              (32,934,225
                              )
                              
                              $
                              14,141,073Adjustments
      to reconcile net loss to net cash  used in
      operations:Amortization
      of intangibles
                              
                              1,534,099
                              
                              
                              
                              3,344,804
                              
                              
                              
                              (1,810,705
                              )Impairment
      loss on goodwill and other intangibles
                              
                              13,062,133
                              
                              
                              
                              25,989,943
                              
                              
                              
                              (12,927,810
                              )Stock
      and warrant-based compensation
                              
                              2,180,613
                              
                              
                              
                              2,031,496
                              
                              
                              
                              149,117Provision
      for doubtful accounts
                              
                              346,707
                              
                              
                              
                              119,728
                              
                              
                              
                              226,979Other
      non-cash items
                              
                              (149,930
                              )
                              
                              
                              483,406
                              
                              
                              
                              (633,336
                              )Net
      adjustments to reconcile net income for non-cash items
                              
                              16,973,622
                              
                              
                              
                              31,969,377
                              
                              
                              
                              (14,995,755
                              )Net
      change in working capital
                              
                              (5,798,439
                              )
                              
                              
                              4,779,347
                              
                              
                              
                              (10,577,786
                              )Cash
      (used in) provided by operations
                              
                              (7,617,969
                              )
                              
                              
                              3,814,499
                              
                              
                              
                              (11,432,468
                              )Cash
      used in investing
                              
                              (498,177
                              )
                              
                              
                              (2,364,384
                              )
                              
                              
                              1,866,207Cash
      used in financing
                              
                              (2,068,865
                              )
                              
                              
                              (2,174,168
                              )
                              
                              
                              105,303Net
      decrease in cash
                              
                              (10,185,011
                              )
                              
                              
                              (724,053
                              )
                              
                              
                              (9,460,958
                              )





For the
year ended December 31, 2009 and 2008, we had cash and cash equivalents of $2.3
million and $12.4 (including cash associated with discontinued operations of
$0.7 million) million respectively.





Operating
Activity





Net cash
used in operations increased $11.4 million to $7.6 million for the year ended
December 31, 2009 from $3.8 million provided by operations for the year ended
December 31, 2008.  The decrease in operating cash flow is primarily
attributable to the following:




·
            Change in Working
      Capital. We had a $10.6 million increase in our cash used in
      working capital assets, which was primarily driven by a $20.7 million
      increase in cash used in accounts payable and billings in excess of
      earnings, offset in part by $10.9 million aggregate increase in cash
      provided by accounts receivable and cost in excess of estimated
      earnings.  The increase in cash used in working capital was
      attributable to $4.5 million of unusual timing on contracts at the end of
      the prior year, while the remainder is primarily attributable to a decline
      in the overall sales volume in the fourth quarter of 2009 as compared to
      2008.  At December 31, 2008, we received more cash receipts
      close to year-end not allowing the corresponding payments to vendors to be
      made.





·
            Decrease in
      Net Loss.We had a $14.1 million decrease
      in our net loss due to a $15.0 million decrease in non-cash items
      consisting primarily of amortization, impairment loss on goodwill and
      other intangibles and stock based compensation. Excluding non-cash items,
      our net loss increased $0.9 million from the preceding
      year.  This decrease is primarily attributable to a decrease in
      the overall volume of work due to customer delays and cancellation of
      projects as customers evaluated their spending in light of the broader
      economy, while we sought to realign fixed expenses to match the decrease
      sales and gross margin
volume.





The
information above is not intended to replace or represent the entire cash flow
statement of the Company, which is available in our financial statements and the
related notes included elsewhere in this Annual Report on Form
10-K.


37





Investing
Activity





Net cash
used in investing activities decreased $1.9 million to $0.5 million for the year
ended December 31, 2009 from $2.4 million for the year ended December 31,
2008.  The decrease was attributable to decreased investing activity
associated with acquired companies, net of proceeds from the sale of
substantially all of the assets and liabilities of Rubicon.





·
            Acquisitions.  For the year ended
      December 31, 2009, cash was used primarily for the payment of contingent
      consideration associated with the Rubicon 2008 earn-out and Innovative
      2008 earn-out totaling $0.7 million and $0.4 million, respectively. For
      the year ended December 31, 2008, cash used for acquisitions and related
      activity was $2.3 million due primarily to the SMLB acquisition of $2.1
      million. In late 2008 our efforts for strategic growth through
      acquisitions were suspended due to the downturn in the economy and our
      focus to preserve capital and improve our overall
      liquidity.





·
            Sale of
      Rubicon. In an
      effort to preserve cash resources and enhance liquidity while maintaining
      a similar set of professional services subsequently, the Company disposed
      of substantially all of the assets and liabilities of Rubicon, LLC to its
      former owners and current management.  The disposition resulted
      in total consideration of $2.0 million, including cash consideration of
      approximately $0.8 million, net of transaction
  fees.





For a
discussion of our acquisitions, see Note 4 —Acquisitions of the Notes to
Consolidated Financial Statements.





Financing
Activity





Net cash
used in financing decreased $0.1 million to $2.1 million for the year ended
December 31, 2009 from $2.2 million for the year ended December 31,
2008.  For the year ended December 31, 2009 and 2008, payments
consisted almost entirely of seller note repayments.




·
            Repayment of
      seller notes.  Debt service was
      approximately $2.1 million in both 2009 and 2008. During the year ended
      December 31, 2009, we repaid $2.0 million of unsecured promissory
      notes that were issued to the Rubicon sellers upon achievement of certain
      financial targets for the year ended December 31,
    2008.





·
            Repurchase of
      common stock. The
      share buyback program was suspended in the third quarter of
      2007; however, during 2009 and 2008, we repurchased 120,673 and
      17,505 shares at an average price of $0.75 and $3.15 per share,
      respectively, for employee taxes associated with net issuance of vesting
      restricted stock.





Non-Cash
Activities





Non-Cash
Consideration-Acquisitions





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





During
the year ended December 31, 2008, in connection with the acquisition of
SMLB, we issued total unsecured promissory notes totaling $0.5 million as
purchase consideration. We initially issued $0.5 million of unsecured promissory
notes that were reduced in the second quarter of 2008 to $120,542 pursuant to
the working capital adjustments pursuant to the terms of the purchase agreement.
Consistent with the Rubicon purchase agreement in exchange for achieving
specified financial targets through December 31, 2008, we issued Rubicon sellers
additional consideration totaling $2.5 million of which $2.0 million of
unsecured promissory notes were issued and an additional $0.5 million was in
accrued payables.  Finally, per the terms of the Innovative purchase
agreement, in exchange for achieving specified financial targets through
December 31, 2008, we owed Innovative sellers an additional $0.4 million, which
was included in accrued payables at December 31, 2008.





Non-Cash
Consideration-Disposition




On
December 29, 2009, we completed the sale of substantially all of the assets and
liabilities of our Rubicon division for total consideration of $2.0 million
consisting of $0.8 million in cash proceeds, net of transaction costs, $0.6
million note receivable and $0.4 million in forgiveness of actual obligations
and potential liabilities related to 2008 and 2009 Earn-outs. Additionally, we
are entitled to contingent consideration in the form of an earn-out equal to
7.5% of gross profit on designated projects during a one year period commencing
on the close date.  At December 31, 2009, we had not recorded any
contingent consideration associated with the earn-out as it’s not reasonably
assured and estimable.


38


Non-Cash-Seller
Note Conversion





During
the third quarter 2008, our Chief Executive Officer and Chief Operating Officer,
both of the selling members of TSS/Vortech, entered into an agreement with us to
convert $2,500,000 and $1,000,000, respectively, of their respective notes
into common stock at a conversion price of $7.50 per share, resulting in
the aggregate issuance of 466,667 common shares. The conversion has been
recorded as an increase to additional paid-in capital. In addition, the Chief
Operating Officer agreed to postpone any principal and interest payments payable
to him under his remaining $4,000,000 promissory note until March, 2010, with
such interest to be accrued to the outstanding principal. At December 31, 2008,
$4,000,000 of the Chief Operating Officer’s note remained outstanding, which is
convertible at $7.50 per shares to 533,333 shares of our common
stock.





On
February 28, 2010, Mr. Gallagher, our Chief Operating Officer and former selling
member, entered into an agreement with us to convert $1.3 million of the
outstanding note balance into equity at a conversion price of $2.00 per share,
resulting in the aggregate issuance of 625,000 common shares in first quarter
2010.  The shares will be subject to certain Registration Rights
Agreement between us and Mr. Gallagher. The terms on the remaining principal
balance of $2.8 million were amended, reducing the interest rate under the note
to 4%, providing for the payment of certain amounts of accrued interest over
time, providing for interest-only payments under the note until April 1, 2012,
providing for eight principal payments in the amount of $125,000 each beginning
on April 1, 2012, and providing for a final payment of all remaining amounts of
principal and interest due under the Note on April 1, 2014.  The note
amendment also provides for the acceleration of all amounts due under the note
upon a change of control of the Company or the death of Mr.
Gallagher.  Based on the amended principal repayment terms, the $4.0
million note was classified as long-term at December 31, 2009.





Liquidity
and Capital Resources





We had
$2.3 million and $12.4 (including cash associated with discontinued
operations of $0.7 million) million of unrestricted cash and cash equivalents at
December 31, 2009 and 2008, respectively. During the year ended December 31,
2009, we have financed our operations primarily with cash on hand as we
experienced negative cash flow from operations and from the sale of
substantially all of the assets and liabilities of Rubicon.





Based on
an unexpected lack of closed contracts and continued customer delays experienced
at June 30, 2009 and through year end, we revised our financial forecast and
implemented selling, general and administrative cost with an approximate annual
savings of $2.2 million.  In an effort to attempt to achieve positive
cash flows from operations and align costs with forecasted revenues in the
future, we have taken additional measures to reduce professional fees and public
company costs as we are managing an orderly transition to the OTC- Bulletin
Board in the first half of 2010.





In second
half of 2008 and through 2009 our strategic growth through acquisitions was
suspended due to the downturn in the economy, the impact this had on our
existing customer base, and as well as the impact it had on our own financial
security and common stock value. Our corporate focus became centered on
preserving cash, achieving positive cash flow and discontinuing or selling
operations that threatened that strategy.   We engaged an
investment bank to assist us in evaluating various disposition and financial
alternatives, which culminated in the sale of the Rubicon division to its
management and former owners on December 29, 2009.





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





As a
result of the cost reduction efforts to realign operations with decreased
anticipated revenues, the added liquidity from the sale of Rubicon, and the
financial restructuring of a $4.0 million seller note, we believe that our
current cash and cash equivalents and expected future cash generated from
operations will satisfy our expected working capital, capital expenditure and
investment requirements through the next twelve months.  If we experience
an increase in revenue, we will attempt to maximize a fixed operating structure
and attempt to take a measured approach in any increase to selling, general and
administrative costs to support that additional revenue.  We may elect
to secure additional capital in the future, at acceptable terms, to
improve our liquidity or fund acquisitions. The amounts involved in any
such transaction, individually or in the aggregate, may be material. To the
extent that we raise additional capital through the sale of equity securities,
the issuance of such securities could result in dilution to our existing
stockholders. If we raise additional funds through the issuance of debt
securities, the terms of such debt could impose additional restrictions on our
operations. Additional capital, if required, may not be available on acceptable
terms, if at all. A failure to obtain additional financing could have a material
adverse impact our business, financial condition and earnings.





Off-Balance
Sheet Arrangements





At
December 31, 2009, we had no off-balance sheet arrangements.


39





Contractual
Obligations and Commercial Commitments





The
following table summarizes our future contractual obligations and commercial
commitments of the Company at December 31, 2009, as further described in
the Notes to our Consolidated Financial Statements:





Less
      thanTotal
                            
                            
                            1
      Year
                            
                            
                            1-3
      Years
                            
                            
                            3-5
      YearLong-term
      debt
                            
                            $
                            5,229,043
                            
                            
                            $
                            1,781,851
                            
                            
                            $
                            1,464,627
                            
                            
                            
                            1,982,565Operating
      leases
                            
                            
                            1,788,194
                            
                            
                            
                            753,942
                            
                            
                            
                            982,587
                            
                            
                            
                            51,665Sublet
      leases
                            
                            
                            (125,895
                            )
                            
                            
                            (65,945
                            )
                            
                            
                            (59,950
                            )
                            
                            
                            -Contractual
      purchase commitments
                            
                            
                            21,211,916
                            
                            
                            
                            21,211,916
                            
                            
                            
                            -
                            
                            
                            
                            -Total
                            
                            $
                            28,103,257
                            
                            
                            $
                            23,681,763
                            
                            
                            $
                            2,387,264
                            
                            
                            $
                            2,034,230





Contractual
purchase commitments represent outstanding purchase orders at December 31,
2009.


40




Item 7A.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK





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


41




Item
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY
DATA





Fortress
International Group, Inc.




Index to Financial Statements and Financial Statement Schedule
              
              NumberFinancial
      Statements:Report
      of Independent Registered Public Accounting Firm
              
              F-1Consolidated
      Balance Sheets as of December 31, 2009 and 2008
              
              F-2Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      2008
              
              F-3Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2009
      and 2008
              
              F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008
              
              F-5Notes
      to Consolidated Financial Statements
              
              F-6Financial
      Statement Schedules:Schedule
      - II Valuation Accounts
              
              45




42


Report
of Independent Registered Public Accounting Firm





Board of
Directors and Shareholders


Fortress
International Group, Inc.





