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, 2008





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 203
              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 MarketWarrants
      to purchase common stock, $.0001 par value per share
                      
                      
                      NASDAQ
      Capital MarketUnits,
      each consisting of one share of common stock, $.0001 par value and two
      warrants to purchase shares of common stock, $.0001 par
    value
                      
                      
                      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 o 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 o 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 o





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. o





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




Large
      accelerated filer o
                Accelerated
      filer o
                Non-accelerated
      filer o
                [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 o 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, 2008 was approximately $16,823,232 based on 7,099,680 shares held by such
non-affiliates at the closing price of a share of common stock of $2.40 as
reported on The NASDAQ Capital Market on such date.




’




Common Stock, par value $0.0001 per
share, outstanding as of March 27, 2009     12,661,716




2




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
2009 Annual Meeting of Stockholders to be filed within 120 days of the end
of the fiscal year ended December 31, 2008.




3




TABLE
OF CONTENTS




PagePART
      IItem
      1.
                        Business
                        
                        7Item
      1A.
                        Risk
      Factors
                        
                        16Item
      1B.
                        Unresolved
      Staff Comments
                        
                        26Item
      2.
                        Properties
                        
                        26Item
      3.
                        Legal
      Proceedings
                        
                        26Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        
                        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
                        
                        39Item
      8.
                        Financial
      Statements and Supplementary Data
                        
                        40Item
      9.
                        Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                        
                        41Item
      9A(T).
                        Controls
      and Procedures
                        
                        41Item
      9B.
                        Other
      Information
                        
                        42PART
      IIIItem
      10.
                        Directors,
      Executive Officers and Corporate Governance
                        
                        42Item
      11.
                        Executive
      Compensation
                        
                        42Item
      12.
                        Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                        
                        42Item
      13.
                        Certain
      Relationships and Related Transactions and Director
      Independence
                        
                        42Item
      14.
                        Principal
      Accounting Fees and Services
                        
                        42PART
      IVItem
      15.
                        Exhibits,
      Financial Statement Schedules
                        
                        43Signatures
                        
                        47




4




Unless
the context otherwise requires, when we use the words “Fortress,” ”FIGI,” “we,”
“us” or “our 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;
 
 ·
              anticipated dates on which we
      will begin providing certain services or reach specific milestones in the
      development and implementation of our business
      strategy;
 
 ·
              expectations as to our future
      revenue, margin, expenses, cash flows and capital
      requirements;
 
 ·
              expectations as to our
      materialization of our
backlog;
  ·
              our
      integration of acquired businesses;
 
 ·
              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.
  5


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:


·
              implement our strategic plan,
      including our ability to make acquisitions and the performance and future
      integration of acquired
businesses;
 
 ·
              deliver services and products
      that meet customer demands and generate acceptable
      margins;
 
 ·
              increase sales volume by
      attracting new customers, retaining existing customers and growing the
      overall number of customers to minimize a significant portion of our
      revenues being dependent on a limited number of
      customers;
 
 ·
              risks relating to revenues and
      backlog under customer contracts, many of which can be cancelled on short
      notice;
 
 ·
              manage
      and meet contractual terms of complex
projects;
 
 ·
              uncertainty related to current
      economic conditions;
 
 ·
              attract
      and retain qualified management and other
  personnel;
  ·
              demand
      for our services and products;
 
 ·
              meet
      all of the terms and conditions of our debt obligations;
    and
 
 ·
              our
      liquidity.


Any or
all of our forward-looking statements in this 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.”




6




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.





On
July 20, 2005, we closed our initial public offering of 7,000,000 units,
with each unit consisting of one share of our common stock and two warrants
(each warrant to purchase one share of our common stock at $5.00 per share). The
units were sold at an offering price of $6.00 per unit, generating gross
proceeds of $42,000,000. On August 24, 2005, we sold an additional 800,000
units pursuant to the underwriters’ over-allotment option raising additional
gross proceeds of $4,800,000.




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 geographical 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.




Our
principal executive offices are located at 7226 Lee DeForest Drive, Suite 203,
Columbia, Maryland 21046 and our telephone number is 410-423-7438. 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 http://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 203, 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.


7


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 the future, we expect to
continue our growth initiatives both internally and through potential
acquisitions of specialized mission-critical engineering or IT services firms
(primarily in the United States), subject to our abilitiy to obtain financing,
if necessary. We believe that growth-oriented strategy enables us to compete
effectively in the markets in which we operate.




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) $11,519,151 in cash,
including acquisition costs of $1,841,468 and net of cash acquired of $1,322,317
 (ii) the assumption of $154,599 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) $10,000,000 in two convertible promissory notes
of $5,000,000 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 geographical 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 paid 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.
Subject to terms and conditions outlined in the purchase agreement, the payment
is due in the second quarter of 2009.





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 $2.5 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 is scheduled for payment in the first half of 2009 per
the terms of the purchase agreement.




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, as provided elsewhere in this Annual Report, (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.


8


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 intend
to 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 as shown
below in our graphic representation of services.


9







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;


·
            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




Construction
Management/Owner’s Representation. 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




Facilities
Maintenance and Service. 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., 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.




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 at the top of the Solutions
      Path. 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.
 
 ·
              Growing
      Professional Sales Staff.To drive growth in revenues,
      we have expanded our sales staff to include account executives for
      existing and future regional sales offices. We intend to
      pursue select account executives and additional sales staff built
      around our project execution model. Each sales professional is
      responsible for achieving specific objectives and is managed
      closely.
 
 ·
              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.
  11
 
 ·
              Geographic
      Expansion and Strategic Acquisitions.We believe that expanding our
      presence in additional markets through establishing regional offices is a
      key to our future success. Our acquisitions of Comm Site, Innovative,
      Rubicon, and SMLB expand our presence in the Washington D.C. metro area,
      Boston, New York/New Jersey, Atlanta, Houston, Miami
      and Chicago.  Our acquisitions 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, we intend
      to 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.
 
 ·
              Establishing
      a National Operations Center.A significant part of our
      strategy for growth in our facilities management services business was to
      establish and maintain a National Operations Center (“NOC”) to service
      customers on a nationwide basis. 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.




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, 2008 and December 31, 2007, revenues from
guaranteed maximum price contracts represented approximately 30.1% and 19.5% of
our revenues, respectively. Most government contracts, including our contracts
with the federal government, are subject to termination by the government, to
government audits and to continued appropriations.




12




We do
have some customer concentration as we earned approximately 31% and 36% of our
total revenue from two and three customers for the year ended December 31, 2008
and 2007, 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 US
government versus perform on a subcontractor basis, we may be subject to audit
and oversight of US 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, 2008, our backlog was approximately $63.1 million, compared to
approximately $172.9 million at December 31, 2007.  In the first
quarter of 2009, discussions with our single largest customer indicated that two
projects were suspended as the customer deferred its expansion plans given the
current economic environment and credit constraints.  Although the
contract is not cancelled, based on the customer indications, we removed the two
projects totaling $144.9 million from our December 31, 2008 backlog, which
primarily accounts for the decrease in backlog from the prior year.




At
December 31, 2008, we have authorizations to proceed with work for approximately
$51.6 million, or 82% of our total backlog of $63.1 million. Additionally,
approximately $36.0 million, or 57% of our total backlog, relates to three
customers at December 31, 2008.  We estimate that approximately 90%
of our backlog will be recognized during our 2009 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.




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.





To drive
growth in revenues, we have expanded our sales staff to include regional account
executives as well as expanding our technical support group, which includes
engineers, estimators and proposal writers. We intend to continue to pursue
select sales professionals responsible for defined geographic regions in
the United States. We are pursing this regional expansion with emphasis placed
on geographic areas that have the greatest amount of local mission-critical
project potential. In conjunction with these efforts, we are expanding our
marketing program from a local to a regional and national level to support our
expanded sales efforts and increase our name recognition and market
penetration.




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.


13
  Executive
Officers




Set
forth below is information as of March 27, 2009, about our executive officers,
as determined in accordance with the rules of the SEC.




Name
                  
                  Age
                  
                  Position with the CompanyHarvey
      L. Weiss
                  
                  66
                  
                  Vice-Chairman
      of the BoardThomas
      P. Rosato
                  
                  57
                  
                  Chief
      Executive Officer and DirectorGerard
      J. Gallagher
                  
                  52
                  
                  President,
      Chief Operating Officer and DirectorTimothy
      C. Dec
                  
                  50
                  
                  Chief
      Financial Officer




Harvey L.
Weiss, age 66, has served as our Vice-Chairman of the Board since
December 2008 and prior to that he has 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 35 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 in Digital Equipment
Corporation. Mr. Weiss serves on the Board of Forterra Systems, Inc., a
simulation company, is 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.


14


Thomas P.
Rosato, age 57, became a Director and our Chief Executive Officer upon
our acquisition of TSS/Vortech on January 19, 2007. Mr. Rosato has over 25 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
Science in Accounting from Temple University.





Gerard J.
Gallagher, age 52, 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
International, 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 50, 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. Broadwing Corp was acquired by Level 3 Inc in 2007. 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, 2008, we had approximately 156 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.


15


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:




Our
financial condition and growth depends upon the successful integration of our
acquired businesses. We may not be able to efficiently and effectively integrate
acquired operations, and thus may not fully realize the anticipated benefits
from such acquisitions.




Achieving
the anticipated benefits of the acquisitions that we have completed starting in
January 2007 will depend in part upon whether we can integrate our businesses in
an efficient and effective manner.




Since
January 2007, we have acquired, in chronological order, VTC, LLC and Vortech
LLC, Comm Site of South Florida, Inc., Innovative Power Systems, Inc. and
Quality Power Systems, Inc., Rubicon Integration, LLC and in January 2008,
we acquired SMLB, Ltd. In the future, we may acquire additional businesses in
accordance with our business strategy. The integration of our acquired
businesses and any future businesses that we may acquire involves a number of
risks, including, but not limited to:





•
            demands
      on management related to the increase in our size after the
      acquisition;




•
            the
      disruption of ongoing business and the diversion of management’s attention
      from the management of daily operations to the integration of
      operations;





•
            failure
      to fully achieve expected synergies and costs
  savings;





•
            unanticipated
      impediments in the integration of departments, systems, including
      accounting systems, technologies, books and records and procedures, as
      well as in maintaining uniform standards, controls, including internal
      control over financial reporting required by the Sarbanes-Oxley Act of
      2002, procedures and policies;





•
            loss
      of customers or the failure of customers to contract for incremental
      services that we expect them to
contract;





•
            failure
      to perform services that are contracted by customers during the
      integration period;





•
            higher
      integration costs than anticipated;
and





•
            difficulties
      in the assimilation and retention of highly qualified, experienced
      employees, many of whom are geographically
  dispersed.




Successful
integration of these acquired businesses or operations will depend on our
ability to manage these operations, realize opportunities for revenue growth
presented by strengthened service offerings and expanded geographic market
coverage, obtain better terms from our vendors due to increased buying power,
and eliminate redundant and excess costs to fully realize the expected
synergies. Because of difficulties in combining geographically distant
operations and systems which may not be fully compatible, we may not be able to
achieve the financial strength and growth we anticipate from the
acquisitions.




We
cannot be certain that we will realize our anticipated benefits from our
acquisitions, or that we will be able to efficiently and effectively integrate
the acquired operations as planned. If we fail to integrate the acquired
businesses and operations efficiently and effectively or fail to realize the
benefits we anticipate, we would be likely to experience material adverse
effects on our business, financial condition, results of operations and future
prospects.


16


If
the acquisitions’ benefits do not meet the expectations of financial or industry
analysts, the market price of our common stock may decline.




The
market price of our common stock may decline as a result of our various
acquisitions if:




·
              we do not achieve the perceived
      benefits of each acquisition as rapidly as, or to the extent anticipated
      by, financial or industry analysts;
or
 
 ·
              the effect of the acquisitions on
      our financial results is not consistent with the expectations of financial
      or industry analysts.




Accordingly,
investors may experience a loss as a result of a decreasing stock
price.




The
Vice-Chairmen and one member of our Board of Directors may have conflicts of
interest that could hinder our ability to make acquisitions.




One of
our growth strategies is to make selective acquisitions of specialty engineering
and information technology/networking consulting and system integration
companies that focus on mission-critical facilities. The current Vice-Chairman
of our Board of Directors, Mr. McMillen, is the president, chief executive
officer and chairman of the board of Homeland Security Capital Corporation
(“HSCC”). HSCC has announced that its intended strategic direction is “to focus
on owning and operating small- and mid-sized growth businesses that provide
homeland security solutions through innovative technologies to both the public
and private sector and to drive growth through management, strategic guidance,
capital and financial support, and government marketing expertise.”  It is
possible that HSCC could be interested in acquiring businesses that we would
also be interested in acquiring and that these relationships could hinder our
ability to carry out our acquisition strategy.





Additionally,
our Vice-Chairman of the Board, Mr.Weiss, Vice-Chairman of the Board, Mr.
McMillen and our Director, Mr. Hutchinson, serve as the Co-Chairman of the
Board, Co-Chairman of the Board, and Director, respectively, on the Board of
Directors at Secure America Acquisition Corporation (Secure America), a blank
check Company formed for the purpose of acquiring, or acquiring control of,
through a merger, capital stock exchange, asset acquisition, stock purchase or
other similar business combination, one or more operating businesses in the
homeland security industry. It is possible that Secure America could be
interested in acquiring businesses that we would also be interested in acquiring
and that these relationships could hinder our ability to carry out our
acquisition strategy.




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.




17


We
may not have sufficient financial resources to carry out our acquisition
strategy; we may need to use our stock to fund acquisitions to a greater extent
than we originally intended.




In
January 2007, we announced a common stock repurchase program. As a result
of that program, through December 31, 2007 we had utilized $2,036,015 of cash to
purchase 379,075 shares of our common stock at an average price of $5.37 per
share. We retired 221,000 of the repurchased shares on June 13, 2007. The
repurchase program was suspended during the third quarter of 2007.  These
stock repurchases reduced the amount of cash available to fund acquisitions. As
a result, we may have to incur more debt, or issue more common stock or other
equity securities, than would otherwise have been necessary in connection with
acquisitions, and we may not have sufficient financial resources to carry out
our acquisition strategy to the extent we had initially planned, especially in
the current global economy and the credit market.




If
third parties bring claims against us or if acquired companies breached any of
its representations, warranties or covenants set forth in the purchase
agreements, we may not be adequately indemnified for any losses arising
therefrom.




Although
the purchase agreement provides that Messrs. Rosato and Gallagher will
indemnify us for losses arising from a breach of the representations, warranties
and covenants by TSS/Vortech or Messrs. Rosato and Gallagher set forth in
the purchase agreement, such indemnification is limited, in general terms, to an
aggregate amount of $5 million and claims may be asserted against
Messrs. Rosato and Gallagher only if a claim exceeds $8,000 and the
aggregate amount of all claims exceeds $175,000. In addition, with some
exceptions, the survival period for claims under the purchase agreement is
limited to the 18-month period following the closing of the acquisition. We will
be prevented from seeking indemnification for most claims above the aggregate
threshold or arising after the applicable survival period. In connection with
the Rubicon, Innovative, and SMLB  acquisitions, we are indemnified
for any losses arising from a breach of the representations, warranties, and
covenants by the sellers through the right to reduce any future contingent
consideration earned by the sellers; however, we may not be adequately
indemnified for the full value of any loses arising therefrom.