We have
audited the accompanying consolidated balance sheets of Fortress International
Group, Inc. and subsidiaries (the “Company”) (a Delaware corporation) as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the years then ended. Our
audits of the basic financial statements included the financial statement
schedule listed in the index appearing under Item 15(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fortress
International Group, Inc. and subsidiaries as of December 31, 2009 and 2008, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects, the information set forth
therein.




/s/ GRANT THORNTON LLPBaltimore,
      MarylandMarch
      31, 2010




F-1


PART
I - FINANCIAL INFORMATION





FORTRESS
INTERNATIONAL GROUP, INC.


CONSOLIDATED
BALANCE SHEETS





December 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Current
      AssetsCash
      and cash equivalents
                    
                    $
                    2,263,146
                    
                    
                    $
                    11,725,892Contract
      and other receivables, net
                    
                    
                    14,196,772
                    
                    
                    
                    15,389,488Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                    
                    
                    1,056,543
                    
                    
                    
                    1,385,954Prepaid
      expenses and other current assets
                    
                    
                    1,007,371
                    
                    
                    
                    537,795Current
      assets of discontinued business
                    
                    
                    -
                    
                    
                    
                    8,979,342Total
      current assets
                    
                    
                    18,523,832
                    
                    
                    
                    38,018,471Property
      and equipment, net
                    
                    
                    612,569
                    
                    
                    
                    813,540Goodwill
                    
                    
                    3,811,127
                    
                    
                    
                    3,906,330Other
      intangible assets, net
                    
                    
                    60,000
                    
                    
                    
                    10,919,729Other
      assets
                    
                    
                    246,218
                    
                    
                    
                    225,553Noncurrent
      assets of discontinued business
                    
                    
                    -
                    
                    
                    
                    3,555,422Total
      assets
                    
                    $
                    23,253,746
                    
                    
                    $
                    57,439,045Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesNotes
      payable, current portion
                    
                    $
                    183,679
                    
                    
                    $
                    1,688,845Accounts
      payable and accrued expenses
                    
                    
                    8,038,658
                    
                    
                    
                    19,442,099Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    6,536,752
                    
                    
                    
                    3,724,096Current
      liabilities of discontinued business
                    
                    
                    -
                    
                    
                    
                    7,276,560Total
      current liabilities
                    
                    
                    14,759,089
                    
                    
                    
                    32,131,600Notes
      payable, less current portion
                    
                    
                    152,343
                    
                    
                    
                    311,709Convertible
      notes, less current portion
                    
                    
                    4,000,000
                    
                    
                    
                    4,000,000Other
      liabilities
                    
                    
                    186,905
                    
                    
                    
                    137,198Total
      liabilities
                    
                    
                    19,098,337
                    
                    
                    
                    36,580,507Commitments
      and Contingencies
                    
                    
                    -
                    
                    
                    
                    -Stockholders’
      EquityPreferred
      stock- $.0001 par value; 1,000,000 shares authorized; no shares issued or
      outstanding
                    
                    
                    -
                    
                    
                    
                    -Common
      stock- $.0001 par value, 100,000,000 shares authorized; 13,142,962 and
      12,797,296 issued; 12,846,709 and 12,621,716 outstanding
atDecember
      31, 2009 and December 31, 2008, respectively
                    
                    
                    1,314
                    
                    
                    
                    1,279Additional
      paid-in capital
                    
                    
                    63,442,796
                    
                    
                    
                    61,262,218Treasury
      stock 296,253 and 175,580 shares at cost at
                    
                    
                    (959,971
                    )
                    
                    
                    (869,381
                    )December
      31, 2009 and December 31, 2008, respectivelyAccumulated
      deficit
                    
                    
                    (58,328,730
                    )
                    
                    
                    (39,535,578
                    )Total
      stockholders' equity
                    
                    
                    4,155,409
                    
                    
                    
                    20,858,538Total
      liabilities and stockholders’ equity
                    
                    $
                    23,253,746
                    
                    
                    $
                    57,439,045





See
accompanying notes to consolidated financial statements.


F-2


FORTRESS
INTERNATIONAL GROUP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS





For the Year EndedDecember 31, 2009
                      
                      
                      December 31, 2008Results
      of Operations:Revenue
                      
                      $
                      48,111,430
                      
                      
                      $
                      86,674,156Cost
      of revenue
                      
                      
                      40,220,290
                      
                      
                      
                      73,780,479Gross
      profit
                      
                      
                      7,891,140
                      
                      
                      
                      12,893,677Operating
      expenses:Selling,
      general and administrative
                      
                      
                      12,312,243
                      
                      
                      
                      17,578,565Depreciation
      and amortization
                      
                      
                      412,161
                      
                      
                      
                      464,438Amortization
      of intangibles
                      
                      
                      919,230
                      
                      
                      
                      1,742,385Impairment
      loss on goodwill and other intangibles
                      
                      
                      10,254,904
                      
                      
                      
                      20,828,460Total
      operating costs
                      
                      
                      23,898,538
                      
                      
                      
                      40,613,848Operating
      loss
                      
                      
                      (16,007,398
                      )
                      
                      
                      (27,720,171
                      )Interest
      income (expense), net
                      
                      
                      (195,940
                      )
                      
                      
                      (206,806
                      )Loss
      from continuing operations before income taxes
                      
                      
                      (16,203,338
                      )
                      
                      
                      (27,926,977
                      )Income
      tax expense
                      
                      
                      -
                      
                      
                      
                      65,611Net
      loss from continuing operations
                      
                      
                      (16,203,338
                      )
                      
                      
                      (27,992,588
                      )Loss
      from discontinued operations
                      
                      
                      (2,887,968
                      )
                      
                      
                      (4,941,637
                      )Gain
      from disposal of discontinued business
                      
                      
                      298,154
                      
                      
                      
                      -Net
      loss
                      
                      $
                      (18,793,152
                      )
                      
                      $
                      (32,934,225
                      )Per
      Common Share (Basic and Diluted):Net
      loss from continuing operations, net of tax
                      
                      $
                      (1.28
                      )
                      
                      $
                      (2.28
                      )Discontinued
      operations, net of tax
                      
                      
                      (0.20
                      )
                      
                      
                      (0.40
                      )Net
      loss
                      
                      $
                      (1.48
                      )
                      
                      $
                      (2.68
                      )Weighted
      average common shares outstanding-basic and diluted
                      
                      
                      12,683,764
                      
                      
                      
                      12,270,546





See
accompanying notes to consolidated financial statements.


F-3


FORTRESS
INTERNATIONAL GROUP, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY





(AccumulatedAdditional
                    
                    
                    
                    
                    
                    
                    
                    
                    Deficit)
                    
                    
                    TotalCommon
      Stock
                    
                    
                    Paid-in
                    
                    
                    Treasury
      Stock
                    
                    
                    Retained
                    
                    
                    Shareholders'Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Earnings
                    
                    
                    EquityBalance
      at January 1, 2008
                    
                    
                    12,150,400
                    
                    
                    
                    1,214
                    
                    
                    
                    55,268,012
                    
                    
                    
                    158,075
                    
                    
                    
                    (814,198
                    )
                    
                    
                    (6,601,353
                    )
                    
                    
                    47,853,675Issuance
      of common stock for the SMLB acquisition
                    
                    
                    96,896
                    
                    
                    
                    10
                    
                    
                    
                    462,765
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    462,775Promissory
      note due to officers converted to stock
                    
                    
                    466,667
                    
                    
                    
                    47
                    
                    
                    
                    3,499,953
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,500,000Purchase
      of treasury stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    17,505
                    
                    
                    
                    (55,183
                    )
                    
                    
                    -
                    
                    
                    
                    (55,183
                    )Stock
      based compensation
                    
                    
                    83,333
                    
                    
                    
                    8
                    
                    
                    
                    2,031,488
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,031,496Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (32,934,225
                    )
                    
                    
                    (32,934,225
                    )Balance
      at December 31, 2008
                    
                    
                    12,797,296
                    
                    
                    $
                    1,279
                    
                    
                    $
                    61,262,218
                    
                    
                    
                    175,580
                    
                    
                    $
                    (869,381
                    )
                    
                    $
                    (39,535,578
                    )
                    
                    $
                    20,858,538Purchase
      of treasury stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    120,673
                    
                    
                    
                    (90,590
                    )
                    
                    
                    -
                    
                    
                    
                    (90,590
                    )Stock
      based compensation
                    
                    
                    345,666
                    
                    
                    
                    35
                    
                    
                    
                    2,180,578
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,180,613Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (18,793,152
                    )
                    
                    
                    (18,793,152
                    )Balance
      at December 31, 2009
                    
                    
                    13,142,962
                    
                    
                    
                    1,314
                    
                    
                    
                    63,442,796
                    
                    
                    
                    296,253
                    
                    
                    
                    (959,971
                    )
                    
                    
                    (58,328,730
                    )
                    
                    
                    4,155,409





See
accompanying notes to consolidated financial statements.


F-4





FORTRESS
INTERNATIONAL GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





For the Year EndedDecember 31, 2009
                                            
                                            
                                            December 31, 2008Cash
      Flows from Operating Activities:Net
      loss
                                            
                                            $
                                            (18,793,152
                                            )
                                            
                                            $
                                            (32,934,225
                                            )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
      and amortization
                                            
                                            
                                            417,440
                                            
                                            
                                            
                                            468,094Amortization
      of intangibles
                                            
                                            
                                            1,534,099
                                            
                                            
                                            
                                            3,344,804Impairment
      loss on goodwill and other intangibles
                                            
                                            
                                            13,062,133
                                            
                                            
                                            
                                            25,989,943Provision
      for doubtful accounts
                                            
                                            
                                            346,706
                                            
                                            
                                            
                                            119,728Stock
      and warrant-based compensation
                                            
                                            
                                            2,180,613
                                            
                                            
                                            
                                            2,031,496Extinguishment
      of contract liabilities
                                            
                                            
                                            (269,217
                                            )
                                            
                                            
                                            -Gain
      on disposal of certain assets and liabilities of Rubicon
    LLC
                                            
                                            
                                            (298,153
                                            )
                                            
                                            
                                            -Other
      non-cash income, net
                                            
                                            
                                            -
                                            
                                            
                                            
                                            15,312Changes
      in operating assets and liabilities:Contracts
      and other receivables
                                            
                                            
                                            3,496,613
                                            
                                            
                                            
                                            (2,671,636
                                            )Costs
      and estimated earnings in excess of billings on
uncompletedcontracts
                                            
                                            
                                            2,331,081
                                            
                                            
                                            
                                            (2,420,276
                                            )Prepaid
      expenses and other current assets
                                            
                                            
                                            (114,045
                                            )
                                            
                                            
                                            (237,536
                                            )Other
      assets
                                            
                                            
                                            176,414
                                            
                                            
                                            
                                            1,075,013Accounts
      payable and accrued expenses
                                            
                                            
                                            (12,411,422
                                            )
                                            
                                            
                                            7,175,362Billings
      in excess of costs and estimated earnings onuncompleted
      contracts
                                            
                                            
                                            673,214
                                            
                                            
                                            
                                            1,781,182Other
      liabilities
                                            
                                            
                                            49,707
                                            
                                            
                                            
                                            77,238Net
      cash provided by (used in) operating activities
                                            
                                            
                                            (7,617,969
                                            )
                                            
                                            
                                            3,814,499Cash
      Flows from Investing Activities:Purchase
      of property and equipment
                                            
                                            
                                            (211,190
                                            )
                                            
                                            
                                            (269,824
                                            )Purchase
      of SMLB, net of cash acquired
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,094,560
                                            )Payment
      of earnout in connection with the acquisition of Rubicon
                                            
                                            
                                            (700,000
                                            )
                                            
                                            
                                            -Payment
      of earnout in connection with the acquisition of
Innovative
                                            
                                            
                                            (353,187
                                            )
                                            
                                            
                                            -Sale
      of certain assets and liabilites of Rubicon LLC
                                            
                                            
                                            766,200
                                            
                                            
                                            
                                            -Net
      cash used in investing activities
                                            
                                            
                                            (498,177
                                            )
                                            
                                            
                                            (2,364,384
                                            )Cash
      Flows from Financing Activities:Payments
      on notes payable
                                            
                                            
                                            (15,991
                                            )
                                            
                                            
                                            (161,991
                                            )Payment
      on seller notes
                                            
                                            
                                            (1,962,284
                                            )
                                            
                                            
                                            (1,956,994
                                            )Purchase
      of treasury stock
                                            
                                            
                                            (90,590
                                            )
                                            
                                            
                                            (55,183
                                            )Net
      cash used in financing activities
                                            
                                            
                                            (2,068,865
                                            )
                                            
                                            
                                            (2,174,168
                                            )Net
      decrease in cash
                                            
                                            
                                            (10,185,011
                                            )
                                            
                                            
                                            (724,053
                                            )Cash,
      beginning of period
                                            
                                            
                                            12,448,157
                                            
                                            
                                            
                                            13,172,210Cash,
      end of period
                                            
                                            $
                                            2,263,146
                                            
                                            
                                            $
                                            12,448,157Less:
      Cash associated with discontinued operations
                                            
                                            
                                            -
                                            
                                            
                                            
                                            722,265Cash,
      end of period from continuing operations
                                            
                                            $
                                            2,263,146
                                            
                                            
                                            $
                                            11,725,892Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                                            
                                            $
                                            126,644
                                            
                                            
                                            $
                                            377,196Cash
      paid for taxes
                                            
                                            
                                            116,411
                                            
                                            
                                            
                                            24,602Supplemental
      disclosure of non-cash operating activitiesAccounts
      payable forgiven in connection with the sale ofsubstantially
      all assets and liabilities of Rubicon
                                            
                                            $
                                            173,910
                                            
                                            
                                            $
                                            -Supplemental
      disclosure of non-cash investing activities:Issuance
      of common stock in connection with the acquisition of SMLB
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            462,775Promissory
      notes payable issued in connection with the acquisition of
      SMLB
                                            
                                            
                                            -
                                            
                                            
                                            
                                            120,572Issuance
      of accounts payable in connection with the acquisition of
      Innovative
                                            
                                            
                                            219,203
                                            
                                            
                                            
                                            353,187Issuance
      of accounts payable in connection with the acquisition of
      Rubicon
                                            
                                            
                                            173,910
                                            
                                            
                                            
                                            489,437Promissory
      notes payable issued in connection with the acquistion of
      Rubicon
                                            
                                            
                                            550,000
                                            
                                            
                                            
                                            2,127,577Promissory
      notes receivable received in connection with the sale of Rubicon
      LLC
                                            
                                            
                                            550,981
                                            
                                            
                                            
                                            -Supplemental
      disclosure of non-cash financing activities:Promissory
      notes payable issued to officers converted to common stock
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            3,500,000Promissory
      notes payable forgiven in connection with the sale ofsubstantially
      all assets and liabilities of Rubicon
                                            
                                            
                                            236,257
                                            
                                            
                                            
                                            -





See
accompanying notes to consolidated financial statements.