18


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 and we plan to continue acquiring
businesses if and when opportunities arise, further increasing our goodwill and
purchased intangibles amount. 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 2008, we conducted such
analyses that resulted in impairment loss on goodwill of $20.6
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 an
impairment loss of approximately $5.4 million during the fourth quarter of
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 two
and three largest customers accounted for approximately 31% and 36% of our
total revenues for the years ended December 31, 2008 and 2007,
respectively.




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.




19


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, 2008 and 2007 was approximately $63.1 million and
$172.9 million, respectively. This significant decline in our backlog
is attributable to the recent indication to us from our largest customer of its
suspension of two projects totaling $144.9 million.




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 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.




20


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.


21


An
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.




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.


22


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.




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.


23




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.




If
we are unable to manage our growth, our business may be adversely
affected.




Sustaining
our historical growth may place significant demands on our management, as well
as on our administrative, operational and financial resources. If we sustain
significant growth, we must improve our operational, financial and management
information systems and expand, motivate and manage our workforce. If we are
unable to do so, or if new systems that we implement to assist in managing any
future growth do not produce the expected benefits, our business, prospects,
financial condition or operating results could be adversely
affected.




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 1% and less than 1% of
our total revenues for the 2008 and 2007, respectively. We expect the percentage
of revenues attributable to our international operations to continue to
increase. 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 warrants and options to purchase our
shares of common stock may place a ceiling on, or otherwise adversely
affect the value of our common stock.




We have
17,810,300 outstanding warrants and options to purchase shares of our
common stock at a weighted average exercise price of $5.20 per share, with
weighted average remaining life of 0.64 years and only 12,661,716
outstanding shares of common stock as of March 27, 2009. Our warrants 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.




24


If our initial
stockholders and Messrs. Rosato and Gallagher make future sales of our
securities, it may have an adverse effect on the market price of our common
stock.




Our
stockholders that acquired shares of common stock prior to our initial public
offering are entitled to demand that we register the resale of their shares of
common stock in certain circumstances. By letter dated July 14, 2008, our
initial stockholders exercised their demand right to register the resale of
their 1,750,000 shares.  In connection with the demand registration,
Mr. Rosato, Chief Executive Officer, and Mr. Gallagher, Chief Operating Officer,
exercised their piggy-back registration rights, per their registration rights
agreement dated January 19, 2007, to register the resale of an aggregate 452,432
shares.  We registered the resale of an aggregate of 2,327,432 common
stock (including 125,000 shares of our common stock underlying a warrant issued
to Maxim Partners, LLC at an exercise price of $5.00) on a Registration
statement on a Form S-3 that was declared effective on October 27, 2008.
Consequently, these stockholders are entitled to freely sell their shares of
common stock in the public market. 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.




Prior
to the acquisition of TSS/Vortech, we did not have operations, and TSS/Vortech
had never operated as a public company. Fulfilling our obligations incident to
being a public company is expensive and time consuming.




Prior to
the acquisition of TSS/Vortech, both we, as a company without operations, and
TSS/Vortech, as a private company, had maintained relatively small finance and
accounting staffs. We have engaged a firm to perform internal audit
services and assist with the effort to remediate the weaknesses described below
and be compliant with Section 404. We have maintained limited disclosure
controls and procedures and internal control over financial reporting as
required under the federal securities laws with respect to our limited
activities prior to the acquisition, but we have not been required to maintain
and establish such disclosure controls and procedures and internal controls as
are required with respect to a business such as TSS/Vortech with substantial
operations following the acquisition. Under the Sarbanes-Oxley Act of 2002 and
the related rules and regulations of the SEC, as well as the rules of NASDAQ, we
have implemented additional internal and disclosure control procedures and
corporate governance practices and adhere to a variety of reporting requirements
and complex accounting rules. Compliance with these obligations require
significant management time, place significant additional demands on our finance
and accounting staff and on our financial, accounting and information systems,
and have increased our insurance, legal and financial compliance
costs.




25




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 our
assessment as to the effectiveness of these controls for fiscal 2009 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 fiscal year ending
December 31, 2008 and subsequent years. In connection with this evaluation,
we retained internal audit services to further enhance our internal control
environment. It will also require an independent registered public accounting
firm to test, evaluate and report on the completeness of our assessment for our
fiscal year ending December 31, 2009 and subsequent years. It may cost us
more than we expect to comply with these control- and procedure-related
requirements.
  Through
December 31, 2006, we had no operations, no full-time personnel and very few
personnel of any kind. Our activities from inception in late 2005 and into 2006
focused on completing our initial public offering, identifying acquisition
candidates and then completing the acquisition of TSS/Vortech on January 19,
2007. 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, 2008. 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, 2008.  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, 2008:  (i) we did not have
the ability to segregate duties; (ii) we lacked formal documentation of policies
and procedures that were in place; (iii) controls are inadequate to reasonably
assume compliance with generally accepted accounting principles related to
revenue.
 
 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 the middle of
2009.  During 2008 and into 2009 the Company: (i) hired additional
personnel and now believes that it has adequate financial personnel to
accommodate changes in our business; (ii) hired a Chief Information Officer and
now believes that our general computer controls and procedures, which were
reported as a material weakness in our 2007 management’s report of internal
control over financial reporting have been remediated and are adequate. 
During 2009 we will address the material weaknesses identified as of December
31, 2008.  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 2009. 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. We will be required, however, to provide the
attestation report in our annual report for the fiscal year ending December 31,
2009.




Item
      1B.
            UNRESOLVED
      STAFF COMMENTS





None.





Item
      2.
            PROPERTIES





Our
principal executive offices are located at 7226 Lee DeForest Drive, 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. We believe that our facilities
are adequate for our current operations and additional 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.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




At the
Company’s 2008 Annual Meeting of Stockholders held on December 2, 2008, the
stockholders of the Company elected the following persons as directors of the
Company to serve until the 2011 Annual Meeting of Stockholders and until their
successors are duly elected and qualified: C. Thomas McMillen, Thomas P, Rosato
and John Morton, III. The results of the voting were as follows:
  Votes
      For
                          
                          
                          Votes
                            WithheldC.
      Thomas McMillen
                          
                          
                          8,787,627
                          
                          
                          
                          1,235,579Thomas
      P. Rosato
                          
                          
                          8,780,354
                          
                          
                          
                          1,242,852John
      Morton, III
                          
                          
                          9,939,283
                          
                          
                          
                          83,923
  In
addition, at the Annual Meeting, the stockholders ratified the Board’s approval
of Grant Thornton LLP as the Company’s independent registered public accounting
firm for the year ending December 31, 2008, with 8,892,549 votes for
ratification, 1,130,657 votes against ratification. There were
no abstentions and no broker non-votes.


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 FINRA Over-the-Counter Bulletin Board
(OTCBB) under the symbols “FAAC,” “FAACW,” and “FAACU,” respectively. Each
warrant entitles the holder to purchase one share of common stock at an exercise
price of $5.00. The closing price per share of our common stock, warrants and
units as reported by NASDAQ on March 27, 2009 was $ 0.73, $0.01 and $1.12,
respectively. 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 from August 1, 2007 and OTCBB bid quotations prior to August
1, 2007, which reflect interdealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual
transactions:




Common Stock
                          
                          
                          Warrants
                          
                          
                          UnitsHigh
                          
                          
                          Low
                          
                          
                          High
                          
                          
                          Low
                          
                          
                          High
                          
                          
                          LowYear 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
                          
                          
                          $
                          0.65Year
      ended December 31, 2007First
      Quarter
                          
                          $
                          5.70
                          
                          
                          $
                          5.23
                          
                          
                          $
                          0.94
                          
                          
                          $
                          0.20
                          
                          
                          $
                          7.50
                          
                          
                          $
                          6.00Second
      Quarter
                          
                          $
                          5.60
                          
                          
                          $
                          4.91
                          
                          
                          $
                          0.95
                          
                          
                          $
                          0.57
                          
                          
                          $
                          7.36
                          
                          
                          $
                          6.04Third
      Quarter
                          
                          $
                          6.53
                          
                          
                          $
                          5.13
                          
                          
                          $
                          1.80
                          
                          
                          $
                          0.63
                          
                          
                          $
                          10.00
                          
                          
                          $
                          6.50Fourth
      Quarter
                          
                          $
                          6.06
                          
                          
                          $
                          4.77
                          
                          
                          $
                          1.30
                          
                          
                          $
                          0.47
                          
                          
                          $
                          8.50
                          
                          
                          $
                          6.00





Stockholders





As of
March 27, 2009, there were 29 stockholders of
record of our 12,661,716 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), one holder of record of
our units and one holder of record of our warrants.




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.


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.




28




Business
Formation and Overview




We were incorporated in Delaware on December 20, 2004 as a special
purpose acquisition company formed under the name “Fortress America Acquisition
Corporation” for the purpose of acquiring an operating business that performed
services to the homeland security industry.




On
July 20, 2005, we closed our initial public offering of 7,000,000 units,
with each unit consisting of one share of our common stock and two warrants
(each warrant to purchase one share of our common stock at $5.00 per share). The
units were sold at an offering price of $6.00 per unit, generating gross
proceeds of $42,000,000. On August 24, 2005, we sold an additional 800,000
units pursuant to the underwriters’ over-allotment option raising additional
gross proceeds of $4,800,000. After deducting underwriting discounts and
commissions and the offering expenses, the total net proceeds to us from the
offering were approximately $43,183,521, of which $41,964,000 was deposited into
a trust fund and the remaining proceeds of $1,219,521 were made available for
business, legal and accounting due diligence on prospective business
combinations and continuing general and administrative expenses.




On
January 19, 2007, we acquired all of the outstanding membership interests
of each of VTC, LLC, doing business as “Total Site Solutions” (“TSS”), and
Vortech, LLC (“Vortech” and, together with TSS, “TSS/Vortech”) and
simultaneously changed our name to “Fortress International Group, Inc.”
 TSS/Vortech provides comprehensive services for the planning, design, and
development of mission-critical facilities and information
infrastructure.




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





As a
result of these acquisitions, fiscal year 2007 was our first year to engage in
operations, generating revenue and incurring debt and expenses.





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,
energy and green solutions consulting, engineering and design management,
construction management, system installations, operations management, and
facilities management and maintenance.





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, 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.


29




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.




During
the fiscal years 2007 and 2008, we have expanded our sales reach by opening
offices in New York, Chicago and Miami. We plan to continue to expand
geographically through internal growth initiatives, as well as through potential
acquisitions of specialized mission-critical engineering, IT services firms
(primarily in the United States) and mission-critical facility management
companies.




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 may be adversely impacted by the current economic environment and tight
credit conditions.  We have seen larger competitors seek to expand
their offerings including a focus in mission-critical market.  These
larger competitors have a significant infrastructure to support and accordingly,
we have begun to experience some price pressure as some are willing to take
on projects at lower margins. With certain customers, we have experienced a
delay in spending, or deferral of projects to an indefinite commencement date
due to the economic uncertainty or lack of access to capital.  This
type of delay was demonstrated by our largest customer in the first quarter of
2009, which led us to significantly reduce our backlog by $144.9 million at
December 31, 2008 although a formal cancellation of contracted amounts has not
been received.





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





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





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. As we continue to make selected strategic
acquisitions, the amortization of identified intangible assets may increase as a
percentage of our revenue.




30




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, how we manage our costs, and the
amortization charges resulting from acquisitions.




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




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 (US GAAP), and our methodology for determining backlog
may not be comparable to the methodology of other companies in determining their
backlog. Our backlog is generally recognized under two categories: (1) contracts
for which work authorizations have been or are expected to be received on a
fixed-price basis, guaranteed maximum price basis and time and materials basis,
and (2) contracts awarded to us where some, but not all, of the work have not
yet been authorized.





As of
December 31, 2008, our backlog was approximately $63.1 million, compared to
approximately $172.9 million at December 31, 2007.   In the first
quarter 2009, discussions with our single largest customer indicated that two
projects were suspended as the customer deferred its expansion plans given the
current economic environment and credit constraints.  Although the
contract is not cancelled, based on the customer indications we removed the two
project totaling $144.9 million from our December 31, 2008 backlog, which
primarily accounts for the decrease in backlog from the prior year.





At December 31, 2008, we have
authorizations to proceed with work for approximately $51.6 million, or 82% of
our total backlog of $63.1 million. Approximately $36.0 million, or 57% of our
total backlog, related to three customers at December 31,
2008.  At
December 31, 2007, we had authorizations to proceed with work for approximately
$32.4 million or 19% of our total backlog of $172.9
million.  Approximately, $118.0 million, or 68% of our backlog related
to a single customer at December 31, 2007.





We
believe that approximately 90% of the backlog at December 31, 2008 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, 2008 and
December 31, 2007, respectively (in millions).





December 31,
                          
                          
                          December 31,2008
                          
                          
                          2007Technology
      consulting
                          
                          $
                          4.0
                          
                          
                          $
                          3.9Construction
      management
                          
                          
                          48.7
                          
                          
                          
                          154.1Facilities
      management
                          
                          
                          10.5
                          
                          
                          
                          14.9Total
                          
                          $
                          63.2
                          
                          
                          $
                          172.9





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 14 — Related Party Transactions of the Notes to Consolidated Financial
Statements. The table below summarizes our related party transactions (in
millions):





Successor
                  
                  
                  PredecessorFor the periodFor the Year Ended December 31,
                  
                  
                  January 1, to2008
                  
                  
                  2007
                  
                  
                  January 19, 2007Revenue
                  
                  $
                  0.4
                  
                  
                  $
                  0.4
                  
                  
                  $
                  -Cost
      of revenue
                  
                  
                  3.9
                  
                  
                  
                  4.3
                  
                  
                  
                  0.1Selling,
      general and administrative
                  
                  
                  0.7
                  
                  
                  
                  0.6
                  
                  
                  
                  -




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 Statement of Position (SOP) 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts, recognizing revenue on the percentage-of-completion method using
costs incurred in relation to total estimated project costs.




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


32





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, 2008, accounts receivable of $1.0 million is due from a
customer to whom we have offered extended payment terms. The customer had
executed a promissory note in the same amount bearing interest at 8% per annum
with payments of interest only due monthly and the balance in full was due
on December 15, 2008. During the fourth quarter 2008, the customer paid $0.4
million and we extended the $1.0 million note balance for an additional six
months to June 15, 2009. This amount was recognized as revenue during the year
ended December 31, 2008. We have a history of conducting business with this
customer and therefore believe collectability is reasonably
assured.