F-5





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




(1)   Basis of Presentation and Significant
Accounting Policies





Nature
of Business and Organization





The
consolidated financial statements are for the years ended December 31, 2009
and 2008 for Fortress International Group, Inc. (“Fortress” or the
“Company”).  The Company was formed in Delaware on December 20, 2004
as a special purpose acquisition company under the name “Fortress America
Acquisition Corporation” for the purpose of acquiring an operating business that
performed services to the homeland security industry.  On July 20,
2005, we closed our initial public offering (IPO) of 7,800,000 units, including
an overallotment option of 800,000 units, with each unit consisting of one share
of our common stock and two warrants (each to purchase one share of common stock
at $5.00). Of the total IPO proceeds of $43,183,521, net of issuance costs,
$41,964,000 was 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. The acquisition transformed the Company
from a special acquisition company to an operating business. Concurrent with the
acquisition, the Company changed its name to Fortress International Group,
Inc.





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





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





The
Company experienced a significant and unexpected decrease in its revenues,
caused by dealys in starting projects or cancellations theoreof during the yeare
ended December 31, 2009 resulting in a significant loss and negative cashlflows
from operations.  The Company has taken actions to address the
liquidity concerns that this caused.





The
Company had $2.3 million and $12.4 million of unrestricted cash and
cash equivalents at December 31, 2009 and 2008, respectively. During the year
ended December 31, 2009, the Company has financed our operations primarily with
cash on hand as it experienced negative cash flow from operations and from the
sale of substantially all of the assets and liabilities of Rubicon.





Based on
an unexpected lack of closed contracts and continued customer delays experienced
at June 30, 2009 and through year end, management revised our financial forecast
and implemented selling, general and administrative cost with an approximate
annual savings of $2.2 million.  In an effort to attempt to achieve
positive cash flows from operations and align costs with forecasted revenues in
the future, the Company has taken additional measures to reduce professional
fees and public company costs as we are managing an orderly transition to the
OTC- Bulletin Board in the first quarter of 2010.





In second
half of 2008 and through 2009 the company’s strategic growth through
acquisitions was suspended due to the downturn in the economy, the impact this
had on its existing customer base, and as well as the impact it had on the
company’s own financial security and common stock value.  The
corporate focus became centered on preserving cash, achieving positive cash flow
and discontinuing or selling operations that threatened that
strategy.   The Company engaged a bank to assist it in evaluating
various disposition and financial alternatives, which culminated in the sale of
the Rubicon division to its management and former owners on December 29,
2009.  The disposition resulted in consideration of approximately $2.0
million.





The
Company further sought to restructure scheduled debt repayments with our
creditors.  In addition to the added liquidity from the proceeds of the
sale of Rubicon, the Company eliminated scheduled debt repayments through debt
forgiveness of approximately $0.5 million to the former sellers. On February 28,
2010, the Company improved its net worth through the principal conversion of
$1.3 million of principal due on a seller note to Mr. Gallagher. 
Furthermore, the principal repayment of the remaining $2.7 million was amended
to begin in the second quarter of 2012.  As a result of note restructuring,
at December 31, 2009 short term debt obligations were reduced $2.3 million and
in turn our short-term liquidity substantially improved.





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





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 the Company applies ASC 605-35 Construction-Type
and 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.





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.





Cost of
revenue





Direct
costs consist of all directly-related contract costs, including compensation
costs for subcontract personnel, subcontract material cost and any other
direct costs. Also appropriate indirect overhead costs are applied to employee
direct labor, subcontractor direct labor and material costs and are included as
direct costs.


F-6





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Stock-Based
Compensation





The
Company applies ASC 718 Compensation-Stock Compensation to its stock based
compensation arrangements. We amortize stock-based costs for such awards on a
straight-line method over the requisite service period, which is generally the
vesting period.





The
Company also grants shares of restricted stock to directors and employees. 
Share based compensation expense is recognized based on the fair market value of
the shares on the date the shares are issued to employees over the vesting
period taking into consideration the employment termination behavior experienced
by the Company.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses include salaries, wages and related benefits
(including non-cash charges for stock based compensation), travel,
insurance, rent, contract maintenance, advertising and other administrative
expenses.





Advertising
Costs





The
Company expenses the cost of advertising as incurred. Advertising expense
is included as a component of selling, general and administrative expenses in
the accompanying consolidated statements of operations.





Advertising
expense for the Company was $0.1 million and $0.2 million for the years
ended December 31, 2009 and 2008, respectively.





Depreciation
and Amortization





Property and
equipment are recorded at cost. Depreciation and amortization for the Company’s
property and equipment are computed on straight-line method based on the
following useful lives:


DepreciableLivesVehicles
                  
                  
                  5Trade
      equipment
                  
                  
                  5Leasehold
      improvements
                  
                  2
      to 5Furniture
      and fixtures
                  
                  
                  7Computer
      equipment and software
                  
                  
                  2-7





Leasehold
improvements are depreciated over the shorter of their estimated useful lives or
lease terms that are reasonably assured. Repairs and maintenance costs are
expensed as incurred.





Net
income (Loss) Per Share





Basic net
income (loss) per share has been computed using the weighted average number
of shares outstanding during each period. Diluted net income (loss)
per share is computed by including the dilutive effect of common stock that
would be issued assuming conversion or exercise of outstanding convertible
notes, warrants, and restricted stock. Unvested restricted stock, convertible
unsecured promissory notes, and options to purchase shares of common stock
totaling 2,158,935and 19,012,300 common shares were excluded in the computation
of diluted loss per share in 2009 and 2008, respectively, because the Company
incurred a net loss and the effect of inclusion would have been
anti-dilutive.


F-7





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Cash
and cash equivalents





The
Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. At times, deposits
held with financial institutions may exceed the amount of insurance provided on
such deposits.  Generally, these deposits may be redeemed upon demand,
and therefore, bear minimal risk.  Effective October 3, 2008 and
through June 30, 2010, in accordance with the Emergency Economic
Stabilization Act of 2008 the Federal Deposit Insurance Corporation (FDIC)
deposit coverage limits were increased to unlimited coverage on non-interest
bearing accounts from prior $250,000 limit.





Trade
Accounts Receivable





Trade
accounts receivable are recorded at the invoiced amount and may bear
interest in the event of late payment under certain
contracts.  Included in accounts receivable is retainage, which
represents the amount of payment contractually withheld by customers until
completion of a particular project.  The allowance for doubtful
accounts is the Company’s best estimate of the amount of probable credit losses
in the Company’s existing accounts receivable. The Company determines the
allowance based on an analysis of its historical experience with bad debt
write-offs and aging of the accounts receivable balance. The Company reviews its
allowance for doubtful accounts quarterly. Past due balances over 90 days
and over a specified amount are reviewed individually for collectability.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The Company does not have any off-balance sheet credit exposure related
to its customers.





The
Company recorded accounts receivable allowances of $0.5 million and $0.2 million
at December 31, 2009 and 2008, respectively.  Included in accounts
receivable was retainage associated with construction projects totaling $0.5
million and $0.4 million at December 31, 2009 and 2008, respectively (See Note
2).





Under
certain construction management contracts, the Company is obligated to obtain
performance bonds with various financial institutions, which typically require a
security interest in the corresponding receivable.  At December 31,
2009 and 2008, bonds secured by customer accounts receivable totaled $13.8
million and $13.1 million, respectively.





Goodwill





The
Company segregates identifiable intangible assets acquired in an acquisition
from goodwill. In accordance with ASC 350 Intangibles-Goodwill and other,
goodwill and indefinite lived intangibles are evaluated for impairment at least
annually, as of December 31. As circumstances change that could affect the
recoverability of the carrying amount of the assets during an interim period,
the Company will evaluate its indefinite lived intangible assets for
impairment.  In 2009 and 2008, the Company conducted such analyses
that resulted in impairment loss on goodwill of $0.3 million and $15.9 million,
respectively. At December 31, 2009 and 2008, the residual carrying value of
goodwill is $3.8 and $3.9 million, respectively.





Long-Lived
Assets and Other Intangibles





As events
or circumstances change that could affect the recoverability of the carrying
value of its long-lived assets, the Company conducts a comprehensive review of
the carrying value of its assets to determine if the carrying amount of the
assets are recoverable in accordance with ASC 360-10-35 Impairment or Disposal
of Long-Lived Assets. The Company’s long-lived assets consist of property and
equipment and finite lived intangibles related to customer contracts, customer
relationships, and trademarks acquired in business
combinations.  This review requires the identification of the lowest
level of identifiable cash flows for purposes of grouping assets subject to
review. The estimate of undiscounted cash flows includes long-term forecasts of
revenue growth, gross margins and capital expenditures. All of these items
require significant judgment and assumptions. An impairment loss may exist when
the estimated undiscounted cash flows attributable to the assets are less than
their carrying amount. If an asset is deemed to be impaired, the amount of the
impairment loss recognized represents the excess of the asset’s carrying value
as compared to its estimated fair value, based on management’s assumptions and
projections.





Based on
contract cancellation and continued customer delays, the Company revised its
forecast in June 2009.  As a result of the revision and business
conditions, the Company evaluated the recoverability of its other intangibles,
resulting in impairment loss of $9.9 million during the year ended December 31,
2009.  Additionally, in an effort to rationalize the Company’s
marketing effort and consolidate its product offerings under a single brand name
Fortress International Group, Inc, the Company abandoned acquired trade names
resulting in an impairment loss of approximately $5.0 million during the year
ended December 31, 2008.


F-8





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Income
Taxes





Deferred
income taxes are provided for the temporary differences between the financial
reporting and tax basis of the Company’s assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse. The U.S. net operating losses not utilized can be carried forward for
20 years to offset future taxable income. A valuation allowance has been
recorded against the majority of the Company’s deferred tax assets, as the
Company has concluded that under relevant accounting standards, it is more
likely than not that deferred tax assets will not be realizable. The Company
recognizes interest and penalty expense associated with uncertain tax positions
as a component of income tax expense in the consolidated statements of
operations.





Reportable
Segment





The
Company reviewed its services by units to determine if any unit of the business
is subject to risks and returns that are different than those of other units in
the Company.  Based on this review, the Company has determined that all
units of the Company are providing comparable services to its clients, and the
Company has only one reportable segment.





Financial
Instruments





The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and long-term debt.  The carrying amounts of
these financial instruments approximate their fair value, due to the short-term
nature of these items.  The carrying amount of long-term debt approximates
its fair value due to the market rates of interest.





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, recoverability of long-lived and
indefinite-lived assets, useful lives of long-lived assets, accruals for
estimated liabilities that are probable and estimable, and the fair value
of stock and option grants. Actual results could differ from those estimates and
assumptions.




Discontinued
Operations and Reclassifications





The
Company must classify a business line as discontinued operations once the
Company has committed to a plan to sell the business, as determined pursuant to
the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic No. 360, “Property, Plant and Equipment” (“ASC 360”)
(formerly Statements of Financial Accounting Standard (“SFAS”) No.
144.  “Accounting for the impairment of Long-Lived
Assets”.  On December 29, 2009, the Company sold substantially all the
assets and liabilities of Rubicon LLC to its former owners and
management.  Historical financial information presented in the
consolidated financial statements and notes to consolidated financial statements
have been reclassified to conform to the current year presentation.