Non-cash
Compensation




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




Goodwill
and Other Purchased Intangible Assets




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




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




In 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 $20.6
million.  At December 31, 2008, the residual carrying value of
goodwill is $4.8 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 $5.4 million during the year ended
December 31, 2008.





Long-Lived
Assets (Excluding Goodwill)




In
accordance with the provisions of SFAS No. 144 in accounting for long-lived
assets such as property, equipment and intangible assets subject to
amortization, we review the assets for impairment. If circumstances
indicate the carrying value of the asset may not be fully recoverable, a loss is
recognized at the time impairment exists and a permanent reduction in the
carrying value of the asset is recorded. We believe that the carrying
values of its long-lived assets as of December 31, 2008 are fully
realizable.


33




Income
Taxes




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




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




Effective
January 1, 2007, we were required to adopt FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”).”
FIN 48 prescribes a more-likely-than-not threshold of financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on de-recognition of
income tax assets and liabilities, classification of current and deferred tax
assets and liabilities, accounting for interest and penalties associated with
tax positions, accounting for income taxes in interim periods and income tax
disclosures. Since inception and through January 1, 2007, the adoption date
of this standard, we were in essence a “blank check” company with no
substantive operations. Management has concluded that the adoption of
FIN 48 had no material effect on our financial position or results of
operations. As of December 31, 2008, we do not have any material
gross unrecognized tax benefit liabilities.




Recently
Issued Accounting Pronouncements




In
October 2008, the FASB issued FASB Staff Position 157-3, “Determining the Fair
Value of a Financial Asset When the Market of that Asset is not Active” (“FSP
157-3”). FSP 157-3 provides an example that clarifies and reiterates certain
provisions of the existing fair value standard, including basing fair value on
orderly transactions and usage of management and broker inputs. FSP 157-3 is
effective immediately but is not expected to have a material impact on our
financial position or results of operations.





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




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





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




34




Results
of Operations





Year
ended December 31, 2008  compared to the year ended December 31,
2007




Revenue. Revenue increased
$52.0 million to $102.5 million for the year ended December 31, 2008 from $50.5
million for the year ended December 31, 2007. The increase was primarily
driven by a $24.1 million increase in our construction management services and
$22.2 million increase attribute to the inclusion of a full year results from
the acquisitions of Innovative, Rubicon, and SMLB.  The increase in
construction management services is primarily attributable to our increased
sales and marketing efforts in late 2006 through 2007 to diversify and grow our
customer base.





Cost of Revenue. Cost of
revenue increased $44.6 million to $86.7 million for the year ended December 31,
2008 from $42.1 million for the year ended December 31, 2007. The
increase was driven by the increase in revenue primarily from our
construction management services and $18.9 million increase of expenses
attribute to the inclusion of a full year results from the acquisitions of
Innovative, Rubicon, and SMLB.




Gross Margin Percentage.
Gross margin percentage decreased 1.2% to 15.4% for the year ended December 31,
2008, compared to 16.6% for the year ended December 31, 2007. Of the total
decrease in gross profit, 0.5% was due to an estimated loss on a contract
we acquired with SMLB, and the remaining decrease was primarily attributable to
an increase in the proportion of construction management revenues as proportion
of total revenue, which typically have a lower profit margin.





Selling, general and administrative
expenses.  Selling, general and administrative expenses
increased $4.7 million to $19.2 million for the year ended December 31, 2008
from $14.6 million for the year ended December 31, 2007. The increase was
primarily driven by $2.4 million of selling, general and administrative
expenses associated with the acquisitions of Innovative, Rubicon and SMLB, and
$1.2 million that we expensed associated with abandoned
acquisitions.





As we
have experienced delays in the timing of revenues associated with certain
customers and lower margins, we began implementing a plan to restructure
expenses to align with current operating revenues. The plan seeks to reduce
operating costs associated with personnel and related costs, professional fees,
and sales and marketing, which resulted in lower total selling, general and
administrative costs during the fourth quarter of 2008.  To the extent
our business experiences continued delays or reduced margins, we may further
reduce operating costs associated with personnel and related costs.





Depreciation and
amortization. Depreciation and amortization increased $0.1 million
to $0.5 million for the year ended December 31, 2008 from $0.4 million
for the year  ended December 31, 2007.




Amortization of intangible
assets. Amortization expense increased $0.7 million to $2.8 million for
the year ended December 31, 2008 from $2.1 million for the year ended December
31, 2007. The increase is attributable to there being a full year of
amortization of the intangible assets from our acquisitions of Innovative,
Rubicon and SMLB.





Impairment loss on
intangibles. 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. Based on these potential impairment
indicators, 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 based on company specific value
approach, an income approach, and a market approach, we determined that the
carrying value exceeded the current fair value of our business, resulting in
goodwill impairment of $20.6 million for the year ended December 31, 2008. At
December 31, 2008, the adjusted carrying value of goodwill was $4.8
million.





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.  We intend to brand our products under this trade name to
simplify our marketing strategy, mitigate potential confusion with customers,
and potentially further reduce marketing costs.  As a result of the
trade name abandonment, we recorded a loss of $5.4 million in the fourth quarter
2008.  At December 31, 2008, the carrying value of our remaining trade
name was $0.1 million.





Interest income (expense),
net. Our interest income (expense), net, decreased $1.0 million to ($0.2)
million for the year ended December 31, 2008 from $0.8 million for the year
ended December 31, 2007. The decrease in interest income was due primarily to a
lower average invested balance in the year ended December 31, 2008, compared to
year ended December 31, 2007.





Income tax expense (benefit).
Income tax expense (benefit) decreased $0.6 million to $0.1 million for the year
ended December 31, 2008 from ($0.5) million for the year  ended
December 31, 2007. For the year ended December 31, 2007, income tax benefit was
$0.5 million reflecting the value of a NOL carryback to prior periods at an
effective federal rate of 34%, net of a valuation allowance on deferred tax
assets.


35


Liquidity
and Capital Resources





Overview





Successor
                        
                        
                        PredecessorFor the periodFortheYearEndedDecember31,
                        
                        
                        Janaury 1, to2008
                        
                        
                        2007
                        
                        
                        January19,2007Cash
      provided by (used in) operations
                        
                        $
                        3,814,499
                        
                        
                        $
                        (4,554,792
                        )
                        
                        $
                        656,001Cash
      provided by (used in) investing
                        
                        
                        (2,364,384
                        )
                        
                        
                        26,286,893
                        
                        
                        
                        (127,602
                        )Cash
      provided by (used in) financing
                        
                        
                        (2,174,168
                        )
                        
                        
                        (8,567,238
                        )
                        
                        
                        (1,567,920
                        )Net
      increase (decrease) in cash
                        
                        $
                        (724,053
                        )
                        
                        $
                        13,164,863
                        
                        
                        $
                        (1,039,521
                        )





From
inception through January 19, 2007, we operated solely as an investment vehicle
to acquire an operating company consistent with our purpose. We completed our
initial public offering on July 20, 2005, resulting in funds of
approximately $43.2 million, net of issuance costs. We invested the net
proceeds from our initial public offering (IPO) in short term U.S. treasury
bills and used the earned interest to fund our operating costs associated with
our pursuit of acquisition candidates. Investing activity from inception through
January 19, 2007 was limited to investing our IPO proceeds in a trust account.
Aside from the IPO, no significant financing activity occurred through January
19, 2007.





On
January 19, 2007, we acquired TSS/Vortech and transitioned from being a Special
Purpose Acquisition Company to an operating company.





SuccessorFor the Year Ended December
    31,2008
                                
                                
                                2007
                                
                                
                                ChangeNet
      loss
                                
                                $
                                (32,934,225
                                )
                                
                                $
                                (7,377,111
                                )
                                
                                $
                                (25,557,114
                                )Adjustments
      to reconcile net loss to net cash provided by (used in)
      operations:Impairment
      loss on goodwill and other intangibles
                                
                                
                                25,989,943
                                
                                
                                
                                -
                                
                                
                                
                                25,989,943Amortization
      of intangibles
                                
                                
                                3,344,804
                                
                                
                                
                                2,562,741
                                
                                
                                
                                782,063Stock
      and warrant-based compensation
                                
                                
                                2,031,496
                                
                                
                                
                                1,405,728
                                
                                
                                
                                625,768Other
      non-cash items
                                
                                
                                603,134
                                
                                
                                
                                (247,228
                                )
                                
                                
                                850,362Net
      adjustments to reconcile net income for non-cash items
                                
                                
                                31,969,377
                                
                                
                                
                                3,721,241
                                
                                
                                
                                28,248,136Net
      change in working capital
                                
                                
                                4,779,347
                                
                                
                                
                                (898,922
                                )
                                
                                
                                5,678,269Cash
      provided by (used in) operations
                                
                                
                                3,814,499
                                
                                
                                
                                (4,554,792
                                )
                                
                                
                                8,369,291Cash
      provided by (used in) investing
                                
                                
                                (2,364,384
                                )
                                
                                
                                26,286,893
                                
                                
                                
                                (28,651,277
                                )Cash
      used in financing
                                
                                
                                (2,174,168
                                )
                                
                                
                                (8,567,238
                                )
                                
                                
                                6,393,070Net
      increase (decrease) in cash
                                
                                $
                                (724,053
                                )
                                
                                $
                                13,164,863
                                
                                
                                $
                                (13,888,916
                                )





For the
year ended December 31, 2008 and 2007, we had cash and cash equivalents of $12.4
million and $13.2 million respectively.




Operating
Activity





Net cash
provided by operations increased $8.4 million to $3.8 million for the year ended
December 31, 2008 from $4.6 million used in operations for the year ended
December 31, 2007.  The increase in operating cash flow is primarily
attributable to the following:




·
              Increase in
      net loss.We had a
      $25.6 million increase in our net loss due to $28.2 million of
      increased 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 decreased $2.7 million from the
      preceding year.  This improvement in operating cash flows is
      primarily attributable to the increased volume in the construction
      management revenue and the addition of Innovative and Rubicon, while
      maintaining a relatively fixed-cost infrastructure for most of the
      year.




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




36




·
              Decrease in
      working capital.Net
      changes in operating assets and liabilities increased approximately $5.7
      million accounting for the remaining increase in operating cash flows. The
      increase was attributable primarily to $4.5 million associated with
      unusual timing on contracts. We received more cash receipts close to
      year-end not allowing the corresponding payments to vendors to be made.
      Management generally seeks to balance customer and vendor cash flows via
      contractual terms standard to our
  industry.




Investing
Activity





Net cash
used in investing increased $28.7 million to ($2.4) million for the year ended
December 31, 2008 from $26.3 million provided by investing activities for the
year ended December 31, 2007.  Excluding the $44.7 cash in flow
related to the unusual event of converting to an operating company during 2007,
cash used in investing decreased $16.0 million from the prior year primarily due
to lower acquisition activity in the year ended December 31, 2008.




·
              Acquisitions. Cash used
      for acquisitions decreased $15.9 million as we acquired a single company
      with a net cash investment of $2.0 million in the year ended December 31,
      2008, compared to the acquisition of four companies with a net cash
      investment of $18.1 million in the year ended December 31, 2007, resulting
      in a net cash investment of approximately $18.0 million. We abandoned
      acquisition efforts in 2008 due to the contraction in the economy and
      credit markets.
 
 ·
              Sale of
      investments held in Trust. Upon the approval of the
      TSS/Vortech acquisition in 2007, we sold approximately $44.7 million
      in trust investments to fund the cash portion the acquisition of
      TSS/Vortech and related operations, and repay dissenting shareholders
      electing to receive their IPO proceeds
  back.


Financing
Activity





Net cash
used in financing decreased approximately $6.4 million to $2.2 million for the
year ended December 31, 2008 from $8.6 million used in financing activities for
the year ended December 31, 2007. The decrease in cash used in financing
activities was attributable fundamentally to different activity as described in
the following:




·
              Repayment of
      seller notes.  Debt services was
      approximately $2.2 million in both 2008 and 2007. During the year ended
      December 31, 2008, we repaid $2.0 million of unsecured promissory
      notes that were issued to the Rubicon sellers upon achievement of certain
      financial targets at December 31, 2007 and June 30,
      2008.
 
 ·
              Repurchase of common
      stock. During the first quarter of 2007, we used $6.4 million to
      repurchase our common stock associated with the election of
      conversion rights by our dissenting shareholders in connection with
      our acquisition of TSS/Vortech and a share buyback program. The share
      buyback program was suspended in the third quarter of 2007;
      however, during 2008, we repurchased 17,505 shares at an average
      price of $3.15 per share for employee taxes associated with net issuance
      of vesting restricted stock.




Non-Cash
Activities





During
the year ended December 31, 2008, we issued total unsecured promissory
notes totaling $0.5 million as purchase consideration. In connection with the
acquisitions of SMLB, we initially issued $0.5 million of unsecured promissory
notes that were reduced in the second quarter 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.





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 the
Company 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 remains outstanding, which is
convertible at $7.50 per shares to 533,333 shares of the Company’s common
stock.




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





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





We
believe that our current cash and cash equivalents and expected future cash
generated from operations will satisfy our expected working capital, capital
expenditure and investment requirements through the next twelve months.  We
may elect to secure additional capital in the future, 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. If we are unable to obtain additional financing, we may be
required to reduce the scope of acquisition plan, which could impact our
business, financial condition and earnings.




Off-Balance
Sheet Arrangements




At
December 31, 2008, we had no off-balance sheet arrangements.


37


Contractual
Obligations and Commercial Commitments





The
following table summarizes our future contractual obligations and commercial
commitments of the Company at December 31, 2008, as further described in
the Notes to our Consolidated Financial Statements:




Less
      thanTotal
            
            
            1 Year
            
            
            1-3 YearsLong-term
      debt, including interest
            
            $
            6,707,940
            
            
            $
            1,823,665
            
            
            $
            4,884,275Operating
      leases
            
            
            2,257,416
            
            
            
            922,820
            
            
            
            1,334,596Contractual
      purchase commitments
            
            
            36,006,335
            
            
            
            36,006,335
            
            
            
            -Total
            
            $
            44,971,691
            
            
            $
            38,752,820
            
            
            $
            6,218,871




Contractual
purchase commitments represent outstanding purchase orders at December 31,
2008.


38




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.


39







Item
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




Fortress
International Group, Inc.




Index to Financial Statements and Financial Statement Schedule
                  
                  NumberFinancial
      Statements:Reports
      of Independent Registered Public Accounting Firm
                  
                  
                  F-1Consolidated
      Balance Sheets as of December 31, 2008 and December 31,
    2007
                  
                  
                  F-3Consolidated
      Statements of Operations for the years ended December 31, 2008 (Successor)
      and December 31, 2007 (Successor), and for the period from January 1, 2007
      through January 19, 2007 (Predecessor)
                  
                  
                  F-4Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2008
      (Successor) and December 31, 2007 (Successor) and Consolidated
      Statements of Members’ Equity for the period from January 1,
      2007 through January 19, 2007 (Predecessor).
                  
                  
                  F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 (Successor
      and December 31, 2007 (Successor) and for the period from January 1, 2007
      through January 19, 2007 (Predecessor)
                  
                  
                  F-6Notes
      to Consolidated Financial Statements
                  
                  
                  F-7Financial
      Statement Schedules:Schedule
      - II Valuation Accounts
                  
                  
                  43


40


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, 2008 and 2007, 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. 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, 2008 and 2007, 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, 2009




F-1


Report
of Independent Registered Public Accounting Firm





Board of
Directors and Shareholders


Fortress
International Group, Inc.





We have
audited the accompanying combined statements of operations, members’ equity, and
cash flows for the period from January 1, 2007 through January 19, 2007 of
Vortech, LLC and VTC, LLC (the “Company”) (a Delaware
corporation).  Our audit of the basic financial statements included
the financial statement schedule listed in the index appearing under Item
15.  These financial statements and the financial statement schedule are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.





We
conducted our audit 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 audit provides a
reasonable basis for our opinion.





In our
opinion, the combined statements of operations, members’ equity, and cash flows
referred to above present fairly, in all material respects, the combined results
of operations of Vortech, LLC and VTC, LLC, for the period from January 1, 2007
through January 19, 2007, 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
      28, 2008




F-2


PART I - FINANCIAL
INFORMATION
 
 FORTRESS
INTERNATIONAL GROUP, INC.
 CONSOLIDATED
BALANCE SHEETS
  Successor (Fortress International Group, Inc.)December 31,
                              
                              
                              December 31,2008
                              
                              
                              2007Current
      AssetsCash
      and cash equivalents
                              
                              $
                              12,448,157
                              
                              
                              $
                              13,172,210Contract
      and other receivables, net
                              
                              
                              21,288,660
                              
                              
                              
                              18,349,140Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                              
                              
                              3,742,530
                              
                              
                              
                              1,322,254Prepaid
      expenses and other current assets
                              
                              
                              539,124
                              
                              
                              
                              301,487Income
      taxes receivable
                              
                              
                              -
                              
                              
                              
                              893,322Total
      current assets
                              
                              
                              38,018,471
                              
                              
                              
                              34,038,413Property
      and equipment, net
                              
                              
                              824,487
                              
                              
                              
                              1,044,545Goodwill
                              
                              
                              4,811,000
                              
                              
                              
                              20,714,967Intangible
      assets, net
                              
                              
                              13,559,234
                              
                              
                              
                              21,089,136Other
      assets
                              
                              
                              225,853
                              
                              
                              
                              512,000Total
      assets
                              
                              $
                              57,439,045
                              
                              
                              $
                              77,399,061Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesNotes
      payable, current portion
                              
                              $
                              1,688,845
                              
                              
                              $
                              1,650,306Accounts
      payable and accrued expenses
                              
                              
                              24,394,990
                              
                              
                              
                              16,121,492Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                              
                              
                              6,047,765
                              
                              
                              
                              3,880,279Total
      current liabilities
                              
                              
                              32,131,600
                              
                              
                              
                              21,652,077Notes
      payable, less current portion
                              
                              
                              311,709
                              
                              
                              
                              348,661Convertible
      notes
                              
                              
                              4,000,000
                              
                              
                              
                              7,500,000Other
      liabilities
                              
                              
                              137,198
                              
                              
                              
                              44,648Total
      liabilities
                              
                              
                              36,580,507
                              
                              
                              
                              29,545,386Commitments
      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; 12,797,296 and
      12,150,400 issued; 12,621,716 and 11,992,325 outstanding atDecember
      31, 2008 and December 31, 2007, respectively
                              
                              
                              1,279
                              
                              
                              
                              1,214Additional
      paid-in capital
                              
                              
                              61,262,218
                              
                              
                              
                              55,268,012Treasury
      stock, 175,580 and 158,075 shares at cost at December 31, 2008 and
      December 31, 2007, respectively
                              
                              
                              (869,381
                              )
                              
                              
                              (814,198
                              )Accumulated
      deficit
                              
                              
                              (39,535,578
                              )
                              
                              
                              (6,601,353
                              )Total
      stockholders' equity
                              
                              
                              20,858,538
                              
                              
                              
                              47,853,675Total
      liabilities and stockholders’ equity
                              
                              $
                              57,439,045
                              
                              
                              $
                              77,399,061
 
 See
accompanying notes to consolidated financial statements.
 
 F-3
 
 FORTRESS
INTERNATIONAL GROUP, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 PredecessorFor the periodJanuary 1,Successor for the Year Ended December 31,
                          
                          
                          through2008
                          
                          
                          2007
                          
                          
                          January 19, 2007Results
      of Operations:Revenue
                          
                          $
                          102,531,778
                          
                          
                          $
                          50,455,823
                          
                          
                          $
                          1,412,137Cost
      of revenue
                          
                          
                          86,734,358
                          
                          
                          
                          42,071,361
                          
                          
                          
                          1,108,276Gross
      profit
                          
                          
                          15,797,420
                          
                          
                          
                          8,384,462
                          
                          
                          
                          303,861Operating
      expenses:Selling,
      general and administrative
                          
                          
                          19,240,300
                          
                          
                          
                          14,563,111
                          
                          
                          
                          555,103Depreciation
      and amortization
                          
                          
                          468,094
                          
                          
                          
                          394,913
                          
                          
                          
                          33,660Amortization
      of intangibles
                          
                          
                          2,762,045
                          
                          
                          
                          2,109,222
                          
                          
                          
                          -Impairment
      loss on goodwill and other intangibles
                          
                          
                          25,989,943
                          
                          
                          
                          -
                          
                          
                          
                          -Total
      operating costs
                          
                          
                          48,460,382
                          
                          
                          
                          17,067,246
                          
                          
                          
                          588,763Operating
      loss
                          
                          
                          (32,662,962
                          )
                          
                          
                          (8,682,784
                          )
                          
                          
                          (284,902
                          )Interest
      income (expense), net
                          
                          
                          (205,652
                          )
                          
                          
                          806,518
                          
                          
                          
                          3,749Loss
      from operations before income taxes
                          
                          
                          (32,868,614
                          )
                          
                          
                          (7,876,266
                          )
                          
                          
                          (281,153
                          )Income
      tax expense (benefit)
                          
                          
                          65,611
                          
                          
                          
                          (499,155
                          )
                          
                          
                          -Net
      loss
                          
                          $
                          (32,934,225
                          )
                          
                          $
                          (7,377,111
                          )
                          
                          $
                          (281,153
                          )Per
      Common Share (Basic and Diluted):Basic
      and diluted net income (loss) (1)
                          
                          $
                          (2.68
                          )
                          
                          $
                          (0.63
                          )
                          
                          $
                          -Weighted
      average common shares outstanding-basic and diluted
                          
                          
                          12,270,546
                          
                          
                          
                          11,698,895
                          
                          
                          
                          -
 
 (1) The
Predecessor was a limited liability Company accordingly no earnings per share
data was computed.
  See
accompanying notes to consolidated financial statements.
 
 F-4
 
 FORTRESS
INTERNATIONAL GROUP, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ AND MEMBERS’ EQUITY
 
 (AccumulatedAdditional
                    
                    
                    
                    
                    
                    
                    
                    
                    Deficit)
                    
                    
                    TotalCommon Stock
                    
                    
                    Paid-in
                    
                    
                    Treasury Stock
                    
                    
                    Retained
                    
                    
                    Shareholders'Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Earnings
                    
                    
                    EquityBalance
      at January 1, 2007
                    
                    
                    9,550,000
                    
                    
                    $
                    955
                    
                    
                    $
                    34,819,062
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    775,758
                    
                    
                    $
                    35,595,775Issuance
      of common stock related to acquisitions
                    
                    
                    2,831,968
                    
                    
                    
                    283
                    
                    
                    
                    15,463,276
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    15,463,559Purchase
      of treasury stock 379,075, retired 221,000 shares
                    
                    
                    (221,000
                    )
                    
                    
                    (22
                    )
                    
                    
                    (1,221,795
                    )
                    
                    
                    158,075
                    
                    
                    
                    (814,198
                    )
                    
                    
                    -
                    
                    
                    
                    (2,036,015
                    )Reclassify
      common stock subject to possible redemption 1,559,220
    shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,388,604
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,388,604Repurchase
      of shares from dissenting shareholders, net of tax effect of deferred
      interest
                    
                    
                    (756,100
                    )
                    
                    
                    (76
                    )
                    
                    
                    (4,160,289
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,160,365
                    )Discount
      received on repayment of promissory note to officer
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    500,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    500,000Warrant
      exercise
                    
                    
                    14,700
                    
                    
                    
                    1
                    
                    
                    
                    73,499
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    73,500Stock
      based compensation
                    
                    
                    730,832
                    
                    
                    
                    73
                    
                    
                    
                    1,405,655
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,405,728Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7,377,111
                    )
                    
                    
                    (7,377,111
                    )Balance
      at December 31, 2007
                    
                    
                    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
                    )
                    
                    $
                    20,858,538
 
  PredecessorMembers'EquityBalance
      at January 1, 2007
                      
                      $
                      3,732,115Distributions
                      
                      
                      (1,561,639
                      )Net
      loss for the period
                      
                      
                      (281,153
                      )Balance
      at January 19, 2007
                      
                      $
                      1,889,323
 
 See
accompanying notes to consolidated financial statements.
  F-5
  FORTRESS
INTERNATIONAL GROUP, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 PredecessorFor the periodJanuary 1,Successor for the Year Ended December 31,
                                          
                                          
                                          through2008
                                          
                                          
                                          2007
                                          
                                          
                                          January 19, 2007Cash Flows from Operating Activities:Net loss
                                          
                                          $
                                          (32,934,225
                                          )
                                          
                                          $
                                          (7,377,111
                                          )
                                          
                                          $
                                          (281,153
                                          )Adjustments to
      reconcile net loss to net cash provided by (used
      in) operating activities:Depreciation
      and amortization
                                          
                                          
                                          468,094
                                          
                                          
                                          
                                          394,913
                                          
                                          
                                          
                                          33,660Amortization
      of intangibles
                                          
                                          
                                          3,344,804
                                          
                                          
                                          
                                          2,562,741
                                          
                                          
                                          
                                          -Impairment
      loss on goodwill and other intangibles
                                          
                                          
                                          25,989,943
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Allowance
      for doubtful accounts
                                          
                                          
                                          119,728
                                          
                                          
                                          
                                          79,611
                                          
                                          
                                          
                                          -Stock
      and warrant-based compensation
                                          
                                          
                                          2,031,496
                                          
                                          
                                          
                                          1,405,728
                                          
                                          
                                          
                                          -Benefit
      from income taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (499,155
                                          )
                                          
                                          
                                          -Other
      non-cash income, net
                                          
                                          
                                          15,312
                                          
                                          
                                          
                                          (222,597
                                          )
                                          
                                          
                                          -Changes
      in operating assets and liabilities, net of the effects from
      acquisitions:Contracts
      and other receivables
                                          
                                          
                                          (2,671,636
                                          )
                                          
                                          
                                          (11,057,579
                                          )
                                          
                                          
                                          3,698,863Costs
      and estimated earnings in excess of billings on
      uncompleted contracts
                                          
                                          
                                          (2,420,276
                                          )
                                          
                                          
                                          652,937
                                          
                                          
                                          
                                          (1,078,505
                                          )Prepaid
      expenses and other current assets
                                          
                                          
                                          (237,536
                                          )
                                          
                                          
                                          (50,988
                                          )
                                          
                                          
                                          (108,618
                                          )Due
      from affiliates
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          519,923Other
      assets
                                          
                                          
                                          1,075,013
                                          
                                          
                                          
                                          425,972
                                          
                                          
                                          
                                          (42,968
                                          )Accounts
      payable and accrued expenses
                                          
                                          
                                          7,175,362
                                          
                                          
                                          
                                          7,689,253
                                          
                                          
                                          
                                          (1,861,306
                                          )Billings
      in excess of costs and estimated earnings onuncompleted
      contracts
                                          
                                          
                                          1,781,182
                                          
                                          
                                          
                                          2,149,719
                                          
                                          
                                          
                                          419,676Other
      liabilities
                                          
                                          
                                          77,238
                                          
                                          
                                          
                                          (708,236
                                          )
                                          
                                          
                                          (643,571
                                          )Net
      cash provided by (used in) operating activities
                                          
                                          
                                          3,814,499
                                          
                                          
                                          
                                          (4,554,792
                                          )
                                          
                                          
                                          656,001Cash
      Flows from Investing Activities:Purchase
      of property and equipment
                                          
                                          
                                          (269,824
                                          )
                                          
                                          
                                          (357,974
                                          )
                                          
                                          
                                          (127,602
                                          )Sale
      of investments held in trust
                                          
                                          
                                          -
                                          
                                          
                                          
                                          44,673,994
                                          
                                          
                                          
                                          -Purchase
      of TSS/Vortech, net of cash received
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (11,519,151
                                          )
                                          
                                          
                                          -Purchase
      of Comm Site of South Florida, Inc.
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (150,000
                                          )
                                          
                                          
                                          -Purchase
      of Innovative Power Solutions, net of cash received
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,614,452
                                          )
                                          
                                          
                                          -Purchase
      of Rubicon Integration LLC, net of cash received
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (4,745,524
                                          )
                                          
                                          
                                          -Purchase
      of SMLB, net of cash acquired
                                          
                                          
                                          (2,094,560
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Net
      cash provided by (used in) investing activities
                                          
                                          
                                          (2,364,384
                                          )
                                          
                                          
                                          26,286,893
                                          
                                          
                                          
                                          (127,602
                                          )Cash
      Flows from Financing Activities:Payments
      on notes payable
                                          
                                          
                                          (2,118,985
                                          )
                                          
                                          
                                          (242,413
                                          )
                                          
                                          
                                          (6,281
                                          )Payment
      on promissory note payable to officer
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (2,000,000
                                          )
                                          
                                          
                                          -Payment
      on shareholder advance
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (20,000
                                          )
                                          
                                          
                                          -Payment
      to shareholders electing to redeem their shares
      in connection with the TSS/Vortech
      acquisition
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (4,342,310
                                          )
                                          
                                          
                                          -Repurchase
      of treasury stock
                                          
                                          
                                          (55,183
                                          )
                                          
                                          
                                          (2,036,015
                                          )
                                          
                                          
                                          -Warrant
      exercise
                                          
                                          
                                          -
                                          
                                          
                                          
                                          73,500
                                          
                                          
                                          
                                          -Members'
      distributions
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,561,639
                                          )Net
      cash used in financing activities
                                          
                                          
                                          (2,174,168
                                          )
                                          
                                          
                                          (8,567,238
                                          )
                                          
                                          
                                          (1,567,920
                                          )Net
      increase (decrease) in cash
                                          
                                          
                                          (724,053
                                          )
                                          
                                          
                                          13,164,863
                                          
                                          
                                          
                                          (1,039,521
                                          )Cash,
      beginning of period
                                          