Recently
Issued Accounting Pronouncements




In June
2009, SFAS 167, Amendments to
FASB Interpretation No. 46(R), (ASC 810) was issued. The objective
of SFAS 167 is to amend certain requirements of FIN 46 (revised December 2003),
Consolidation of Variable
Interest Entities, or FIN 46(R), to improve financial reporting by
enterprises involved with variable interest entities and to provide more
relevant and reliable information to users of financial statements. SFAS 167
carries forward the scope of FIN 46(R), with the addition of entities previously
considered qualifying special-purpose entities, as the concept of these entities
was eliminated in SFAS 166, Accounting for Transfers of
Financial Assets (ASC 860).SFAS 167 nullifies ASC
860-10-50 (FASB Staff Position FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities).The principal
objectives of these new disclosures are to provide financial statement users
with an understanding of:




a.
            The significant judgments and
      assumptions made by an enterprise in determining whether it must
      consolidate a variable interest entity and/or disclose information about
      its involvement in a variable interest
  entity;





b.
            The nature of restrictions on a
      consolidated variable interest entity’s assets and on the settlement of
      its liabilities reported by an enterprise in its statement of financial
      position, including the carrying amounts of such assets and
      liabilities;





c.
            The nature of, and changes in,
      the risks associated with an enterprise’s involvement with the variable
      interest entity; and





d.
            How
      an enterprise’s involvement with the variable interest entity affects the
      enterprise’s financial position, financial performance and cash
      flows.




SFAS 167
is effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009. Early adoption is
prohibited. The provisions of SFAS 167 need not be applied to immaterial items.
The Company has reviewed and evaluated the provisions of SFAS 167
and  it has concluded that the adoption of this standard will have no
significant impact on its results of operations or financial position. In
October 2009, Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging
Issues Task Force, was issued. The objective of this Update is to address
the accounting for multiple-deliverable arrangements to enable vendors to
account for products or services (deliverables) separately rather than as a
combined unit. Vendors often provide multiple products or services to their
customers. Those deliverables often are provided at different points in time or
over different time periods. Subtopic 605-25, Revenue Recognition-Multiple-Element
Arrangements, establishes the accounting and reporting guidance for
arrangements under which the vendor will perform multiple revenue-generating
activities. Specifically, this Subtopic addresses how to separate deliverables
and how to measure and allocate arrangement consideration to one or more units
of accounting. The amendments in this Update will affect accounting and
reporting for all vendors that enter into multiple-deliverable arrangements with
their customers when those arrangements are within the scope of ASC Subtopic
605-25. The amendments in this Update significantly expand the disclosures
related to a vendor’s multiple-deliverable revenue arrangement. The objective of
the disclosures is to provide information about the significant judgments made
and changes to those judgments and about the application of the relative
selling-price method affects the timing of the revenue recognition. The
amendments in this Update will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. The Company does not
anticipate that the adoption of this standard will have any significant impact
on its results of operations or financial position.




On
June 30, 2009, Accounting Standards Update No. 2009-01, Topic 105—Generally Accepted
Accounting Principles amendments based on Statement of Financial Accounting
Standards No. 168—The FASB Accounting Standards CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles, was issued. This Accounting Standards
Update amends the ASC for the issuance of Statement of Financial Accounting
Standard No. 168, The
FASB Accounting Standards CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles(SFAS 168).This Accounting Standards
Update includes SFAS 168 in its entirety, including the Accounting Standards
Update instructions contained in Appendix B of the Statement. The Codification
is the source of authoritative U.S. Generally Accepted Accounting Principles
(GAAP) recognized by the FASB to be applied by non-governmental entities. Rules
and interpretive releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. On the effective
date of SFAS 168, the Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. Following SFAS
168, the Board will not issue new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue
Accounting Standards Updates. The GAAP hierarchy will be modified to include
only two levels of GAAP: authoritative and non-authoritative.


F-9





FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




(2)   Accounts
Receivable





The
Company had accounts receivable allowances for doubtful accounts of $0.5
million and $0.2 million at December 31, 2009 and December 31, 2008,
respectively.





Bad debt
expense for the year ended December 31, 2009 was approximately $0.4 million
compared to $0.1 million for the year ended December 31, 2008. The increase in
bad debt expense is associated with a single customer note receivable that was
fully reserved during the year ended December 31, 2009 as more fully described
below:





·
            During
      the year ended December 31, 2009, the Company executed a promissory note
      receivable with a customer for $0.8 million.  This note has a
      six-month repayment schedule and does not bear interest given its short
      term nature.  The customer ceased making installment payments
      and has failed to successfully recapitalize its organization and secure
      additional funding.  Based on the preceding, the Company fully
      reserved the balance of the receivable of $0.3 million, which resulted in
      the increase in bad debt expense.





·
            During
      the year ended December 31, 2009, we had a receivable of $1.0 million due
      from another customer that had previously entered into a $1.0 million
      note.  The note was extended from its original maturity of
      December 31, 2008 to June 15, 2009; at which point the customer requested
      an additional extension due to an inability to satisfy the
      note.  At June 30, 2009, we fully reserved the balance of the
      note.  The Company continued its collection efforts through
      legal recourse and subsequent to year end collected in full all amounts
      outstanding for our work as a result of the customer selling its property
      in March 2009.   Accordingly, the Company reversed the
      prior reserve associated with the customer receivable in full at December
      31, 2009.





During
the year ended December 31, 2008, the Company recognized a $0.7 million loss on
a customer contract due to concerns as to whether the amounts due from this
customer were collectible.





The
Company earned approximately 20% and 31% of its revenue from three and two
customers for the year ended December 31, 2009 and 2008, respectively.
Additionally, during the fourth quarter 2009, a customer, comprising 6% of the
Company’s total revenue for year ended December 31, 2009, entered into a
definitive merger agreement.  We are unable determine if the merger
agreement will close, or if it does, the affect it may have on continued
business with our customer.  Accounts receivable from these customers
at December 31, 2009 and 2008 was $8.1 million and $2.7 million,
respectively.





(3)
Extinguishment of Liabilities





During
the year ended December 31, 2009, the Company finalized the extinguishment of
approximately $0.3 million due to two vendors’ as a result of contract
assignment. Pursuant to the contract assignment these two vendors have relieved
the Company of its obligation due to these vendors which had been previously
recorded by the Company. These vendors will pursue collection remedy
independently and without recourse to the Company pursuant to the terms of the
contract assignment. The Company recorded the extinguishment of liabilities for
the amount due to these two vendors as a reduction to accounts payable and a
reduction to cost of sales of $0.3 million during the year ended December 31,
2009.





(4)  Acquisitions





On
September 26, 2007, November 30, 2007 and January 2, 2008, the Company acquired
100% of the issued and outstanding stock of Innovative, 100% of the membership
interests of Rubicon, and 100% of the outstanding stock of SMLB, respectively.
The purchase agreements executed in connection with the
Innovative,  Rubicon and SMLB transactions contained earn-out
provisions that required the Company to make additional payments to be
calculated based on excess profits during the applicable earn-out
periods.





Rubicon





Under the
Rubicon earn-out arrangement during the year ended December 31, 2009, the
Company recorded approximately $0.2 million for the 2009 earn-out period which
began January 1, 2009 and continued through December 29, 2009 (2009 Rubicon
Earn-out).  In conjunction with the sale of substantially all of
assets and liabilities of Rubicon, consideration of the buyers included
forgiveness of the 2009 Rubicon Earn-out.





Under the
Rubicon earn-out arrangement at December 31, 2008, the Company recorded
approximately $0.5 million for the 2008 earn-out period which began December 1,
2007 and continued through December 31, 2008 (2008 Rubicon
Earn-out).  Per the terms of the purchase agreement on March 31, 2009
the Company delivered the 2008 Rubicon Earn-out calculation. The Rubicon sellers
separately responded with a calculation of $1.7 million, based on varying
interpretations of the purchase agreement. On June 2, 2009, the Company and
sellers finalized the 2008 Rubicon Earn-out which totaled $1.3 million, or an
increase of $0.8 million from December 31, 2008 per computation made by the
Company.  Consideration was issued in the form of a cash payment of
$0.7 million and a seller note for $0.6 million (See Note 10).


F-10





Innovative





In 2009,
Innovative achieved certain 2009 earnings targets established in the purchase
agreement, entitling the sellers to additional purchase consideration of $0.2
million.  Subject to terms and conditions outlined in the purchase
agreement, the payment is due in the second quarter of 2010 and is included in
accrued payables at December 31, 2009.





During
the year ended December 31, 2009, the increase in cash paid for the Rubicon and
Innovative acquisitions totaled $0.7 million and $0.4 million, respectively, and
was attributable for achievement of certain profitability targets during 2008,
as stipulated in the respective purchase agreements.





In 2008,
Innovative achieved certain 2008 earnings targets established in the purchase
agreement, entitling the sellers to additional purchase consideration of $0.4
million. Subject to terms and conditions outlined in the purchase agreement, the
payment was paid in the second quarter of 2009 and was included in accrued
payables at December 31, 2008.





SMLB





On
January 2, 2008, the Company acquired all of the outstanding stock of SMLB,
Ltd., which provides consulting and construction management services for the
mission-critical facilities in the Chicago area. The closing consideration
consisted of (i) $2,094,560 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 the Company’s 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 year ended December 31, 2008, the unsecured promissory note of
$500,000 was reduced to $120,572 based on a working capital adjustment per the
purchase agreement.  In 2008 and 2009, SMLB did not achieve certain
earnings targets; therefore no additional earn-out amount was
earned.





The
Company paid a premium (i.e., goodwill) over the fair value of the net tangible
and 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 $2.5 million associated with the SMLB
acquisition, which is not expected to be deductible for income tax
purposes.





At
December 31, 2009, there is no additional contingent purchase consideration
related to achievement of performance targets on any of our prior
acquisitions.





(5)
            Discontinued
      Operations




On
December 29, 2009, the Company completed the sale of substantially all of the
assets and liabilities of Rubicon for total consideration of $2.0 million
consisting of $0.8 million in cash proceeds, net of transaction costs, a $0.6
million note receivable and $0.4 million in forgiveness of actual obligations
and potential liabilities related to 2008 and 2009 earn-outs to the former
owners and management of Rubicon. Additionally, the Company is entitled to
contingent consideration in the form of an earn-out equal to 7.5% of gross
profit on designated projects during a one year period commencing on the close
date.  At December 31, 2009, the Company had not recorded any
contingent consideration associated with this earn-out. Approximately
$0.9 million of goodwill was included in the calculation of the gain on disposal
of discontinued business.




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




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




December
      31,2009
                  
                  
                  2008Revenue
                  
                  $
                  25,434,969
                  
                  
                  $
                  15,857,622Income
      from operations of discontinued business, before taxes
                  
                  
                  (2,887,968
                  )
                  
                  
                  (4,941,637
                  )Income
      tax expense
                  
                  
                  -
                  
                  
                  
                  -Income
      from operations of discontinued business
                  
                  $
                  (2,887,968
                  )
                  
                  $
                  (4,941,637
                  )Gain
      on disposal of discontinued business, after taxes
                  
                  $
                  (298,153
                  )
                  
                  $
                  -




(6)
            Property and
      Equipment





Property
and equipment consisted of the following:





December 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Vehicles
                    
                    $
                    142,682
                    
                    
                    $
                    164,576Trade
      equipment
                    
                    
                    144,391
                    
                    
                    
                    139,143Leasehold
      improvements
                    
                    
                    636,826
                    
                    
                    
                    500,040Furniture
      and fixtures
                    
                    
                    38,695
                    
                    
                    
                    38,694Computer
      equipment and software
                    
                    
                    906,581
                    
                    
                    
                    837,4251,869,175
                    
                    
                    
                    1,679,878Less
      accumulated depreciation
                    
                    
                    (1,256,606
                    )
                    
                    
                    (866,338
                    )Property
      and equipment, net
                    
                    $
                    612,569
                    
                    
                    $
                    813,540





Depreciation
of fixed assets and amortization of leasehold improvements totaled $0.4 million
and $0.5 million for the years ended December 31, 2009 and 2008,
respectively.


F-11


FORTRESS INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





(7)
            Goodwill and Other
      Intangibles





The
Company recognized goodwill associated with its five acquisitions beginning in
2007 through 2009. As of December 31, 2009 and December 31, 2008, goodwill
totaled $3.8 million and $3.9 million, respectively, of which approximately
$11.8 million is deductible for income tax purposes.  The following
provides a gross carrying value goodwill rollforward for each respective
transaction as of December 31, 2009 (see Note 3 for description of
adjustments):





December 31, 2008
                            
                            
                            Additions
                            
                            
                            December 31, 2009TSS/Vortech
                            
                            $
                            15,739,472
                            
                            
                            $
                            -
                            
                            
                            $
                            15,739,472Commsite
                            
                            
                            134,623
                            
                            
                            
                            -
                            
                            
                            
                            134,623Innovative
                            
                            
                            1,351,786
                            
                            
                            
                            219,203
                            
                            
                            
                            1,570,989SMLB,
      Ltd.
                            
                            
                            2,542,909
                            
                            
                            
                            -
                            
                            
                            
                            2,542,909Total
                            
                            $
                            19,768,790
                            
                            
                            $
                            219,203
                            
                            
                            $
                            19,987,993





Goodwill
from acquisitions as of December 31, 2009 and December 31, 2008 were as
follows:





December 31,
                        
                        
                        December 31,2009
                        
                        
                        2008Gross
      carrying amount of goodwill
                        
                        $
                        19,987,993
                        
                        
                        $
                        19,768,790Accumulated
      Impairment loss on goodwill
                        
                        
                        (16,176,866
                        )
                        
                        
                        (15,862,460
                        )Net
      goodwill
                        
                        $
                        3,811,127
                        
                        
                        $
                        3,906,330





Goodwill Impairment





The
Company has not realized the anticipated revenue from customers acquired in its
acquisitions and had experienced continued operating losses during the years
ended December 31, 2009 and 2008, resulting in impairments being recorded in
both years. The Company also performed an impairment analysis at December 31,
2009, its annual testing date.  This analysis did not indicate the
need for any additional impairment.