                                          
                                          13,172,210
                                          
                                          
                                          
                                          7,347
                                          
                                          
                                          
                                          2,361,838Cash,
      end of period
                                          
                                          $
                                          12,448,157
                                          
                                          
                                          $
                                          13,172,210
                                          
                                          
                                          $
                                          1,322,317Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                                          
                                          $
                                          392,038
                                          
                                          
                                          $
                                          523,268
                                          
                                          
                                          $
                                          368Cash
      paid for taxes
                                          
                                          
                                          24,602
                                          
                                          
                                          
                                          593,196
                                          
                                          
                                          
                                          -Supplemental
      disclosure of non-cash investing activities:Issuance
      of common stock in connection with the acquisition of SMLB
                                          
                                          $
                                          462,775
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Issuance
      of common stock in connection with the acquistion of
      TSS/Vortech
                                          
                                          
                                          -
                                          
                                          
                                          
                                          14,211,359
                                          
                                          
                                          
                                          -Issuance
      of common stock in connection with the acquistion of
      Innovative
                                          
                                          
                                          -
                                          
                                          
                                          
                                          150,075
                                          
                                          
                                          
                                          -Issuance
      of common stock in connection with the acquistion of
    Rubicon
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,080,800
                                          
                                          
                                          
                                          -Promissory
      notes payable issued in connection with the acquistion of
    SMLB
                                          
                                          
                                          120,572
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Promissory
      notes payable issued in connection with the acquistion of
      TSS/Vortech
                                          
                                          
                                          -
                                          
                                          
                                          
                                          10,000,000
                                          
                                          
                                          
                                          -Prommissory
      note issued in connection with the acquistion of
Innovative
                                          
                                          
                                          -
                                          
                                          
                                          
                                          564,611
                                          
                                          
                                          
                                          -Promissory
      notes payable issued in connection with the acquistion of
      Rubicon
                                          
                                          
                                          2,127,577
                                          
                                          
                                          
                                          1,517,753
                                          
                                          
                                          
                                          -Issuance
      of accounts payable in connection with the acquisition of
      Innovative
                                          
                                          
                                          353,187
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Issuance
      of accounts payable in connection with the acquisition
      of Rubicon
                                          
                                          
                                          489,437
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Accrual
      of acquisitions
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Supplemental
      disclosure of non-cash financing activities:Promissory
      notes payable issued to officers converted to common stock
                                          
                                          $
                                          3,500,000
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Discount
      received on note repayment from officer
                                          
                                          
                                          -
                                          
                                          
                                          
                                          500,000
                                          
                                          
                                          
                                          -
 
 See
accompanying notes to consolidated financial statements.
  F-6
  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, 2008
and 2007 for Fortress International Group, Inc. (the “successor Company”,
“Fortress” or the “Company”) and are for the period from January 1, 2007 to
January 19, 2007 (the acquisition date) for VTC, LLC t/a Total Site Solutions
and Vortech, LLC ( collectively the “Predecessor Company” or
“TSS/Vortech”).
  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 (See Note 3). The acquisition transformed
the Company from a special acquisition corporation to an operating business.
Concurrent with the acquisition, the Company changed its name to Fortress
International Group, Inc.
  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.
  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.  As
applicable, the Company also acquired these companies’ operating subsidiaries.
The results of operations, cash flows and financial position attributable to
these acquisitions are included in the consolidated financial statements from
the respective dates of their acquisition (See Note 3). All inter-company
transactions have been eliminated in consolidation.
  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 collectibility 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 Statement of Position
(SOP) 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, recognizing revenue on the percentage-of-completion
method using costs incurred in relation to total estimated project
costs.
  Revenue
from fixed price contracts is recognized on the percentage of completion method,
measured by the percentage of total costs incurred to date to estimated total
costs for each contract. This method is used because management considers 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.
  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-7
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Stock-Based
Compensation
  Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS)
No. 123R, Share Based
Payment (SFAS No. 123R). On the date of adoption, with the exception of
shares of common stock granted to certain individuals, the Company had not
granted any options, warrants or similar instruments requiring measurement under
SFAS No. 123R.  The Company has granted to third parties warrants for the
purchase of its common stock for professional investment related
services. Expense related to these warrants was computed using the fair
value of the warrant as determined by an option pricing model, the Black-Scholes
valuation model and was fixed on the vesting date. We amortize stock-based costs
for such awards on a straight-line method over the contractual term of the
warrant agreement.
  The
Company also grants shares of restricted stock to 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 $0.2 million and $1.2 million for the years
ended December 31, 2008 and December 31, 2007, respectively. For the period from
January 1, 2007 through January 19, 2007, the predecessor
incurred advertising expense of $0.1 million.
  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
                    
                    VariousFurniture
      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, options to purchase units, warrants to purchase
common shares and notes convertible totaling 19,012,300 and 19,050,300 common
shares were excluded in the computation of diluted loss per share in 2008 and
2007, respectively, because the Company incurred a net loss and the effect of
inclusion would have been anti-dilutive.
  F-8
  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, the
Emergency Economic Stablization Act of 2007 the Federal Deposit Insurance
Corporation (FDIC) deposit coverage limits were increased to unlimited coverage
on non-interest bearing accounts from prior $100,000
limit.  Accordingly, the Company had uninsured cash balances of $10.9
million and $13.0 million at December 31, 2008 and 2007,
respectively.
  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 $150,000 and $65,000 at
December 31, 2008 and 2007, respectively.  Included in accounts receivable
was retainage associated with construction projects totaling $0.4 million and
$0.2 million at December 31, 2008 and 2007, respectively.
  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, 2008 and 2007
bonds secured by customer accounts receivable totaled $0.6 million and $0.6
million, respectively.
  Goodwill
  The
Company segregates identifiable intangible assets acquired in an acquisition
from goodwill. In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets” (“SFAS No. 142”), 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 2008, the
Company conducted such analyses that resulted in impairment loss on goodwill of
$20.6 million.
 
 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 SFAS No. 144 “Accounting for the
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.
 
 At
December 31, 2008, the residual carrying value of goodwill is $4.8
million.  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 impairment loss of approximately $5.4 million during the year ended
December 31, 2008.
  F-9
  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.
  Recently
Issued Accounting Pronouncements
 
 In
October 2008, the FASB issued FASB Staff Position 157-3, “Determining the Fair
Value of a Financial Asset When the Market of that Asset is not Active” (“FSP
157-3”). FSP 157-3 provides an example that clarifies and reiterates certain
provisions of the existing fair value standard, including basing fair value on
orderly transactions and usage of management and broker inputs. FSP 157-3 is
effective immediately but is not expected to have a material impact on our
financial position or results of operations.
 
 In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS No. 162 will become effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” The Company does not
expect the adoption of SFAS 162 to have a material effect on its
consolidated results of operations and financial condition.
  In April
2008, FASB issued a Staff Position (“FSP”) No. FAS 142-3, “Determination of the
Useful Life of Intangible Assets,” (“FSP 142-3”) which amends the factors a
company should consider when developing renewal assumptions used to determine
the useful life of an intangible asset under SFAS 142. FSP 142-3 replaces the
previous useful life criteria with a new requirement-that an entity consider its
own historical experience in renewing similar arrangements. In issuing FSP
142-3, the FASB hopes to improve the consistency between the useful life of a
recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset. FAS 142-3 is effective January 1, 2009. The
Company is currently assessing the potential impact that adoption of FAS 142-3
may have on its financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,”
(“SFAS No. 141R”) which replaces SFAS No. 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective for the
Company beginning January 1, 2009 and will apply prospectively to business
combinations completed on or after that date.
 
 F-10
 
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  (2)
                Accounts
      Receivable
   During
the second quarter 2008 and included in the year ended December 31, 2008, the
Company recognized a $0.7 million loss on customer contract due to concerns as
to whether the amounts due from this customer were collectible. As such, the
Company has not recorded any revenue related to this contract and we will
recognize revenue for this customer based on cash collections. The Company is
owed $1.3 million from this customer of which $0.8 million will be recognized as
revenue upon cash collection and the remaining $0.5 million reduced the
unsecured, promissory notes payable to the sellers of SMLB (seller note). The
seller note reduction was pursuant to the working capital adjustment pursuant to
terms of the SMLB purchase agreement. Contract costs totaling $0.7 million were
fully recognized in the year ended December 31, 2008.  In the event
the $1.3 million is collected, the Company will recognize revenue of $0.8
million and the seller note will be increased by $0.5 million.
  As of
December 31, 2008, accounts receivable of $1.0 million is due from a customer to
whom the Company has offered extended payment terms.  During the
second quarter 2008, the customer executed a promissory note of $1.4 million
bearing interest at 8% per annum with payments of interest only due monthly and
the balance in full was due on December 15, 2008. During the fourth quarter
2008, the customer paid $0.4 million and the Company extended the $1.0 million
balance due on the note six months. This amount was recognized as revenue during
the year ended December 31, 2008. The Company has a history of conducting
business with this customer and therefore believes collectability is reasonably
assured.
  The
Company earned approximately 31% and 36% of its revenue from two and three
customers for the year ended December 31, 2008 and 2007, respectively. Accounts
receivable from these customers at December 31, 2008 and 2007 was $2.7 million
and $7.7 million, respectively.
 
 (3)
              Acquisitions
 
 In
January 19, 2007, the Company transitioned from a special purpose acquisition
company to an operating entity with its purchase of TSS/Vortech. The Company
embarked on a strategy to build on to the TSS/Vortech operations through
acquisitions that expand geographical reach, add complementary services, and
access new key customers for additional selling opportunities. All of the
acquisitions have been accounted for using purchase accounting. The results of
operations attributable to each acquisition are included in the consolidated
financial statements from the date of acquisition. The value of Fortress common
stock issued in connection with the acquisitions was determined based on the
average closing price for Fortress common stock two days before and two days
after the date the acquisition was announced multiplied by the number of shares
issued.
 
 2008
Acquisition
  SMLB,
Ltd.
 
 On
January 2, 2008, the Company acquired all of the outstanding stock of SMLB,
Ltd., which provides consulting 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, SMLB did not achieve certain earnings
targts, 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.
 
 F-11
 
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  2007
Acquisitions
 
 Rubicon Integration,
LLC
 
 On
November 30, 2007, Fortress acquired 100% of the membership interests of Rubicon
Integration LLC (Rubicon), for the aggregate closing consideration consisting of
(i) $4,745,524 in cash, including acquisition costs of $198,043, net of cash
acquired of $42,660 (ii) 204,000 shares of the Company’s 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 an unsecured promissory note
of $1,517,753 due on January 31, 2008. Additionally, the purchase agreement
required net working capital of $200,000 at the acquisition date, while any
excess or shortfall would result in consideration adjustment. Actual working
capital was approximately $290,141, resulting in additional cash payment of
$90,141 to the seller on January 31, 2008.
  During
the first quarter of 2008, the Company finalized its purchase price allocation
associated with Rubicon, resulting in an increase in the value of customer
relationship intangibles of $1.0 million and a corresponding decrease in
goodwill.
 
 In 2008,
the former Rubicon members received additional consideration totaling $2.5
million by achieving or exceeding certain financial targets defined in the
purchase agreement.  The additional consideration resulted in a
corresponding increase in goodwill of $2.5 million. The contingent consideration
was earned as follows:
 
 ·
              2008
      Contact Signings- Rubicon achieved certain revenue bookings targets
      established in the purchase agreement, entitling the sellers to unsecured
      promissory notes of approximately $0.4 million and $1.6 million at June
      30, 2008 and December 31, 2008, respectively, based on achievement of the
      financial targets through those respective dates.  The issuance
      of the unsecured promissory notes (see Note 8) resulted in a corresponding
      increase in goodwill.
 
 ·
              2008
      Earn-out- Additionally, Rubicon achieved certain 2008 earnings
      targets established in the purchase agreement, entitling the sellers to an
      earn-out payment of approximately $0.5 million which is included in
      accrued payables at December 31, 2008.  Subject to terms and
      conditions outlined in the purchase agreement, the payment is due in the
      second quarter of 2009.
 
 At
December 31, 2008, the only remaining contingent consideration issuable under
the purchase agreement is the 2009 earn-out to be determined based on 2009
earnings targets.
 
 Associated
with the Rubicon transaction, the Company recorded indefinite lived intangibles
totaling $3.9 million, all of which is expected to be deductible for income tax
purposes.
 
 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
Rubicon’s complementary experience, key customer relationships, and service
offerings in the mission-critical facility industry.
 
 Innovative
Power Systems, Inc. and Quality Power Systems, Inc .
 
 On
September 24, 2007, Fortress acquired 100% of the issued and outstanding stock
of Innovative Power Systems, Inc. and Quality Power Systems, Inc. (collectively
“Innovative”) for aggregate consideration consisting of (i) $1,614,452 in cash,
including acquisition costs of $112,420, and net of acquired cash of $244,968,
(ii) a promissory note (the “Note”) for the aggregate amount of $300,000 payable
to sellers accruing interest at 6% annually from the date of issuance of the
Note (the Note is payable in three years, based on a five-year amortization
schedule, as described in the Note), (iii) 25,155 shares of common stock valued
at $150,000, and (iv) additional contingent consideration 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 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 is due in the second quarter of 2009 and is included in accrued payables
at December 31, 2008.
 
 In 2007,
Innovative achieved certain 2007 earnings targets established in the purchase
agreement, entitling the sellers to additional purchase consideration of
$265,000, consisting of $200,000 in cash due on January 31, 2008 and a $65,000
promissory note, net of a $135,000 post closing working capital adjustment,
accruing interest at 6% annually (the Note is payable in three years, based on a
five-year amortization schedule, as described in the Note 7). The purchase
agreement required working capital of $300,000 at September 24, 2007, while any
excess or shortfall would result in consideration adjustment. Actual working
capital was approximately $165,000, resulting in a $135,000 promissory note
reduction consistent with terms in the purchase agreement.
  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
Innovative complementary experience, contacts and facilities maintenance
offerings in the mission-critical facility industry and is complementary to the
Company’s primary operations.
 
 F-12
 
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Comm Site of South Florida,
Inc.
  On May 7,
2007, the Company purchased all of the assets of Comm Site of South Florida,
Inc. for $150,000 paid in cash. In connection with this purchase, $135,000 has
been allocated to goodwill with the balance to other current assets and property
and equipment, based on their historic cost which management believes
approximates fair value.
 
 TSS/Vortech
 
 On
January 19, 2007, Fortress acquired all of the outstanding membership interests
of TSS/Vortech. In total, the Company paid consideration consisting of
approximately (i) $11,519,151 in cash, including acquisition costs of $1,841,468
and net of $1,322,317 of acquired cash (ii) $14,211,359 of Fortress common
stock, consisting of 2,602,813 shares of Fortress common stock, of which
2,534,988 shares were issued to the selling members and 67,825 shares were
issued associated with acquisition costs, and (iii) $10,000,000 in two
convertible promissory notes of $5,000,000 each, bearing interest at 6% (See
Note 8).  Concurrent with the acquisition the Company issued 574,000 shares
of restricted stock under the Fortress International Group, Inc. 2006 Omnibus
Incentive Compensation Plan.
 
 All of
the shares issued to the selling members (2,534,988 shares) were placed into
escrow accounts as follows: 2,461,728 into the General Indemnity escrow to
secure the rights of Fortress under the acquisition and 73,260 shares into the
Balance Sheet escrow subject to TSS/Vortech delivering $1,000,000 in working
capital. These shares were due to be released July 13, 2008, subject to
certain conditions under the respective agreements; however, they were released
in the first quarter 2009. Based on a determination of net working capital at
the acquisition date, the Company has recorded a payable for approximately
$155,000, included in accounts payable and accrued expenses in the December 31,
2008 consolidated balance sheet, expected to be paid to the sellers as a
purchase price adjustment.
   F-13
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  The cash
portion of the payments made in the acquisition was financed entirely through
the use of cash raised in the Company’s initial public offering and held in a
trust fund prior to the closing of the TSS/Vortech acquisition. In connection
with the acquisition of TSS/Vortech, holders of 756,100 shares of common stock
voted against the acquisition and exercised their right to convert their shares
of common stock into $5.74 of cash per share. An aggregate of $4,342,310 was
paid to converting stockholders. These conversions were also funded with the
proceeds of the Company’s IPO.
  All of
the shares of the Company’s common stock issued to Messrs. Rosato and Gallagher
are subject to a lock-up agreement restricting the sale or transfer of those
shares through July 13, 2008 and were being held in escrows maintained by the
escrow agent (up to 2,461,728 shares held in a general indemnity escrow and
73,260 shares held in a balance sheet escrow). These shares were subsequently
released from escrow in the first quarter of 2009.  The shares of the
Company’s stock issued to certain employees as restricted stock grants are
subject to forfeiture if the receiving employee terminates his or her employment
within three years of the acquisition closing date, in which event the forfeited
shares will be delivered to the selling members.
  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 the
following:
  ·
                TSS/Vortech has a broad range of
      experience, contacts and service offerings in the mission-critical
      facility industry. TSS/Vortech has a very experienced and committed
      management team with strong core competencies. TSS has a significant
      number of personnel with security clearances which is important in the
      homeland security
industry.
  Purchase
Price Allocation
  Under
business combination accounting, the purchase price for each of the acquired
companies was allocated to the net tangible and identifiable intangible assets
based on their estimated fair values as of the acquisition dates. The allocation
of the purchase price was based upon valuations performed for each acquired
company. The valuations for TSS/Vortech and Innovative were finalized
in 2007, while Rubicon and SMLB were finalized in 2008.
  The
valuations indicated that the estimated fair value of the assets acquired was
less than the total of the purchase price paid and the liabilities assumed in
the transactions. As a result, the excess purchase price was assigned to
goodwill for each acquisition.  The transactions resulted in goodwill of
$20.7 million of which $19.8 is expected to be deductible for income tax
purposes.
  Tangible
and Other Intangible Long-Lived Assets
  In
performing the purchase price allocation for each acquired company, the Company
considered, among other factors, the intention for future use of acquired
assets, analysis of historical financial performance and estimates of future
performance of each acquired company’s products. The fair value of assets was
based, in part, on a valuation using either a cost, income, or in some cases,
market valuation approach and estimates and assumptions provided by management.
The tangible assets primarily include personal property such as computers,
software and service vehicles. Intangible assets consist primarily of customer
relationships, order backlog, and trade name.
  The
adjusted fair values and assigned amortizable lives of the intangible assets
acquired for the companies Fortress acquired in 2007 and 2008 are as
follows:
 
 AmortizableTSS/Vortech
                        
                        
                        Innovative
                        
                        
                        Rubicon
                        
                        
                        SMLB
                        
                        
                        Total
                        
                        
                        Lives in YearsFinite
      Lived-Intangible assets:In-place
      contracts
                        
                        $
                        406,200
                        
                        
                        $
                        350,000
                        
                        
                        $
                        50,000
                        
                        
                        $
                        230,000
                        
                        
                        $
                        1,036,200
                        
                        
                        
                        1-1.25Customer
      relationships
                        
                        
                        14,100,000
                        
                        
                        
                        560,000
                        
                        
                        
                        2,970,000
                        
                        
                        
                        -
                        
                        
                        
                        17,630,000
                        
                        
                        
                        5-8Non
      competition agreement
                        
                        
                        -
                        
                        
                        
                        50,600
                        
                        
                        
                        685,000
                        
                        
                        
                        5,000
                        
                        
                        
                        740,600
                        
                        
                        
                        2Gross
      carrying amount
                        
                        
                        14,506,200
                        
                        
                        
                        960,600
                        
                        
                        
                        3,705,000
                        
                        
                        
                        235,000
                        
                        
                        
                        19,406,800Indefinite
      Lived-Intangible assets:Trade
      name
                        
                        
                        4,930,000
                        
                        
                        
                        60,000
                        
                        
                        
                        460,000
                        
                        
                        
                        -
                        
                        
                        
                        5,450,000
                        
                        
                        IndefiniteTotal
      allocated finite and indefinite intangibles
                        
                        $
                        19,436,200
                        
                        
                        $
                        1,020,600
                        
                        
                        $
                        4,165,000
                        
                        
                        $
                        235,000
                        
                        
                        $
                        24,856,800
  For the
net carrying value of intangible assets at December 31, 2008 and December 31,
2007 see Note 6.
 
 Unaudited pro
forma results of operations are as follows. The amounts are shown as if the TSS,
Innovative, Rubicon and SMLB acquisitions had occurred on January 1,
2007:
  For the YearEndedDecember 31, 2007(unaudited)Proforma
      revenue
                      
                      $
                      63,303,645Proforma
      operating loss
                      
                      
                      (8,095,834
                      )Proforma
      pretax loss
                      
                      
                      (7,413,017
                      )Proforma
      net loss
                      
                      
                      (7,360,482
                      )Pro
      forma basic and diluted net loss per share
                      
                      $
                      (0.59
                      )Weighted
      average common shares
                      
                      
                      12,476,570
 
 This
information is not necessarily indicative of the operational results that would
have occurred if the acquisitions had been consummated on the dates indicated
nor is it necessarily indicative of future operating results of the combined
enterprise.  As we acquired SMLB on January 2, 2008, no proforma
information was required as a full year of operations were included in the
financial results for the year ended December 31, 2008.
 
 F-14
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  The
adjusted fair values of the assets acquired and the liabilities assumed for the
companies Fortress acquired in 2007 and 2008 are as follows:
  TSS/Vortech
                          
                          
                          Commsite
                          
                          
                          IPSI
                          
                          
                          Rubicon
                          
                          
                          SMLB, Ltd.
                          
                          
                          TotalCash
                          
                          $
                          11,000,000
                          
                          
                          $
                          150,000
                          
                          
                          $
                          1,747,000
                          
                          
                          $
                          4,590,141
                          
                          
                          $
                          2,000,000
                          
                          
                          $
                          19,487,141Common
      stock
                          
                          
                          14,211,359
                          
                          
                          
                          -
                          
                          
                          
                          150,075
                          
                          
                          
                          1,080,800
                          
                          
                          
                          462,775
                          
                          
                          
                          15,905,009Promissory
      notes to sellers
                          
                          
                          10,000,000
                          
                          
                          
                          -
                          
                          
                          
                          930,208
                          
                          
                          
                          4,134,767
                          
                          
                          
                          120,572
                          
                          
                          
                          15,185,547Acquistion
      costs
                          
                          
                          1,841,468
                          
                          
                          
                          -
                          
                          
                          
                          112,420
                          
                          
                          
                          198,043
                          
                          
                          
                          151,133
                          
                          
                          
                          2,303,064Total
      purchase price
                          
                          
                          37,052,827
                          
                          
                          
                          150,000
                          
                          
                          
                          2,939,703
                          
                          
                          
                          10,003,751
                          
                          
                          
                          2,734,480
                          
                          
                          
                          52,880,761AssetsCash
      and equivalents
                          
                          
                          1,322,317
                          
                          
                          
                          -
                          
                          
                          
                          244,968
                          
                          
                          
                          42,660
                          
                          
                          
                          56,573
                          
                          
                          
                          1,666,518Contracts
      and other receivables
                          
                          
                          6,261,988
                          
                          
                          
                          5,200
                          
                          
                          
                          466,852
                          
                          
                          
                          637,132
                          
                          
                          
                          387,612
                          
                          
                          
                          7,758,784Costs
      and estimated earnings
                          
                          
                          1,559,045
                          
                          
                          
                          -
                          
                          
                          
                          274,002
                          
                          
                          
                          37,688
                          
                          
                          
                          -
                          
                          
                          
                          1,870,735Prepaid
      expenses
                          
                          
                          233,894
                          
                          
                          
                          -
                          
                          
                          
                          12,855
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          246,749Total
      current assets
                          
                          
                          9,377,244
                          
                          
                          
                          5,200
                          
                          
                          
                          998,677
                          
                          
                          
                          717,480
                          
                          
                          
                          444,185
                          
                          
                          
                          11,542,786Property
      and equipment - net
                          
                          
                          904,689
                          
                          
                          
                          10,177
                          
                          
                          
                          163,947
                          
                          
                          
                          3,048
                          
                          
                          
                          -
                          
                          
                          
                          1,081,861Goodwill-Investment
      in Subsidiary
                          
                          
                          15,739,472
                          
                          
                          
                          134,623
                          
                          
                          
                          1,351,786
                          
                          
                          
                          5,606,153
                          
                          
                          
                          2,542,909
                          
                          
                          
                          25,374,943Identifiable
      intangibles, net
                          
                          
                          19,436,200
                          
                          
                          
                          -
                          
                          
                          
                          1,020,600
                          
                          
                          
                          4,165,000
                          
                          
                          
                          271,000
                          
                          
                          
                          24,892,800Other
      Assets
                          
                          
                          64,158
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          64,158Total
      assets
                          
                          
                          45,521,763
                          
                          
                          
                          150,000
                          
                          
                          
                          3,535,010
                          
                          
                          
                          10,491,681
                          
                          
                          
                          3,258,094
                          
                          
                          
                          62,956,548LiabilitiesNotes
      payable, current
                          
                          
                          72,808
                          
                          
                          
                          -
                          
                          
                          
                          6,684
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          79,492Accounts
      payable and accrued expenses
                          
                          
                          6,653,886
                          
                          
                          
                          -
                          
                          
                          
                          398,903
                          
                          
                          
                          487,930
                          
                          
                          
                          137,310
                          
                          
                          
                          7,678,029Income
      taxes payable
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          114,075
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          114,075Billings
      in excess of costs
                          
                          
                          1,662,718
                          
                          
                          
                          -
                          
                          
                          
                          67,842
                          
                          
                          
                          -
                          
                          
                          
                          386,304
                          
                          
                          
                          2,116,864Total
      current liabilities
                          
                          
                          8,389,412
                          
                          
                          
                          -
                          
                          
                          
                          587,504
                          
                          
                          
                          487,930
                          
                          
                          
                          523,614
                          
                          
                          
                          9,988,460Long-Term
      LiabilitiesNotes
      payable, less current portion
                          
                          
                          79,524
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          79,524Other
      long term liabilities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          7,803
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          7,803Total
      liabilities
                          
                          
                          8,468,936
                          
                          
                          
                          -
                          
                          
                          
                          595,307
                          
                          
                          
                          487,930
                          
                          
                          
                          523,614
                          
                          
                          
                          10,075,787Allocated
      purchase price
                          
                          $
                          37,052,827
                          
                          
                          $
                          150,000
                          
                          
                          $
                          2,939,703
                          
                          
                          $
                          10,003,751
                          
                          
                          $
                          2,734,480
                          
                          
                          $
                          52,880,761
 
 (4)
              Investment
      Held in Trust
  The
Company held certain investments, consisting primarily of short term
investments, in a trust account through January 19, 2007. All such investments
were disposed as of January 19, 2007.
  (5)
              Property
      and Equipment
  Property
and equipment consisted of the following:
 
 December 31,
                      
                      
                      Decmber 31,2008
                      
                      
                      2007Vehicles
                      
                      $
                      164,576
                      
                      
                      $
                      164,576Trade
      equipment
                      
                      
                      139,143
                      
                      
                      
                      135,482Leasehold
      improvements
                      
                      
                      500,040
                      
                      
                      
                      500,040Furniture
      and fixtures
                      
                      
                      38,694
                      
                      
                      
                      32,753Computer
      equipment and software
                      
                      
                      852,545
                      
                      
                      
                      606,6071,694,998
                      
                      
                      
                      1,439,458Less
      accumulated depreciation
                      
                      
                      (870,511
                      )
                      
                      
                      (394,913
                      )Property
      and equipment, net
                      
                      $
                      824,487
                      
                      
                      $
                      1,044,545
 Depreciation
of fixed assets was $0.5 million and $0.4 million for the years ended December
31, 2008 and December 31, 2007. For the period from January 1, 2007 through
January 19, 2007 our Predecessor Company recorded nominal depreciation
expense.
  F-15
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  (6)
              Goodwill
      and Other Intangibles
  The
Company recognized goodwill associated with its five acquisitions beginning in
2007 through 2008. As of December 31, 2008 and December 31, 2007, goodwill
totaled $4.8 million and $20.7 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, 2008 (see Note 3 for description of
adjustments):
 
 Fair ValueDecember 31, 2007
                                    
                                    
                                    Adjustments
                                    
                                    
                                    December 31, 2008TSS/Vortech
                                    
                                    $
                                    15,739,472
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    15,739,472Commsite
                                    
                                    
                                    134,623
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    134,623IPSI
                                    
                                    
                                    942,323
                                    
                                    
                                    
                                    409,463
                                    
                                    
                                    
                                    1,351,786Rubicon
                                    
                                    
                                    3,898,549
                                    
                                    
                                    
                                    1,707,604
                                    
                                    
                                    
                                    5,606,153SMLB,
      Ltd.
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,542,909
                                    
                                    
                                    
                                    2,542,909Total
                                    
                                    $
                                    20,714,967
                                    
                                    
                                    $
                                    4,659,976
                                    
                                    
                                    $
                                    25,374,943
 
 Goodwill
from acquisitions as of December 31, 2008 and December 31, 2007 were
as follows:
 
 December 31,
                    
                    
                    December 31,2008
                    
                    
                    2007Gross
      carrying amount of goodwill
                    
                    $
                    25,374,943
                    
                    
                    $
                    20,714,967Impairment
      loss on goodwill
                    
                    
                    (20,563,943
                    )
                    
                    
                    -Net
      goodwill
                    
                    $
                    4,811,000
                    
                    
                    $
                    20,714,967
 
 Goodwill Impairment
 
 The
Company has not realized the anticipated revenue from customers acquired in its
acquisitions and had experienced continued operating losses during the year
ended December 31, 2008. 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 SFAS 142 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
$20.6 million for the year ended December 31, 2008.  At December 31,
2008, the adjusted carrying value of goodwill was $4.8 million.
 