2009 Impairment-The Company
continued to experience operating losses and further revised its financial
forecast due to a lack of anticipated bookings arising from customer contract
cancellation and deferral of anticipated projects.  The Company
performed an impairment analysis of the intangible assets acquired pursuant to
ASC 350 to identify any impairment in the carrying value of the goodwill related
to the business in the second quarter of 2009. The analyses of the business used
both an income and market approach to determine that the carrying value exceeded
the current fair value of the business at each referenced quarter, resulting in
goodwill impairment of $0.3 million





2008 Impairment-Based on the
recurring operating losses and revisions to the Company’s forecast, and a
decline in the Company’s market value, the Company performed an impairment
analysis of the intangible assets acquired pursuant to ASC 350 to identify any
impairment in the carrying value of the goodwill related to the business in the
second quarter. During the third and fourth quarter 2008, the Company’s market
value declined further and we conducted additional analysis, which contemplated
the market conditions beginning in third quarter and continuing through the
fourth quarter indicating an other than temporary decline in the market price of
our common stock. The analyses of the business used both an income and market
approach to determine that the carrying value exceeded the current fair value of
the business at each referenced quarter, resulting in goodwill impairment of
$15.9 million for the year ended December 31, 2008.





At
December 31, 2009 and 2008, the adjusted carrying value of goodwill was $3.8
million and $3.9 million, respectively.





Identifiable
acquisition-related intangible assets as of December 31, 2009 and December 31,
2008 were as follows:




December 31, 2009
                      
                      
                      December 31, 2008Accumulated
                      
                      
                      Loss on
                      
                      
                      Net Carrying
                      
                      
                      
                      
                      
                      Accumulated
                      
                      
                      Net CarryingCarrying Amount
                      
                      
                      Amortization
                      
                      
                      Impairment
                      
                      
                      Amount
                      
                      
                      Carrying Amount
                      
                      
                      Amortization
                      
                      
                      AmountFinite
      Lived-Intangible assets:Customer
      relationships
                      
                      $
                      14,660,000
                      
                      
                      $
                      (4,719,401
                      )
                      
                      $
                      (9,940,599
                      )
                      
                      $
                      -
                      
                      
                      $
                      14,660,000
                      
                      
                      $
                      (3,820,398
                      )
                      
                      $
                      10,839,602Non
      competition agreement
                      
                      
                      55,600
                      
                      
                      
                      (55,600
                      )
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      55,600
                      
                      
                      
                      (35,473
                      )
                      
                      
                      20,127Total
                      
                      
                      14,715,600
                      
                      
                      
                      (4,775,001
                      )
                      
                      
                      (9,940,599
                      )
                      
                      
                      -
                      
                      
                      
                      14,715,600
                      
                      
                      
                      (3,855,871
                      )
                      
                      
                      10,859,729Indefinite
      Lived-Intangible assets:Trade
      name
                      
                      
                      60,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      60,000
                      
                      
                      
                      60,000
                      
                      
                      
                      -
                      
                      
                      
                      60,000Net
      other intangible assets
                      
                      $
                      14,775,600
                      
                      
                      $
                      (4,775,001
                      )
                      
                      $
                      (9,940,599
                      )
                      
                      $
                      60,000
                      
                      
                      $
                      14,775,600
                      
                      
                      $
                      (3,855,871
                      )
                      
                      $
                      10,919,729





Other
intangibles impairment





2009 Impairment-Based on the
lack of new contracts and revision in anticipated revenue from customers and the
general condition of the Company, the Company evaluated long-lived customer
relationship intangible assets and determined the carrying value exceeded the
undiscounted cash flows at June 30, 2009.  Accordingly, the Company
performed a fair value assessment based on discounted cash flows of June 30,
2009, resulting in an impairment loss of $9.9 million for the year ended
December 31, 2009.  The adjusted net carrying value of the aggregate
customer relationship intangibles was zero at December 31, 2009.





2008
Impairment-The Company
acquired five companies, which all marketed and maintained their respective
trade names.  In an effort to more efficiently market the Company’s
products across acquired businesses and minimize confusion with customers, the
Company has adopted a plan to abandon the various trade names and migrate to a
single trade name of Fortress International Group, Inc.  As a result
of the abandonment, the Company recorded $5.0 million loss on impairment in the
fourth quarter 2008.  During 2008, based on potential
impairment indicators, including the impairment of goodwill, the Company
performed an impairment analysis of intangible assets acquired under SFAS 144.
The Company did not recognize an impairment loss, as the carrying amount of
finite-lived intangible assets was determined to be
recoverable.





For the
year ended December 31, 2009, intangible asset amortization expense totaling
$0.9 million has been included in the accompanying consolidated statement of
operations related to the above intangibles, of which zero is included in cost
of revenue. As finite lived intangibles have zero carrying value as of December
31, 2009, no related amortization expense will be recorded in future
periods.





For the
year ended December 31, 2008, intangible asset amortization expense totaling
$2.3 million has been included in the accompanying consolidated statement of
operations related to the above intangibles, of which $0.5 million is included
in cost of revenue.


F-12


FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





(8)
            Basic and Diluted Net Loss Per
      Common Share





Basic and
diluted earnings per share are based on the weighted average number of shares of
common stock and potential common stock outstanding during the period. Potential
common stock, for purposes of determining diluted earnings per share, includes
the effects of dilutive restrictive stock units, stock options and convertible
securities. The effect of such potential common stock is computed using the
treasury stock method or the if-converted method, as applicable. Basic and
diluted net loss per common share is computed as follows:





The
following table presents a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for income from continuing
operations. In the table below, income represents the numerator and shares
represent the denominator:





For the Year Ended December 31,2009
                  
                  
                  2008Net
      loss from continuing operations
                  
                  $
                  (16,203,338
                  )
                  
                  $
                  (27,992,588
                  )Basic
      and diluted weighted average common shares
                  
                  
                  12,683,764
                  
                  
                  
                  12,270,546Net
      loss from continuing operations per share
                  
                  $
                  (1.28
                  )
                  
                  $
                  (2.28
                  )





Unvested
restricted stock, convertible unsecured promissory notes, and options to
purchase 925,601, 533,333, and 700,000 shares of common stock, respectively,
that were outstanding at December 31, 2009 were not included in the computation
of diluted net loss per common share for the year ended December 31, 2009, as
their inclusion would be anti-dilutive.  On July 13, 2009, outstanding
warrants, including those attached to the options to purchase an aggregate of
17,110,300 shares expired.





Unvested
restricted stock, convertible unsecured promissory notes, options to purchase
units, and warrants outstanding at December 31, 2008 to purchase 668,667,
533,333, 2,100,000, and 15,710,300 shares of common stock, respectively, were
not included in the computation of diluted net loss per common share for the
year ended December 31, 2008, as their inclusion would be
anti-dilutive.





(9)
            Notes
    Payable





Long-term
debt was as follows:




December 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Convertible,
      unsecured promissory note, due 2012 (6.0%)
                    
                    $
                    4,000,000
                    
                    
                    $
                    4,000,000Unsecured
      promissory note, due 2008 (6.0%)
                    
                    
                    -
                    
                    
                    
                    -Unsecured
      promissory note, due 2009 (6.0%)
                    
                    
                    -
                    
                    
                    
                    1,575,618Unsecured
      promissory note, due 2010 (6.0%)
                    
                    
                    120,572
                    
                    
                    
                    120,572Unsecured
      promissory note, due 2010 (6.0%)
                    
                    
                    210,535
                    
                    
                    
                    -Unsecured
      promissory note, due 2011 (6.0%)
                    
                    
                    -
                    
                    
                    
                    283,457Vehicle
      notes
                    
                    
                    4,915
                    
                    
                    
                    20,907Total
      debt
                    
                    
                    4,336,022
                    
                    
                    
                    6,000,554Less
      current portion
                    
                    
                    183,679
                    
                    
                    
                    1,688,845Total
      debt, less current portion
                    
                    $
                    4,152,343
                    
                    
                    $
                    4,311,709





In
connection with the TSS/Vortech acquisition, the Company entered into two
convertible unsecured promissory notes payable (in equal amounts) with each the
Company’s current Chief Executive Officer (“CEO”) and Chief Operating Officer
and President (“COO”). The notes bear interest at six percent per year and had
an original term of five years.  At any time after the sixth months
following the closing of the acquisition, the balance of the notes are
convertible at any time by the selling members at a conversion price of $7.50
per share and are automatically convertible if the average closing price of the
Company’s common stock for 20 consecutive trading days equals or exceeds $7.50
per share.





On August
26, 2008, the CEO and COO, entered into an agreement with the Company to convert
$2.5 million and $1.0 million, respectively, of their respective outstanding
note balance into equity at a conversion price of $7.50 per share, resulting in
the aggregate issuance of 466,667 common shares. The amount of the excess of the
conversion price of $7.50 over the market price at $1.28 on the date of
conversion totaling $2.9 million has been recorded as additional paid-in
capital. In addition, the COO agreed to postpone any principal and interest
payments payable to him under his remaining $4,000,000 promissory note until
March, 2010, with such interest to be accrued to the outstanding
principal.





On
February 28, 2010, the COO entered into an agreement with the Company to convert
$1.3 million of the outstanding note balance into equity at a conversion price
of $2.00 per share, resulting in the aggregate issuance of 625,000 common shares
in first quarter 2010.  The shares will be subject to that certain
Registration Rights Agreement between the Company and the COO. The terms on the
remaining principal balance of $2.8 million were amended reducing the interest
rate under the note to 4%, providing for the payment of certain amounts of
accrued interest over time, providing for interest-only payments under the note
until April 1, 2012, providing for eight principal payments in the amount of
$125,000 each beginning on April 1, 2012, and providing for a final payment of
all remaining amounts of principal and interest due under the note on April 1,
2014.  The note amendment also provides for the acceleration of all
amounts due under the note upon a change of control of the Company or the death
of the COO.  Based on the amended principal repayment terms, the $4.0
million note was classified as long-term at December 31, 2009.





In
connection with the acquisition of Innovative, on September 24, 2007, the
Company issued an unsecured promissory note to 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 (see Note 3). The additional unsecured promissory note is in a
similar form of 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 are due commencing 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 of
December  2007 and certain revenue bookings targets for 2008,
respectively. The $1.5 million note was issued in 2007 and paid in full in
January 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 issued the balance of the note of $1.6 million based on Rubicon’s
achievement of certain revenue booking targets in the second half of 2008. The
issued note bears interest at six percent per annum from the acquisition date
and was paid on January 2, 2009.


F-13





FORTRESS INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





In
connection with the Rubicon acquisition, on June 2, 2009 the Company issued
unsecured promissory notes totaling $0.6 million to the sellers of Rubicon based
on their achievement of certain earnings targets for the year ended December 31,
2008, (“the 2008 earn-out”) (see Note 3).  The note issued bears
interest at 6% per annum and scheduled principal repayment is over one year with
amortization of $39,286 per month and a final balloon payment of $78,571 due on
May 15, 2010.  As part of the consideration in the sale of
substantially all of the assets and liabilities of Rubicon, the note balance of
$0.2 million was forgiven on December 29, 2009 as part of the purchase
consideration.





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 notes bear interest at six percent per year and have a three-year term.
During the twelve months ended December 31, 2008, the Company reduced the seller
notes to $120,572 based on a $379,428 working capital adjustment in accordance
with the terms of the purchase agreement. Principal installments net of the
adjustment of $24,118, $24,118 and $72,336, plus accrued interest, are due on
January 2, 2009, January 2, 2010 and January 2, 2011, respectively. The January
2, 2009 scheduled payment was not made, as the note was adjusted in the fourth
quarter of 2008. The Company may prepay the notes any time at its election
without penalty.





The
Company is obligated under multiple notes payable arrangements through October
2010 totaling $20,907 that bear interest at rates up to six percent, and are
secured by vehicles.





Scheduled
principal repayments at December 31, 2009 are as follows:





December 31,20092010
                      
                      $
                      1,433,6792011
                      
                      
                      152,3432012
                      
                      
                      375,0002013
                      
                      
                      500,0002014
                      
                      
                      1,875,000Total
                      
                      $
                      4,336,022









(10)
            Employee Benefit
      Plans





Restricted
Stock





On
January 17, 2007, the stockholders of the Company approved the Fortress
International Group, Inc. 2006 Omnibus Incentive Compensation Plan (the “Plan”).
Under the Plan, the Company reserved 2.1 million shares of the Company’s common
stock for issuance to employees and directors through incentive stock options,
non-qualified stock options or restricted stock. During 2008, grants under the
plan have been limited primarily to shares of restricted stock, which were
granted to the recipients at no cost and generally restrictions lapse over a
three year period. Concurrent with the acquisition of TSS/Vortech, the Company
issued 574,000 shares of restricted stock under the Plan.





At
December 31, 2008, the Company issued to employees 115,000 restricted stock
units, which will vest upon attainment of a $3.00 per share closing price of the
Company’s common stock, par value $0.0001 per share, for twenty consecutive
trading days, provided that respective employees remain employed by the Company
through such vesting date. If the vesting condition is not met on or before
December 31, 2010, the second anniversary of the date of grant, no units shall
vest and the restricted stock unit awards shall terminate. In addition, the
restricted stock units will be fully vested upon the occurrence of
change-in-control of the Company prior to December 31, 2010.  At
December 31, 2009, less than 0.1 million shares remain available for issuance
under the 2006 Omnibus Incentive Compensation Plan.