 Identifiable
acquisition-related intangible assets as of December 31, 2008 and
December 31, 2007 were as follows:
  December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007Finite
      Lived-Intangible assets:In-place
      contracts
                        
                        $
                        1,036,200
                        
                        
                        
                        806,277Customer
      relationships
                        
                        
                        17,630,000
                        
                        
                        
                        16,660,000Non
      competition agreement
                        
                        
                        740,600
                        
                        
                        
                        735,600Gross
      carrying amount
                        
                        
                        19,406,800
                        
                        
                        
                        18,201,877Accumulated
      amortization
                        
                        
                        (5,907,566
                        )
                        
                        
                        (2,562,741
                        )Net
      finite lived-intangible assets
                        
                        $
                        13,499,234
                        
                        
                        $
                        15,639,136Indefinite
      Lived-Intangible assets:Trade
      name
                        
                        
                        5,450,000
                        
                        
                        
                        5,450,000Impairment
      loss on other intangibles
                        
                        
                        (5,390,000
                        )
                        
                        
                        -Net
      indefinite lived-intangible assets
                        
                        
                        60,000
                        
                        
                        
                        5,450,000Net
      intangible assets
                        
                        $
                        13,559,234
                        
                        
                        $
                        21,089,136
 
 Other
intangibles impairment
 
 The
Company has 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 $5.4
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, 2008, intangible asset amortization expense totaling
$3.3 million has been included in the accompanying consolidated statement of
operations related to the above intangibles, of which $0.6 million is included
in cost of revenue. The Company estimates amortization expense will be $2.8
million in 2009, $2.4 million in 2010, $2.4 million in 2011, $2.3 million in
2012 and $1.8 million in 2013 and $1.8 million thereafter.
 
 For the
year ended December 31, 2007, intangible asset amortization expense totaling
$2.6 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-16
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  (7)
              Basic
      and Diluted Net Loss Per Common
Share
  Basic and
diluted net loss per common share is computed as follows:
  SuccessorFor the Year Ended December 31,2008
                    
                    
                    2007Net
      income (loss)
                    
                    $
                    (32,934,225
                    )
                    
                    $
                    (7,377,111
                    )Basic
      and diluted weighted average common shares
                    
                    
                    12,270,546
                    
                    
                    
                    11,698,895Net
      income (loss) per share
                    
                    $
                    (2.68
                    )
                    
                    $
                    (0.63
                    )
 
 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.
 
 Unvested
restricted stock, convertible unsecured promissory notes, options to purchase
units, and warrants outstanding at December 31, 2007 to purchase 240,000,
1,000,000, 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, 2007, as their inclusion would be
anti-dilutive.
 
 No
weighted average common shares or income (loss) per share amounts are shown for
the predecessor since the predecessor was limited liability company whose
capital structure consisted of membership interests. As such, no weighted
average number of outstanding shares and earnings per share are
presented.
  (8)
              Notes
      Payable
  Long-term
debt was as follows:
  December 31,
                          
                          
                          December 31,2008
                          
                          
                          2007Convertible,
      unsecured promissory note, due 2012 (6.0%)
                          
                          $
                          4,000,000
                          
                          
                          $
                          7,500,000Unsecured
      promissory note, due 2008 (6.0%)
                          
                          
                          -
                          
                          
                          
                          1,517,753Unsecured
      promissory note, due 2009 (6.0%)
                          
                          
                          1,575,618
                          
                          
                          
                          -Unsecured
      promissory note, due 2010 (6.0%)
                          
                          
                          120,572
                          
                          
                          
                          -Unsecured
      promissory note, due 2011 (6.0%)
                          
                          
                          283,457
                          
                          
                          
                          394,611Vehicle
      notes
                          
                          
                          20,907
                          
                          
                          
                          86,603Total
      debt
                          
                          
                          6,000,554
                          
                          
                          
                          9,498,967Less
      current portion
                          
                          
                          1,688,845
                          
                          
                          
                          1,650,306Total
      debt, less current portion
                          
                          $
                          4,311,709
                          
                          
                          $
                          7,848,661
 
 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”) totaling $10,000,000. The notes bear interest at
six percent per year and have a term of five years. Interest only is payable
during the first two years of each note with principal payments commencing on
the second anniversary (January 19, 2009) and continuing throughout the balance
of the term of the notes in equal quarterly installments totaling $833,333.
Subsequent to the retirement described below, the recalculated quarterly
principal installments total $625,000 over the original term. At any time after
the sixth months following the closing of the acquisition, the notes are
convertible into shares of our common stock at a conversion price of $7.50 per
share. At any time after the sixth months following the closing of the
acquisition, the notes are automatically convertible if the average closing
price of Fortress common stock for 20 consecutive trading days equals or exceeds
$7.50 per share.
  On August
29, 2007 the Company entered into an agreement with the CEO to retire $2,500,000
of the note due to him by paying $2,000,000 and the CEO agreed to use the
proceeds to purchase the Company’s common stock and warrants. The prepayment
realized discount of $500,000 has been recorded as additional paid-in capital.
This transaction was completed on September 28, 2007.
 
 On August
26, 2008, the CEO and COO, both of the selling members, entered into an
agreement with the Company to convert $2,500,000 and $1,000,000, respectively,
of their respective notes 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. 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.
 
 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.
  F-17
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  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. As described in footnote 3 above, Rubicon exceeded earnings
targets for the month of December 2007, resulting in the issuance of a
promissory note totaling $1.5 million, which was paid January 31, 2008 per the
terms of the purchase agreement. At the purchase date, Rubicon’s achievement of
the revenue bookings targets for 2008 was not determinable beyond a reasonable
doubt; therefore the $2.0 million contingent note was not
issued  until 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.
 
 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, 2008 are as follows:
 
 December 31,20082009
                      
                      $
                      1,688,8452010
                      
                      
                      2,492,6992011
                      
                      
                      1,485,6762012
                      
                      
                      333,334Total
                      
                      $
                      6,000,554
 
 (9)
              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,
or non-qualified stock options or through restricted stock. During 2007 and
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, 2008, approximately 0.6 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, 2008 and
December 31, 2007 totaled $0.8 million and $5.3 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, 2008 and
December 31, 2007, the Company recognized non-cash compensation associated with
restricted stock of $2.0 million and $1.2 million, respectively, of which $0.4
million and zero, respectively, was included in cost of sales.  As of
December 31, 2008, the total compensation cost related to unvested restricted
stock or restricted stock not yet recognized was approximately $2.4 million with
a weighted average remaining vest life of 1.6 years.
  F-18
  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, 2006
              
              
              -
              
              
              $
              -Granted
      restricted stock
              
              
              970,833
              
              
              
              5.47Vested
      restricted stock
              
              
              (730,833
              )
              
              
              5.43Unvested
      December 31, 2007
              
              
              240,000
              
              
              $
              5.47Granted
      restricted stock and units
              
              
              512,000
              
              
              
              1.53Vested
      restricted stock and units
              
              
              (83,333
              )
              
              
              5.15Unvested
      December 31, 2008
              
              
              668,667
              
              
              $
              2.49
  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 2008 and 2007. During 2007
and through August 26, 2008, the Company matched 50% of employee contributions
up to 6% of eligible earnings or applicable regulatory limits. On August
26, 2008 as part of its cost reduction efforts, the Company reduced its matching
contribution to 50% of employee contribution up to 3% of eligible earnings or
applicable regulatory limits.  The Company made 401(k) Plan
matching contributions in cash of approximately $286,000 and $222,000 for the
years ended December 31, 2008 and December 31, 2007, respectively. The
predecessor contributed approximately $15,000 for the period from January 1,
2007 through January 19, 2007. The Company’s matching contributions were
recorded in selling, general and administrative expenses.
  (10)
              Common Stock
      Repurchases
  During
the year ended December 31, 2008, the Company repurchased 17,505 treasury shares
with an aggregate value of $55,183 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. There were no
similar repurchases during 2007.
  Prior to
the consummation of the acquisition of TSS/Vortech, the Company announced and
implemented a common stock repurchase program under which it may purchase up to
3,000,000 shares of common stock. Currently the Board of Directors has
authorized the repurchase of up to 500,000 shares under this program.  For
the year ended December 31, 2007, the Company paid approximately $2.0 million in
cash to redeem 379,075 shares of common stock at an average price of $5.37 per
share. On June 13, 2007, the Company retired 221,000 shares resulting
in 158,075 shares of Treasury Stock on December 31, 2007.
  In
January 2007, the Company repurchased 756,100 shares of those shareholders
that voted against the acquisition of TSS/Vortech and requested that their
shares be redeemed at the then per share trust value of $5.74 per share
(including deferred interest of $0.38 per share).
 
 (11)
              Options to Purchase Units
      and Warrants
  At
December 31, 2008 and December 31, 2007, there were outstanding options to
purchase units and warrants to purchase 17,810,300 of common shares. Both the
option to purchase units and warrants have a cashless exercise feature, whereby
the holder may elect to receive a net amount of shares and forego the payment of
the strike price.
 
 In
connection with initial public offerings, the Company issued 15,600,000
warrants, each to purchase one share of common stock with an
exercise price of $5.00 and an expiration date of July 11, 2009. During the
fourth quarter of 2007, a warrant exercise resulted in the issuance of 14,700
shares of common stock and related cash proceeds of $73,500. 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
unit. Units are convertible to one share of common stock and two warrants, each
warrant is convertible to one share of common stock at an exercise
price of $6.25. The units are set to expire July 11, 2010.
  In
February 2007, the Company entered into an agreement with an advisor in which it
was obligated to issue a warrant for the purchase of 125,000 shares of our
common stock. The warrants have an exercise price of $5.00 and an
expiration date of July 11, 2009. The fair value of these warrants has been
determined using the Black Sholes model and is recognized over the term of the
agreement. For the year ended December 31, 2007, the Company recognized $234,000
of stock-based compensation expense which was recorded as selling, general and
administrative expense.
  (12)
              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-19
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  (13)
                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 consists of the following:
  For the Year EndedDecember 31,2008
                    
                    
                    2007Current:Federal
                    
                    $
                    -
                    
                    
                    $
                    (897,283
                    )State
                    
                    
                    65,611
                    
                    
                    
                    -Deferred:Federal
                    
                    
                    (6,417,646
                    )
                    
                    
                    (1,730,703
                    )State
                    
                    
                    (970,138
                    )
                    
                    
                    (347,573
                    )Total
      provision (benefit) for income taxes before valuation
      allowance
                    
                    $
                    (7,387,784
                    )
                    
                    $
                    (2,975,559
                    )Change
      in valuation allowance
                    
                    
                    7,387,784
                    
                    
                    
                    2,476,404Total
      provision (benefit) for income taxes
                    
                    $
                    65,611
                    
                    
                    $
                    (499,155
                    )
  The
significant components of the Company’s deferred tax assets and liabilities are
as follows:
 December 31,Gross curent deferred taxes:
                      
                      2008
                      
                      
                      2007Deferred
      tax assets:Bad
      debts
                      
                      $
                      -
                      
                      
                      $
                      22,123Accrued
      expenses
                      
                      
                      300,227
                      
                      
                      
                      17,719Net
      operating loss carryover
                      
                      
                      -
                      
                      
                      
                      412,632Deferred
      compensation
                      
                      
                      -
                      
                      
                      
                      142,191Gross
      current deferred tax assets before valuation allowance
                      
                      
                      300,227
                      
                      
                      
                      594,665Valuation
      allowance
                      
                      
                      (183,998
                      )
                      
                      
                      (445,180
                      )Gross
      current deferred tax assets
                      
                      $
                      116,229
                      
                      
                      $
                      149,485Deferred
      tax liabilities:Tax
      accounting differnces for long-term contracts
                      
                      
                      -
                      
                      
                      
                      (75,899
                      )Prepaid
      expenses
                      
                      
                      (116,229
                      )
                      
                      
                      (59,535
                      )Deferred
      current tax liabilities
                      
                      
                      (116,229
                      )
                      
                      
                      (135,434
                      )Net
      current deferred taxes
                      
                      
                      -
                      
                      
                      
                      14,051Non-current
      deferred taxes:Deferred
      tax assets:Net
      operating loss carryover
                      
                      $
                      2,881,715
                      
                      
                      $
                      1,219,628Amortization
      of goodwill and other
                      
                      
                      5,317,834
                      
                      
                      
                      -Expenses
      deferred for income tax purposes
                      
                      
                      -
                      
                      
                      
                      325,521Deferred
      compensation
                      
                      
                      937,714
                      
                      
                      
                      521,945Depreciation
                      
                      
                      97,536
                      
                      
                      
                      63,453Other
      carryovers and credits
                      
                      
                      14,969
                      
                      
                      
                      -Gross
      non-current deferred tax assets before valuation allowance
                      
                      
                      9,249,768
                      
                      
                      
                      2,130,547Valuation
      allowance
                      
                      
                      (9,249,768
                      )
                      
                      
                      (1,595,059
                      )Gross
      non-current deferred tax assets
                      
                      
                      -
                      
                      
                      
                      535,488Deferred
      tax liabilities:Amortization
      of goodwill and other
                      
                      
                      -
                      
                      
                      
                      (549,539
                      )Deferred
      non-current tax liabilities
                      
                      
                      -
                      
                      
                      
                      (549,539
                      )Net
      non-current deferred taxes
                      
                      $
                      -
                      
                      
                      $
                      (14,051
                      )
  In 2007,
the company reported a net operating loss and carried back $2.6 million to prior
years resulting in a refund of federal income taxes of $0.9 million received in
2008.  At December 31, 2008 and 2007, the Company had net operating
loss totaling $7.0 million and $2.2 million, respectively, to be carried forward
20 years to offset future taxable income. At December 31, 2008 and 2007, the
Company has recorded a deferred tax asset of $2.9 million and $1.6 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, 2008. 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.
 
 For the
year ended December 31, 2008, the Company has established a full valuation
allowance with respect to a portion of 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.
  For the
year ended December 31, 2007, the Company recorded a partial valuation
allowance against its deferred tax assets, as the Company concluded that
under relevant accounting standards, it is more likely than not that a portion
of deferred tax assets will be not be realizable.
 
 F-20
  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, 2008, the Company has recorded a full valuation allowance against
these deferred tax assets.
  On
January 2, 2008, the Company acquired all issued and outstanding stock
of  SMLB, LTD, Inc.  In connection with this acquisition,
the Company has recorded a deferred tax liability of $3,895.
 