The fair
value of restricted stock awarded for the years ended December 31, 2009 and
December 31, 2008 totaled $0.5 million and $0.8 million, respectively, and were
calculated using the value of Fortress’ common stock on the grant date. The
value of awards are being amortized over the restriction lapse periods of the
awards taking into account the effect of an estimated forfeiture rate of 6%
associated with termination behavior. For the years ended December 31, 2009 and
December 31, 2008, the Company recognized non-cash compensation associated with
restricted stock of $2.2 million and $2.0 million, respectively, of which $0.4
million was included in cost of sales.  As of December 31, 2009, the
total compensation cost related to unvested restricted stock or restricted stock
not yet recognized was approximately $0.6 million with a weighted average
remaining vest life of 1.1 years.


F-14


FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
changes in restricted stock and restricted stock units are shown in the
following table:





WeightedAverageGrant DateNumber
                      
                      
                      Fair ValueUnvested
      December 31, 2007
                      
                      
                      240,000
                      
                      
                      $
                      5.47Granted
      restricted stock and units
                      
                      
                      512,000
                      
                      
                      
                      1.53Vested
      restricted stock
                      
                      
                      (83,333
                      )
                      
                      
                      5.15Unvested
      December 31, 2008
                      
                      
                      668,667
                      
                      
                      $
                      2.49Granted
      restricted stock and units
                      
                      
                      638,764
                      
                      
                      
                      0.77Vested
      restricted stock
                      
                      
                      (345,665
                      )
                      
                      
                      2.98Forfeitures
                      
                      
                      (36,166
                      )
                      
                      
                      1.75Unvested
      December 31, 2009
                      
                      
                      925,600
                      
                      
                      $
                      1.15





401(k)
Plan





The
Company and its subsidiaries offer their qualified employees the opportunity to
participate in a defined contribution retirement plan qualifying under the
provisions of Section 401(k) of the Internal Revenue Code (“401(k) Plan”). Each
employee is eligible to contribute, on a tax deferred basis, a portion of annual
earnings generally not to exceed $15,500 in 2009 and 2008. From January 1, 2008
through August 26, 2008, the Company matched 50% of employee contributions up to
6% of eligible earnings or applicable regulatory limits. As part of cost
reduction efforts effected on August 26, 2008, the Company reduced its matching
contribution to 50% of employee contribution up to 3% of eligible earnings or
applicable regulatory limits, and effective July 1, 2009 the match was
eliminated in its entirety. The Company made 401(k) Plan matching contributions
in cash of approximately $0.1 million and $0.3 million for the years ended
December 31, 2009 and December 31, 2008, respectively.





(11)
            Common Stock
      Repurchases





During
the year ended December 31, 2009, the Company repurchased 120,673 treasury
shares with an aggregate value of $0.1 million associated with vesting
restricted stock of an employee.  During the year ended December 31,
2008, the Company repurchased 17,505 treasury shares with an aggregate value of
$0.1 million associated with vesting restricted stock of an
employee.  Per terms of the restricted stock agreements, the Company
paid the employee’s related taxes associated with the employee’s 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.





(12)
            Options to
      Purchase Units andWarrants





At
December 31, 2009, there were outstanding options to purchase units to purchase
700,000 common shares.  As part of the underwriter’s fee associated
with our IPO, Sunrise Securities Corporation received an option to purchase
700,000 units at an offering price of $7.50 per share.  Units were
convertible to one share of common stock and two warrants, each warrant
convertible to one share of common stock at an exercise price of
$6.25.  The option to purchase units has a cashless exercise feature,
whereby the holder may elect to receive a net amount of shares and forego the
payment of the strike price. The units set to expire July 11, 2010.





At
December 31, 2008, there were outstanding options to purchase units and warrants
to purchase 17,810,300 common shares. On July 13, 2009, outstanding warrants,
including those attached to the option to purchase units, totaling an aggregate
of 17,110,300 shares expired.





(13)
            Preferred
      Stock





The
Company is authorized to issue 1,000,000 shares of preferred stock with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors.


F-15




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




(14)
                Income
      Taxes


Income
taxes are recognized for the amount of taxes payable or refundable for the
current year and deferred tax liabilities and assets are established for the
future tax consequences of events that have been recognized in our consolidated
financial statements or tax returns. The effects of income taxes are measured
based on enacted tax laws and rates.





The
provision (benefit) for income taxes from continuing operations consists of the
following:




For the Year EndedDecember 31,2009
                    
                    
                    2008Current:Federal
                    
                    $
                    -
                    
                    
                    $
                    -State
                    
                    
                    -
                    
                    
                    
                    65,611Deferred:Federal
                    
                    
                    (6,311,583
                    )
                    
                    
                    (6,417,646
                    )State
                    
                    
                    (896,495
                    )
                    
                    
                    (970,138
                    )Total
      provision (benefit) for income taxes before valuation
      allowance
                    
                    $
                    (7,208,078
                    )
                    
                    $
                    (7,387,784
                    )Change
      in valuation allowance
                    
                    
                    7,208,078
                    
                    
                    
                    7,387,784Total
      provision (benefit) for income taxes
                    
                    $
                    -
                    
                    
                    $
                    65,611





The
significant components of the Company’s deferred tax assets and liabilities are
as follows:





December
      31,Gross
      curent deferred taxes:
                          
                          2009
                          
                          
                          2008Deferred
      tax assets:Accrued
      expenses
                          
                          
                          328,433
                          
                          
                          
                          300,227Gross
      current deferred tax assets before valuation allowance
                          
                          
                          328,433
                          
                          
                          
                          300,227Valuation
      allowance
                          
                          
                          (317,725
                          )
                          
                          
                          (183,998
                          )Gross
      current deferred tax assets
                          
                          $
                          10,708
                          
                          
                          $
                          116,229Deferred
      tax liabilities:Prepaid
      expenses
                          
                          
                          (10,708
                          )
                          
                          
                          (116,229
                          )Deferred
      current tax liabilities
                          
                          
                          (10,708
                          )
                          
                          
                          (116,229
                          )Net
      current deferred taxes
                          
                          
                          -
                          
                          
                          
                          -Non-current
      deferred taxes:Deferred
      tax assets:Net
      operating loss carryover
                          
                          $
                          7,034,230
                          
                          
                          $
                          2,881,715Goodwill
      and other intangibles
                          
                          $
                          8,128,956
                          
                          
                          $
                          5,317,834Deferred
      compensation
                          
                          
                          1,003,019
                          
                          
                          
                          937,714Depreciation
                          
                          
                          141,365
                          
                          
                          
                          97,536Other
      carryovers and credits
                          
                          
                          16,552
                          
                          
                          
                          14,969Gross
      non-current deferred tax assets before valuation allowance
                          
                          
                          16,324,122
                          
                          
                          
                          9,249,768Valuation
      allowance
                          
                          
                          (16,324,122
                          )
                          
                          
                          (9,249,768
                          )Gross
      non-current deferred tax assets
                          
                          
                          -
                          
                          
                          
                          -Deferred
      tax liabilities:Amortization
      of goodwill and other
                          
                          
                          -
                          
                          
                          
                          -Deferred
      non-current tax liabilities
                          
                          
                          -
                          
                          
                          
                          -Net
      non-current deferred taxes
                          
                          $
                          -
                          
                          
                          $
                          -





At
December 31, 2009 and 2008, the Company had net operating loss totaling $17.6
million and $7.0 million, respectively, to be carried forward 20 years to offset
future taxable income. At December 31, 2009 and 2008, the Company has recorded a
deferred tax asset and corresponding valuation allowance of $7.0 million and
$2.9 million, respectively, reflecting the federal and state benefit of the
remaining loss carryforwards.





The
Company does not believe its net operating loss will be limited under Internal
Revenue Code (IRC) Section 382 and believes it will also be available for state
income tax purposes subject to state carryforward limitations.  IRC
382 limits the utilization of net operating loss in years subsequent to an owner
shift based upon the value of the Company at the date of the owner
shift.  The Company has not undertaken a detailed study in connection
with 382 in order to determine if there is any limitation of the utilization of
its net operating loss carryforward.  If IRC Section 382 limitation
were deemed to apply, the Company’s gross deferred tax asset and it’s
corresponding valuation allowance could be reduced.





The
Company’s provision for income taxes reflects the establishment of a full
valuation allowance against deferred tax assets as of December 31, 2009. SFAS
No. 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.





At
December 31, 2009 and 2008, the Company has established a full valuation
allowance with respect to these federal and state loss carryforwards and other
net deferred tax assets due to uncertainties surrounding their realization. The
Company believes that it is more likely than not that the benefit of the net
deferred tax assets will not be fully realized based on the Company’s current
year loss and estimated future taxable income.


F-16


FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
carryforward loss has not resulted in a fully reported tax benefit because of an
offsetting valuation allowance for deferred tax assets that results from the
inability to determine the realizability of those assets.





In
determining the Company’s provision (benefit) for income taxes, net deferred tax
assets, liabilities and valuation allowances, management is required to make
judgments and estimates related to projections of profitability, the timing and
extent of the utilization of net operating loss carryforwards and applicable tax
rates. Judgments and estimates related to the Company’s projections and
assumptions are inherently uncertain; therefore, actual results could differ
materially from the projections.





The
Company has recorded a gross deferred tax asset in connection with the prior
grants of restricted stock to employees and directors.  Subsequent to
the grant of this stock the value has declined which could result in the
reduction in the related deferred tax asset in the future.  At
December 31, 2009, the Company has recorded a full valuation allowance against
these deferred tax assets.





On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainties in Income taxes” (“FIN 48”). The Company has
analyzed its current tax reporting compliance positions for all open years, and
has determined that it does not have any material unrecognized tax benefits.
Accordingly, the Company has omitted the tabular reconciliation schedule of
unrecognized tax benefits. The Company does not expect a material change in
unrecognized tax benefits over the next 12 months. All of the Company’s prior
tax federal, Maryland and Virginia filings from the 2006 tax year forward remain
open under statutes of limitation.  Innovative Power System Inc.’s
statutes of limitation are open from the 2006 tax year forward for both federal
and Virginia purposes.  Quality Power Systems Inc.’s statutes of
limitation are open from the 2006 tax year forward for both federal and Virginia
purposes.   SMLB’s statutes of limitation are open from the 2006
tax year for both federal and Illinois purposes.





The total
provision for income taxes differs from that amount which would be computed by
applying the U.S. federal income tax rate to income before provision for income
taxes due to the following:




For the YearEnded Decemeber 31,2009
                    
                    
                    2008Federal
      statutory rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %State
      tax, net of income tax benefit
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %Effect
      of permanent differences
                    
                    
                    2.0
                    %
                    
                    
                    (14.0
                    )%Effect
      of valuation allowance
                    
                    
                    (-36.0
                    )%
                    
                    
                    (-20.0
                    )%Total
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %


F-17


FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





(15)
            Related
      Party Transactions





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





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





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





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





CTS Services, LLC (CTS) is 9%
owned by the Company’s Chief Executive Officer. CTS is a mechanical contractor
that acts as a subcontractor to the Company for certain projects. In addition,
CTS utilizes the Company as a subcontractor on projects as needed. On April 1,
2009, the Company’s Chief Executive Officer sold 46% of his interest in CTS,
reducing his ownership to 9%.





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





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





TPR Group Re Three, LLC As of
November 1, 2006, TPR Group Re Three, LLC (TPR Group Re Three) is 50% 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 Company had an independent valuation, which determined
the lease to be at fair value.





Chesapeake Tower Systems, LLC
As of September 30, 2009, Chesapeake Tower Systems, LLC (Chesapeake) is owned
100% by the Company’s Chief Executive Officer.  During the second
quarter 2009 and concurrent with an expiring leased facility, the Company
entered into a new lease for approximately 25,000 square feet of combined office
and warehouse space from Chesapeake.  The lease commitment is for five
years (Initial Term) with a two-year renewal option (Renewal
Term).  During the Initial Term, annual rent is $124,000, plus
operating expenses.  If the Company elects to extend the lease, annual
rent increases by  the greater of i) fair market rental as defined in
the agreement, or ii) 3% increase in each year of the Renewal
Term.  Additionally, Chesapeake provided $150,000 for tenant
improvements and relocation costs.  The Company completed an
independent appraisal, which determined the lease to be at fair
value.


F-18





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





Twelve Months
                                      
                                      
                                      Twelve MonthsEnded
                                      
                                      
                                      EndedDecember 31, 2009
                                      
                                      
                                      December 31, 2008RevenueCTS
      Services, LLC
                                      
                                      $
                                      40,519
                                      
                                      
                                      $
                                      203,681Chesapeake
      Mission Critical, LLC
                                      
                                      
                                      179,320
                                      
                                      
                                      
                                      77,485Telco
      P&C, LLC
                                      
                                      
                                      218,621
                                      
                                      
                                      
                                      -Chesapeake
      Systems, LLC
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,410S3
      Integration, LLC
                                      
                                      
                                      -
                                      
                                      
                                      
                                      7,667Total
                                      
                                      $
                                      438,460
                                      
                                      
                                      $
                                      291,243Cost
      of RevenueCTS
      Services, LLC
                                      
                                      $
                                      1,888,139
                                      
                                      
                                      $
                                      3,078,257Chesapeake
      Systems, LLC
                                      
                                      
                                      -
                                      
                                      
                                      
                                      147,931Chesapeake
      Mission Critical, LLC
                                      
                                      
                                      422,966
                                      
                                      
                                      
                                      97,291S3
      Integration, LLC
                                      
                                      
                                      379,400
                                      
                                      
                                      
                                      206,530LH
      Cranston & Sons, Inc.
                                      
                                      
                                      118,099
                                      
                                      
                                      
                                      263,600Telco
      P&C, LLC
                                      
                                      
                                      118,843
                                      
                                      
                                      
                                      395,964Total
                                      
                                      $
                                      2,927,447
                                      
                                      
                                      $
                                      4,189,573Selling,
      general and administrativeOffice
      rent paid to TPR Group Re Three, LLC
                                      
                                      
                                      403,707
                                      
                                      
                                      
                                      394,440Office
      rent paid to Chesapeake Tower Systems, LLC
                                      
                                      
                                      219,905
                                      
                                      
                                      
                                      257,825Total
                                      
                                      $
                                      623,612
                                      
                                      
                                      $
                                      652,265December
      31,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008Accounts
      receivable/(payable):CTS
      Services, LLC
                                      
                                      $
                                      104,065
                                      
                                      
                                      $
                                      50,437CTS
      Services, LLC
                                      
                                      
                                      (104,528
                                      )
                                      
                                      
                                      (584,460
                                      )Chesapeake
      Mission Critical, LLC
                                      
                                      
                                      2,000
                                      
                                      
                                      
                                      15,900Chesapeake
      Mission Critical, LLC
                                      
                                      
                                      (124,425
                                      )
                                      
                                      
                                      -Telco
      P&C, LLC
                                      
                                      
                                      39,813
                                      
                                      
                                      
                                      -Telco
      P&C, LLC
                                      
                                      
                                      (52,373
                                      )
                                      
                                      
                                      (21,154
                                      )LH
      Cranston & Sons, Inc.
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (67,455
                                      )S3
      Integration, LLC
                                      
                                      
                                      (3,425
                                      )
                                      
                                      
                                      (53,630
                                      )Total
      accounts receivable
                                      
                                      $
                                      145,878
                                      
                                      
                                      $
                                      66,337Total
      accounts (payable)
                                      
                                      $
                                      (284,751
                                      )
                                      
                                      $
                                      (726,699
                                      )


F-19


FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




(16)
            Commitments,
      Contingencies and Other





A)
            Summary





The
following table provides information regarding our contractual obligations and
commercial commitments as of December 31, 2009.




Payments Due by PeriodTotal
                            
                            
                            2010
                            
                            
                            2011
                            
                            
                            2012
                            
                            
                            2013
                            
                            
                            2014Long-term
      debt
                            
                            
                            5,229,043
                            
                            
                            
                            1,781,851
                            
                            
                            
                            392,210
                            
                            
                            
                            483,292
                            
                            
                            
                            589,125
                            
                            
                            
                            1,982,565Operating
      leases
                            
                            
                            1,788,194
                            
                            
                            
                            753,942
                            
                            
                            
                            678,455
                            
                            
                            
                            180,136
                            
                            
                            
                            123,996
                            
                            
                            
                            51,665Operating
      subleases
                            
                            
                            (125,895
                            )
                            
                            
                            (65,945
                            )
                            
                            
                            (59,950
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Contractual
      purchase commitments
                            
                            
                            21,211,916
                            
                            
                            
                            21,211,916
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Total
                            
                            $
                            28,103,257
                            
                            
                            $
                            23,681,763
                            
                            
                            $
                            1,010,715
                            
                            
                            $
                            663,428
                            
                            
                            $
                            713,121
                            
                            
                            $
                            2,034,230





B)
            Operating
      Leases





Under
operating leases, the Company leases certain facilities, equipment and vehicles
for use in its operations. Total rent expense was $0.9 million and $1.2 million
for the years ended December 31, 2009 and December 31, 2008,
respectively.





C)
            Operating
      Subleases





Under
operating subleases, the Company has sublet certain facilities as result of
downsizing and cost reduction efforts. As these sublets were executed late in
December 2009, no rental income was recorded for the year ended December 31,
2009 and 2008.





D)
            Legal
      Matters





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




F)
              Contractual
      Purchase Commitments


Contractual
purchase commitments represent subcontracts and purchase orders entered into
with trade subcontractors and equipment suppliers, as the Company performs under
its customer contracts.





E)
            Employment
      Agreements





On
January 19, 2007, the Company entered into employment agreements with our
Vice-Chairman (Mr. Weiss), Chief Executive Officer and President and a
consulting agreement (the agreements) with an entity controlled by the
Vice-Chairman (Mr. McMillen). In August 2007, the Company entered into an
employment agreement with its Chief Financial Officer. The employment agreements
were filed as part of a current report on Form 8-K on January 25, 2007 and on
August 8, 2007, respectively. The agreements specify annual salary, benefits and
incentive compensation for the terms of the agreement.  The agreements
also provide for twelve months salary if the employee or consultant is
terminated other than for cause.





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





On August
26, 2008, the aforementioned agreements were amended to reduce the individuals’
respective compensation and bonuses.  While we did not reduce the
total amount of the consulting agreements with our Vice Chairmen term, but we
did extend the term and as such reduced the required monthly
payments.  The amended agreements were filed as part of a current
report on Form 10-Q on November 14, 2008.





The
agreements with the Chief Executive Officer and President also provided a share
performance bonus plan.  The bonus plan expired on July 13, 2008,
without any shares being earned and issued.





On August
20, 2009, the aforementioned agreements were amended to reduce annual
compensation paid to Mr. Rosato, Mr. Gallagher, and Mr. Dec to $150,000 per
individual.  The amended agreements were filed as part of a current
report on Form 8-K on August 24, 2009.


F-20




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




(17)   Unaudited Quarterly Financial
Data




2009QuarterEnded
                    
                    December31,
                    
                    
                    September30,
                    
                    
                    June30,
                    
                    
                    March31,Revenue
                    
                    $
                    9,012,657
                    
                    
                    $
                    10,093,152
                    
                    
                    $
                    12,087,200
                    
                    
                    $
                    16,918,421Net
      loss from continuing operations, net of tax
                    
                    
                    (743,157
                    )
                    
                    
                    (627,449
                    )
                    
                    
                    (13,575,215
                    )
                    
                    
                    (1,257,517
                    )Discontinued
      operations
                    
                    
                    (278,639
                    )
                    
                    
                    640,366
                    
                    
                    
                    (3,192,460
                    )
                    
                    
                    240,919Net
      loss
                    
                    
                    (1,021,796
                    )
                    
                    
                    12,917
                    
                    
                    
                    (16,767,675
                    )
                    
                    
                    (1,016,598
                    )Basic
      and Diluted net loss per share:Net
      loss from continuing operations, net of tax
                    
                    
                    (0.06
                    )
                    
                    
                    (0.05
                    )
                    
                    
                    (1.07
                    )
                    
                    
                    (0.10
                    )Net
      loss from discontinued operations, net of tax
                    
                    
                    (0.02
                    )
                    
                    
                    0.05
                    
                    
                    
                    (0.25
                    )
                    
                    
                    0.02Net
      loss
                    
                    
                    (0.08
                    )
                    
                    
                    0.00
                    
                    
                    
                    (1.32
                    )
                    
                    
                    (0.08
                    )
 
 2008 Quarter Ended
                    
                    December 31,
                    
                    
                    September 30,
                    
                    
                    June 30,
                    
                    
                    March 31,Revenue
                    
                    $
                    26,499,095
                    
                    
                    $
                    25,930,166
                    
                    
                    $
                    18,575,627
                    
                    
                    $
                    15,669,268Net
      loss from continuing operations, net of tax
                    
                    
                    (18,064,309
                    )
                    
                    
                    (2,248,245
                    )
                    
                    
                    (4,983,496
                    )
                    
                    
                    (2,696,537
                    )Discontinued
      operations
                    
                    
                    (3,357,480
                    )
                    
                    
                    (969,673
                    )
                    
                    
                    (1,010,822
                    )
                    
                    
                    396,337Net
      loss
                    
                    
                    (21,421,789
                    )
                    
                    
                    (3,217,918
                    )
                    
                    
                    (5,994,318
                    )
                    
                    
                    (2,300,200
                    )Basic
      and Diluted net loss per share:Net
      loss from continuing operations, net of tax
                    
                    
                    (1.43
                    )
                    
                    
                    (0.18
                    )
                    
                    
                    (0.41
                    )
                    
                    
                    (0.22
                    )Net
      loss from discontinued operations, net of tax
                    
                    
                    (0.27
                    )
                    
                    
                    (0.08
                    )
                    
                    
                    (0.08
                    )
                    
                    
                    0.03Net
      loss
                    
                    
                    (1.70
                    )
                    
                    
                    (0.26
                    )
                    
                    
                    (0.50
                    )
                    
                    
                    (0.19
                    )





Loss per
share was calculated for each three-month period on a stand-alone basis. As a
result of stock transactions during the periods, the sum of the loss per share
for the four quarters of each year may not equal the loss per share for the
twelve month periods.




(18)   Subsequent Events




On
February 28, 2010, Mr. Gallagher, our COO, entered into an agreement to convert
$1.3 million of his note balance and to further amend the promissory note terms
to reduce the interest rate to 4% and extend the term of principal maturities on
the remaining balance of $2.8 million (see Note 9).





On
February 25, 2010, the Board of Directors of the Company approved an increase to
$200,000, effective September 1, 2010, in the annual base salary of Mr. Rosato,
our Chief Executive Officer, and an increase to $200,000, effective March 1,
2010, in the annual base salary of Mr. Timothy C. Dec, the Company’s Chief
Financial Officer.  On February 28, 2010 Mr. Gallagher’s employment
agreement was amended to provide for an increase in Mr. Gallagher’s base salary
to $200,000, effective September 1, 2010. The amended agreements were filed as
part of a current report on Form 8-K on March 12, 2009.




F-21




Item 9.
            CHANGES IN AND DISAGREEMENTS WITH
      ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
  DISCLOSURE





None.





Item
9A(T).
            CONTROLS AND
      PROCEDURES




Disclosure
Controls and Procedures




As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s “disclosure controls and procedures” (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)). Based upon this evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that the Company’s
disclosure controls and procedures were ineffective at that time for the purpose
of ensuring that information required to be disclosed by the Company in reports
filed with the SEC under the Exchange Act is (1) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms
and  (2) is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.





Management’s
Annual Report on Internal Control Over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal controls over
financial reporting for the Company.  Internal control over financial
reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the
Exchange Act as a process designed by, or under the supervision of, the
Company’s principal executive and principal financial officers and effected by
the Company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:





•
            Pertain to the maintenance of
      records that in reasonable detail accurately and fairly reflect the
      transactions and dispositions of the assets of the
      company;





•
            Provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance with generally accepted accounting principles,
      and that receipts and expenditures of the company are being made only in
      accordance with authorizations of management and directors of the company;
      and





•
            Provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use
      or disposition of the company’s assets that could have a material effect
      on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failure. Internal control over financial reporting can also be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.





The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009. In making this assessment, the
Company’s management used the criteria set forth by the Committee of Sponsoring
Organizations (“COSO”) of the Treadway Commission’s Internal Control-Integrated
Framework.





As a
result of this assessment, we have determined that our internal control over
financial reporting was ineffective as of December 31, 2009.  We had
neither the resources, nor the personnel, to provide an adequate control
environment.  The following material weaknesses in our internal
control over financial reporting existed at December 31, 2009:  (i) we
did not have the ability to segregate duties due to resource limitations; (ii)
we lacked formal documentation of policies and procedures that were in place;
and (iii) controls are inadequate to reasonably assume compliance with generally
accepted accounting principles related to revenue.





Attestation
Report of the Independent Registered Public Accounting Firm




This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management’s report in this Annual Report on Form 10-K. We will be
required, however, to provide the attestation report in our annual report for
the fiscal year ending December 31, 2010.





Changes
in Internal Control Over Financial Reporting




We had
begun to address the material internal control weaknesses summarized above
beginning in the first quarter of 2008, with the goal of eliminating such
deficiencies by 2009.  During 2010 we will address the remaining
material weaknesses identified as of December 31, 2009.  We plan to
continue working with a certified public accounting firm to assist us in our
documentation and testing of internal controls over financial reporting in
2010.




43




Item 9B.
            OTHER
      INFORMATION




None.




PART
III





Item 10.
            DIRECTORS, EXECUTIVE OFFICERS AND
      CORPORATE GOVERNANCE





Information
required by this item regarding our directors, executive officers and corporate
governance matters may be found in Fortress International Group, Inc.’s Proxy
Statement relating to our 2010 Annual Meeting of Stockholders (the “2010 Proxy
Statement”) and is incorporated herein by reference. Information relating to
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, may be found under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the 2010 Proxy Statement and is incorporated herein by
reference.





Item 11.
            EXECUTIVE
      COMPENSATION




The
information required by this item is included under the captions “Compensation
Discussion and Analysis,” “Executive Officer and Director Compensation” and
“Compensation Committee Report” in the 2010 Proxy Statement and incorporated
herein by reference.





Item 12.
            SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS




The
information required by this item is included under the caption “Security
Ownership of Certain Beneficial Owners and Management” in the 2010 Proxy
Statement and is incorporated herein by reference.





Item 13.
            CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





The
information required by this item is included under the captions “Certain
Relationships and Related Transactions” and “Director Independence” in the 2010
Proxy Statement and is incorporated herein by reference





Item 14.
            PRINCIPAL ACCOUNTING FEES AND
      SERVICES





The
information required by this item is included under the caption “Independent
Public Accountants” in the 2010 Proxy Statement and is incorporated herein by
reference.




44




PART
IV





Item
      15.
            EXHIBITS,
      FINANCIAL STATEMENTS
SCHEDULES





(a)(1).
  Financial
Statements:





We have
filed the following documents as part of this Annual Report on Form
10-K:




PageConsolidated Financial
      Statements:Reports
      of Independent Registered Public Accounting Firm
                
                
                F-1Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                
                
                F-2Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      2008
                
                
                F-3Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2008
      and 2007
                
                
                F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007
                
                
                F-5Notes
      to Consolidated Financial Statements
                
                
                F-6




(a)(2). Financial
Statements Schedules:




Schedule II—Valuation
and Qualifying Accounts for fiscal years ended December 31, 2009 and 2008





Balance at
                  
                  
                  
                  
                  
                  
                  
                  
                  Balance atBeginning
                  
                  
                  
                  
                  
                  
                  
                  
                  End ofof Period
                  
                  
                  Additions
                  
                  
                  Deductions
                  
                  
                  Period2009Allowance
      for doubtful accounts
                  
                  $
                  (150,000
                  )
                  
                  $
                  (346,707
                  )
                  
                  $
                  -
                  
                  
                  $
                  (496,707
                  )Allowance
      for unrealizable deferred tax assets
                  
                  
                  (9,428,023
                  )
                  
                  
                  (7,204,718
                  )
                  
                  
                  -
                  
                  
                  
                  (16,632,741
                  )2008Allowance
      for doubtful accounts
                  
                  $
                  (65,000
                  )
                  
                  $
                  (95,000
                  )
                  
                  $
                  10,000
                  
                  
                  $
                  (150,000
                  )Allowance
      for unrealizable deferred tax assets
                  
                  
                  (2,040,239
                  )
                  
                  
                  (7,387,784
                  )
                  
                  
                  -
                  
                  
                  
                  (9,428,023
                  )




45


(a)(3).   Index to
Exhibits:




Exhibit
              Number
            
            Description3.1
            
            Second
      Amended and Restated Certificate of Incorporation dated January 19,
      2007 (previously filed with the Commission as Exhibit 3.1 to the Current
      Report on Form 8-K filed on January 25, 2007 and incorporated herein
      by reference)3.1.1
            
            Amendment
      to the Second Amended and Restated Certificate of Incorporation
      (previously filed with the Commission as Exhibit A-1 to the Company’s
      Definitive Proxy Statement filed on May 22, 2007 and incorporated herein
      by reference)3.2
            
            Amended
      and Restated By-laws (previously filed with the Commission as Exhibit 4.2
      to the Company’s Registration Statement on Form S-8 No. 333-142906, filed
      on May 14, 2007 and incorporated herein by reference)4.1
            
            Specimen
      Unit Certificate (previously filed with the Commission as Exhibit 4.1 to
      the Company’s Registration Statement on Form S-1 No. 333-123504, effective
      July 13, 2005 and incorporated herein by
reference)4.2
            
            Specimen
      Common Stock Certificate (previously filed with the Commission as Exhibit
      4.2 to the Company’s Registration Statement on Form S-1 No. 333-123504,
      effective July 13, 2005 and incorporated herein by
      reference)4.3
            
            Specimen
      Warrant Certificate (previously filed with the Commission as Exhibit 4.3
      to the Company’s Registration Statement on Form S-1 No. 333-123504,
      effective July 13, 2005 and incorporated herein by
      reference)4.4
            
            Warrant
      Agreement between Continental Stock Transfer & Trust Company and the
      Company (previously filed with the Commission as Exhibit 4.4 to the
      Company’s Annual Report on Form 10-KSB for the year ended
      December 31, 2005 and incorporated herein by
    reference)4.4.1
            
            Warrant
      Clarification Agreement between Continental Stock Transfer & Trust
      Company and the Company (previously filed with the Commission as Exhibit
      4.5 to the Company’s Quarterly Report on Form 10-QSB for the quarterly
      period ended September 30, 2006 and incorporated herein by
      reference)4.4.2
            
            Warrant
      Clarification Agreement No. 2 between Continental Stock Transfer &
      Trust Company and the Company (previously filed with the Commission as
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December
      14, 2006 and incorporated herein by reference)4.5
            
            Unit
      Purchase Option (previously filed with the Commission as Exhibit 4.5 to
      the Company’s Annual Report on Form 10-KSB for the year ended
      December 31, 2005 and incorporated herein by
    reference)4.5.1
            
            Amendment
      to Unit Purchase Option (previously filed with the Commission as Exhibit
      4.6 to the Company’s Quarterly Report on Form 10-QSB for the quarterly
      period ended September 30, 2006 and incorporated herein by
      reference)4.5.2
            
            Amendment
      No. 2 to Unit Purchase Option (previously filed with the Commission as
      Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December
      14, 2006 and incorporated herein by reference)10.1
            
            Second
      Amended and Restated Membership Interest Purchase Agreement dated
      July 31, 2006 among Fortress America Acquisition Corporation, VTC,
      L.L.C., Vortech, L.L.C., Thomas P. Rosato and Gerard J. Gallagher, and
      Thomas P. Rosato as Members’ Representative (previously filed with the
      Commission as Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-QSB for the quarterly period ended September 30, 2006 and incorporated
      herein by reference)10.2
            
            Amendment
      to the Second Amended and Restated Membership Interest Purchase Agreement
      dated January 16, 2007 among Fortress America Acquisition
      Corporation, VTC, L.L.C., Vortech, L.L.C., Thomas P. Rosato and Gerard J.
      Gallagher, and Thomas P. Rosato as Members’ Representative (previously
      filed with the Commission as Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed on January 19, 2007 and incorporated herein by
      reference)10.3
            
            Registration
      Rights Agreement among Fortress America Acquisition Corporation and Thomas
      P. Rosato and Gerard J. Gallagher (previously filed with the Commission as
      Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on
      January 25, 2007 and incorporated herein by
  reference)10.4
            
            Fortress
      America Acquisition Corporation 2006 Omnibus Incentive Compensation Plan
      (previously filed with the Commission as Exhibit E to the Company’s
      Definitive Proxy Statement filed on December 27, 2006 and incorporated
      herein by reference)




46




Exhibit
              Number
            
            Description10.5‡
            
            Employment
      Agreement between Harvey L. Weiss and the Company, dated January 19,
      2007 (previously filed with the Commission as Exhibit 10.7 to the
      Company’s Current Report on Form 8-K filed on January 25, 2007 and
      incorporated herein by reference), as amended by Amendment No. 1, dated
      August 26, 2008 (previously filed with the Commission as Exhibit 10.3 to
      the Company’s Quarterly Report on Form 10-Q filed on November 14, 2008 and
      incorporated herein by reference)10.6‡
            
            Executive
      Consulting Agreement dated January 19, 2007 by Fortress America
      Acquisition Corporation and Washington Capital Advisors, Inc. (previously
      filed with the Commission as Exhibit 10.8 to the Company’s Current Report
      on Form 8-K filed on January 25, 2007 and incorporated herein by
      reference), as amended by Amendment No. 1, dated August 26, 2008
      (previously filed with the Commission as Exhibit 10.5 to the Company’s
      Quarterly Report on Form 10-Q filed on November 14, 2008 and incorporated
      herein by reference)10.7‡
            
            Executive
      Employment Agreement dated January 19, 2007 by Fortress America
      Acquisition Corporation and Thomas P. Rosato (previously filed with the
      Commission as Exhibit 10.9 to the Company’s Current Report on Form 8-K
      filed on January 25, 2007 and incorporated herein by reference), as
      amended by Amendment No. 1, dated August 26, 2008(previously filed with
      the Commission as Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-Q filed on November 14, 2008 and incorporated herein by
      reference)10.8‡
            
            Executive
      Employment Agreement dated January 19, 2007 by Fortress America
      Acquisition Corporation and Gerard J. Gallagher (previously filed with the
      Commission as Exhibit 10.10 to the Company’s Current Report on Form 8-K
      filed on January 25, 2007 and incorporated herein by reference), as
      amended by Amendment No. 1, dated August 26, 2008 (previously filed with
      the Commission as Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-Q filed on November 14, 2008 and incorporated herein by
      reference)10.9
            
            Form
      of Restricted Stock Agreement (Employees Only) (previously filed with the
      Commission as Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed on May 21, 2007 and incorporated herein by
      reference)10.10
            
            Form
      of Restricted Stock Unit Agreement (previously filed with the Commission
      as Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed on
      March 31, 2009 and incorporated herein by reference)10.11‡
            
            Executive
      Employment Agreement, dated as of August 6, 2007, between Fortress
      International Group, Inc. and Timothy C. Dec (previously filed with the
      Commission as Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on August 8, 2007 and incorporated herein by reference), as amended
      by Amendment No. 1, dated August 26, 2008 (previously filed with the
      Commission as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q
      filed on November 14, 2008 and incorporated herein by
      reference)10.12
            
            Stock
      Purchase Agreement, dated September 24, 2007, between Innovative Power
      Systems Inc., the Stockholders of Innovative Power Systems Inc., Quality
      Power Systems, Inc., the Stockholders of Quality Power Systems, Inc., and
      the Company (previously filed with the Commission as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed on September 27, 2007 and
      incorporated herein by reference)10.13†
            
            Membership
      Interest Purchase Agreement, dated November 30, 2007, between Rubicon
      Integration, LLC, each of the members of Rubicon and the Company
      (previously filed with the Commission as Exhibit 10.29 to the Company’s
      Annual Report on Form 10-K filed on March 31, 2008 and incorporated herein
      by reference)10.14
            
            Stock
      Purchase Agreement by and among SMLB, Ltd, the Stockholders of SMLB, Ltd,
      and the Company dated January 2, 2008 (previously filed with the
      Commission as Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on January 1, 2008 and incorporated herein by
    reference)10.15
            
            Convertible
      Promissory Note, dated January 19, 2007, issued by the Company to Gerard
      J. Gallagher (previously filed with the Commission as Exhibit 99.3 to the
      Schedule 13D filed by Gerard J. Gallagher on January 29,
    2007)10.15.1
            
            Amendment
      to Convertible Promissory Note, effective as of February 28, 2010, between
      the Company and Gerard J. Gallagher (previously filed with the Commission
      as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on March
      1, 2010 and incorporated herein by reference)10.16
            
            Letter
      Agreement, dated February 28, 2010, between the Company and Gerard J.
      Gallagher ((previously filed with the Commission as Exhibit 99.1 to the
      Company’s Current Report on Form 8-K filed on March 1, 2010 and
      incorporated herein by reference).10.17
            
            Amendment
      to Executive Employment Agreement, effective as of February 28, 2010,
      between the Company and Gerard J. Gallagher (previously filed with the
      Commission as Exhibit 99.3 to the Company’s Current Report on Form 8-K
      filed on March 1, 2010 and incorporated herein by
    reference)10.18
            
            Asset
      Purchase Agreement, dated December 21, 2009, by and among Rubicon
      Integration, LLC, the Company, and Rubicon Acquisition Company, LLC
      (previously filed with the Commission as Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed on December 22, 2009 and incorporated
      herein by reference).21*
            
            Significant
      Subsidiaries of the Registrant23.1*
            
            Consent
      of Grant Thornton LLP regarding Fortress International Group, Inc.
      financial statements for the years ended December 31, 2009 and
      2008.31.1*
            
            Certificate
      of Fortress International Group, Inc. Principal Executive Officer pursuant
      to Section 302 of the Sarbanes-Oxley Act of 200231.2*
            
            Certificate
      of Fortress International Group, Inc. Principal Financial Officer pursuant
      to Section 302 of the Sarbanes-Oxley Act of 200232.1**
            
            Certificates
      of Fortress International Group, Inc. Principal Executive Officer and
      Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002





‡
            Management
      contract or compensatory plan or arrangement.†
            Confidential
      treatment has been requested as to certain portions, which have been filed
      separately with the Securities and Exchange Commission.*
            Filed
      herewith.**
            Furnished
      herewith.




47





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:  
      March 31,
      2010
                By:
                /s/ Thomas P.
  RosatoThomas
      P. RosatoChief
      Executive Officer(Authorized
      Officer and Principal Executive Officer)Date:  
      March 31,
      2010
                By:
                /s/ Timothy C. DecTimothy
      C. DecChief
      Financial Officer(Authorized
      Officer and Principal Financial and Accounting
                  Officer)




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated below and on the dates indicated.




Signatures
                    
                    Title
                    
                    DateName
                    
                    Position
                    
                    Date/s/ Thomas P. Rosato
                    
                    Chief
      Executive Officer and Director
                    
                    March
      31, 2010Thomas
      P. Rosato
                    
                    (Principal
      Executive Officer)/s/ Timothy C. Dec
                    
                    Chief
      Financial Officer
                    
                    March
      31, 2010Timothy
      C. Dec
                    
                    (Principal
      Financial Officer and Accounting Officer)/s/ Gerard J. Gallagher
                    
                    President
      and Director
                    
                    March
      31, 2010Gerard
      J. Gallagher/s/ Asa Hutchinson
                    
                    Director
                    
                    March
      31, 2010Asa
      Hutchinson/s/ William L. Jews
                    
                    Director
                    
                    March
      31, 2010William
      L. Jews/s/ John Morton, III
                    
                    Chairman
      and Director
                    
                    March
      31, 2010John
      Morton, III/s/ Harvey L. Weiss
                    
                    Vice
      - Chairman and Director
                    
                    March
      31, 2010Harvey
      L. Weiss




48