 In 2007,
the Company acquired all issued and outstanding stock of Innovative Power
Systems, Inc. and Quality Power Systems, Inc. The Company has recorded $470,173
of deferred tax liabilities related to this acquisition. This deferred tax
liability is off-set in purchase accounting by a corresponding reduction in the
Company’s previously recorded valuation allowance against net 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 2005 tax year forward remain
open under statutes of limitation.  Innovative Power System Inc.’s statutes
of limitation are open from the 2002 tax year forward for both federal
and Virginia purposes.  Quality Power Systems
Inc.’s statutes of limitation are open from the 2003 tax year forward for
both federal and Virginia purposes.   SMLB’s statutes of
limitation are open from the 2006 tax year 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 31,2008
                      
                      
                      2007Federal
      statutory rate
                      
                      
                      34.0
                      %
                      
                      
                      34.0
                      %State
      tax, net of income tax benefit
                      
                      
                      0.0
                      %
                      
                      
                      0.0
                      %Effect
      of permanent differences
                      
                      
                      -14.0
                      %
                      
                      
                      -0.3
                      %Effect
      of valuation allowance
                      
                      
                      -20.0
                      %
                      
                      
                      -27.4
                      %Total
                      
                      
                      0.0
                      %
                      
                      
                      6.3
                      %
 
 F-21
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  (14) 
Related Party Transactions
 
 The
Company participates in transactions with the following entities affiliated
through common ownership and management. The Audit Committee in accordance with
its written charter reviews and approves in advance all related party
transactions greater than $25,000 and follows a pre-approved process for
contracts with related party for less than $25,000.
 
 The
Company participated in transactions with the following entities affiliated
through common ownership and management.  The Audit Committee of the
Board reviewed and approved in advance all of these related party transactions
in accordance with its written charter.
 
 S3 Integration LLC S3
Integration LLC (S3 Integration) is owned 15% each by the Company’s Chief
Executive Officer and President. S3 Integration provides commercial security
systems design and installation services as a subcontractor to the
Company.
 
 Chesapeake Systems, LLC
(Chesapeake Systems) is 9% owned and significantly indebted to the Company’s
Chief Executive Officer. Chesapeake Systems is a manufacturers’ representative
and distributor of mechanical and electrical equipment and purchased certain
assets of Chesapeake Tower Systems, Inc. in February 2007.
 
 Chesapeake Mission Critical,
LLC (Chesapeake MC) is 9% owned each by the Company’s Chief Executive
Officer and its President. Additionally, it is significantly indebted to the
Company’s Chief Executive Officer. Chesapeake MC is a manufacturers’
representative and distributor of electrical equipment and purchased certain
assets of Chesapeake Tower Systems, Inc. in February 2007.
 
 Chesapeake Tower Systems, Inc
.. Chesapeake Tower Systems, Inc. (Chesapeake) is 100% owned by the Company’s
Chief Executive Officer. On February 28, 2007 Chesapeake sold substantially all
of its assets to Chesapeake Systems and Chesapeake MC and, except for an office
space sublease agreement, does not engage in any business with the Company.
Chesapeake was a manufacturer’s representative and distributor of mechanical and
electrical equipment, which Chesapeake sold to the Company. In addition, the
Company acted as a subcontractor to Chesapeake for certain equipment
installation on project-by-project basis.
  CTS Services, LLC (CTS) is 55%
owned by the Company’s Chief Executive Officer and was 5% owned by the Company’s
former Treasurer until the sale of his interest on December 31, 2008. CTS is a
mechanical contractor that acts as a subcontractor to the Company for certain
projects. In addition, CTS utilizes the Company as a subcontractor on projects
as needed.
 
 L.H. Cranston Acquisition Group,
Inc . L.H.
Cranston Acquisition Group, Inc. (Cranston) is 25% owned by the Company’s Chief
Executive Officer. 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 (See Note
17).
 
 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.
 
 Automotive Technologies, Inc.
Automotive Technologies, Inc. is 60% owned by the Company’s Chief Executive
Officer and provides vehicle maintenance and repair services to the
Company.
 
 TPR Group, LLC TPR Group, LLC
is 100% owned by the Company’s Chief Executive Officer and has provided human
resources, employee benefit, and administrative services to
TSS/Vortech.
 
 TPR Group Re Three, LLC As of
November 1, 2006, TPR Group Re Three, LLC (TPR Group Re Three) is owned 50% each
by the Company’s Chief Executive Officer and its President. TPR Group Re Three
leases office space to the Company under the terms of a real property lease to
TSS/Vortech. The Company had an independent valuation, which determined the
lease to be at fair value.
  CSI Engineering, Inc. (CSI),
which was 9% owned by the Company’s President, acts as an engineering services
subcontractor to the Company and the Company acts as an electrical subcontractor
to CSI. As of December 31, 2006, the President no longer had an interest in
CSI.
  GR Partners GR Partners, which
is owned 50% by the Company’s Chief Executive Officer and President, leases
office and field equipment to the Company under the terms of an equipment lease.
In addition, the predecessor Company has paid fees for management services
(which is included in general and administrative expenses).
 
 The
following table sets forth transactions the Company has entered into with the
above related parties for the year ended December 31, 2008 and 2007, and
Predecessor transactions for the period from January 1, 2007 through January 19,
2007.  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.
  F-22
 
  FORTRESS
INTERNATIONAL GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




Successor
                              
                              
                              PredecessorFor the Year Ended December 31,
                              
                              
                              January 19,2008
                              
                              
                              2007
                              
                              
                              2007RevenueCTS
      Services, LLC
                              
                              $
                              201,902
                              
                              
                              $
                              183,532
                              
                              
                              
                              1,800Chesapeake
      Systems, LLC
                              
                              
                              2,410
                              
                              
                              
                              105,965
                              
                              
                              
                              -Chesapeake
      Mission Critical, LLC
                              
                              
                              93,385
                              
                              
                              
                              106,627
                              
                              
                              
                              -S3
      Integration, LLC
                              
                              
                              7,667
                              
                              
                              
                              -
                              
                              
                              
                              -Total
                              
                              $
                              305,364
                              
                              
                              $
                              396,124
                              
                              
                              
                              1,800Cost
      of RevenueCTS
      Services, LLC
                              
                              $
                              2,944,485
                              
                              
                              $
                              3,439,631
                              
                              
                              
                              82,032Chesapeake
      Systems, LLC
                              
                              
                              147,931
                              
                              
                              
                              161,178
                              
                              
                              
                              -Chesapeake
      Mission Critical, LLC
                              
                              
                              105,516
                              
                              
                              
                              144,924
                              
                              
                              
                              -Chesapeake
      Tower Systems, Inc.
                              
                              
                              -
                              
                              
                              
                              1,052
                              
                              
                              
                              8,225S3
      Integration, LLC
                              
                              
                              203,735
                              
                              
                              
                              267,848
                              
                              
                              
                              -LH
      Cranston & Sons, Inc.
                              
                              
                              111,950
                              
                              
                              
                              234,252
                              
                              
                              
                              -Telco
      P&C, LLC
                              
                              
                              383,268
                              
                              
                              
                              29,174
                              
                              
                              
                              -Total
                              
                              $
                              3,896,885
                              
                              
                              $
                              4,278,059
                              
                              
                              
                              90,257Selling,
      general and administrativeOffice
      rent paid on Chesapeake sublease agmt
                              
                              $
                              257,825
                              
                              
                              $
                              207,671
                              
                              
                              $
                              16,016Office
      rent paid to TPR Group Re Three, LLC
                              
                              
                              394,440
                              
                              
                              
                              384,271
                              
                              
                              
                              26,472Vehicle
      repairs to Automotive Technologies, Inc.
                              
                              
                              -
                              
                              
                              
                              4,442
                              
                              
                              
                              656Total
                              
                              $
                              652,265
                              
                              
                              $
                              596,384
                              
                              
                              
                              43,144





Successor
                        
                        
                        PredecessorDecember 31,
                        
                        
                        December 31,
                        
                        
                        January 19,2008
                        
                        
                        2007
                        
                        
                        2007Accounts receivable/(payable):CTS
      Services, LLC
                        
                        $
                        50,437
                        
                        
                        $
                        44,821
                        
                        
                        $
                        231,135CTS
      Services, LLC
                        
                        
                        (584,460
                        )
                        
                        
                        (2,969,671
                        )
                        
                        
                        (207,195
                        )Chesapeake
      Systems, LLC
                        
                        
                        -
                        
                        
                        
                        611
                        
                        
                        
                        -Chesapeake
      Systems, LLC
                        
                        
                        -
                        
                        
                        
                        (873
                        )
                        
                        
                        -Chesapeake
      Mission Critical, LLC
                        
                        
                        15,900
                        
                        
                        
                        104,397
                        
                        
                        
                        -Chesapeake
      Mission Critical, LLC
                        
                        
                        -
                        
                        
                        
                        (18,950
                        )
                        
                        
                        -Chesapeake
      Tower Systems, Inc.
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,336Chesapeake
      Tower Systems, Inc.
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (8,225
                        )Telco
      P&C, LLC
                        
                        
                        (21,154
                        )
                        
                        
                        (8,000
                        )
                        
                        
                        -LH
      Cranston & Sons, Inc.
                        
                        
                        (67,455
                        )
                        
                        
                        (11,575
                        )
                        
                        
                        -S3
      Integration, LLC
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        150S3
      Integration, LLC
                        
                        
                        (53,630
                        )
                        
                        
                        (60,556
                        )
                        
                        
                        (42,918
                        )Total
      Accounts receivable
                        
                        
                        66,337
                        
                        
                        $
                        149,829
                        
                        
                        
                        233,621Total
      Accounts (payable)
                        
                        $
                        (726,699
                        )
                        
                        $
                        (3,069,625
                        )
                        
                        $
                        (258,338
                        )




F-23




FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




(15)  Commitments, Contingencies and
Other




A)
            Summary





The
following table provides information regarding our contractual obligations and
commercial commitments as of December 31, 2008.


Payments Due by PeriodTotal
                                        
                                        
                                        2009
                                        
                                        
                                        2010
                                        
                                        
                                        2011
                                        
                                        
                                        2012Long-term debt
                                        
                                        $
                                        6,707,940
                                        
                                        
                                        $
                                        1,823,665
                                        
                                        
                                        $
                                        2,985,429
                                        
                                        
                                        $
                                        1,560,471
                                        
                                        
                                        $
                                        338,375Operating
      leases
                                        
                                        
                                        2,257,416
                                        
                                        
                                        
                                        922,820
                                        
                                        
                                        
                                        695,758
                                        
                                        
                                        
                                        582,698
                                        
                                        
                                        
                                        56,140Contractual
      purchase commitments
                                        
                                        
                                        36,006,335
                                        
                                        
                                        
                                        36,006,335
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
                                        
                                        $
                                        44,971,691
                                        
                                        
                                        $
                                        38,752,820
                                        
                                        
                                        $
                                        3,681,187
                                        
                                        
                                        $
                                        2,143,169
                                        
                                        
                                        $
                                        394,515





B)
            Leases




Under
operating leases, the Company leases certain facilities, equipment and vehicles
for use in its operations. Total rent expense was $1.2 million and $1.0 million
for the years ended December 31, 2008 and December 31, 2007, respectively, and
was nominal for  the period from January 1, 2007 through January 19,
2007.





C)
            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.




D)
            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), each of whom have been serving in that capacity
since then. 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 Gerard J. 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 and additionally in the case of the Vice
Chairmen term extensions.  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.




F-24


FORTRESS
INTERNATIONAL GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




(16)  Unaudited Quarterly Financial
Data




Successor2008QuarterEnded
                                  
                                  December31,
                                  
                                  
                                  September30,
                                  
                                  
                                  June30,
                                  
                                  
                                  March31,Revenue
                                  
                                  $
                                  37,168,297
                                  
                                  
                                  $
                                  25,781,523
                                  
                                  
                                  $
                                  20,149,876
                                  
                                  
                                  $
                                  19,432,080Operating
      loss
                                  
                                  
                                  (21,382,289
                                  )
                                  
                                  
                                  (3,518,156
                                  )
                                  
                                  
                                  (5,505,380
                                  )
                                  
                                  
                                  (2,257,130
                                  )Net
      loss
                                  
                                  
                                  (21,421,789
                                  )
                                  
                                  
                                  (3,217,911
                                  )
                                  
                                  $
                                  (5,994,318
                                  )
                                  
                                  $
                                  (2,300,200
                                  )Net
      income per share – basic and diluted
                                  
                                  
                                  (1.70
                                  )
                                  
                                  
                                  (0.26
                                  )
                                  
                                  
                                  (0.50
                                  )
                                  
                                  
                                  (0.19
                                  )2007 Quarter Ended
                                  
                                  December 31,
                                  
                                  
                                  September 30,
                                  
                                  
                                  June 30,
                                  
                                  
                                  March 31,Revenue
                                  
                                  $
                                  18,223,808
                                  
                                  
                                  $
                                  12,692,772
                                  
                                  
                                  $
                                  10,862,307
                                  
                                  
                                  $
                                  8,676,937Operating
      loss
                                  
                                  
                                  (1,645,046
                                  )
                                  
                                  
                                  (2,725,168
                                  )
                                  
                                  
                                  (2,650,115
                                  )
                                  
                                  
                                  (1,662,454
                                  )Net
      loss
                                  
                                  
                                  (1,165,087
                                  )
                                  
                                  
                                  (2,621,052
                                  )
                                  
                                  
                                  (2,558,964
                                  )
                                  
                                  
                                  (1,032,008
                                  )Net
      loss per share – basic and diluted
                                  
                                  
                                  (0.10
                                  )
                                  
                                  
                                  (0.22
                                  )
                                  
                                  
                                  (0.21
                                  )
                                  
                                  
                                  (0.09
                                  )





PredecessorJanuary 1, 2007throughJanuary 19,2007Revenue
                            
                            $
                            1,412,137Operating
      income (loss)
                            
                            
                            (284,902
                            )Net
      income
                            
                            
                            (281,153
                            )




* The
Predecessor was a limited liability company accordingly no earnings per share
data is computed.




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.




(17)  Subsequent Events




On
February 28, 2009, Mr. Thomas Rosato, Chief Executive Officer, sold his 25%
interest in LH Cranston Acquisition Group, Inc.


F-25




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, 2008. 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, 2008.  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, 2008:  (i) we
did not have the ability to segregate duties; (ii) we lacked formal
documentation of policies and procedures that were in place; (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, 2009.
 
 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 the middle of 2009.  During 2008 and into 2009 the
Company: (i) hired additional personnel and now believes that it has adequate
financial personnel to accommodate changes in our business; (ii) hired a Chief
Information Officer and now believes that our general computer controls and
procedures, which were reported as a material weakness in our 2007 management’s
report of internal control over financial reporting have been remediated and are
adequate.  During 2009 we will address the material weaknesses
identified as of December 31, 2008.  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 2009.


41




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 2009 Annual Meeting of Stockholders (the “2009 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 2009 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 2009 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 2009 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 2009
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 2009 Proxy Statement and is incorporated herein by
reference.


42




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, 2008 and December 31,
      2007
                      
                      F-3Consolidated
      Statements of Operations for the years ended December 31, 2008 (Successor)
      and December 31, 2007 (Successor), and for the period from January 1, 2007
      through January 19, 2007 (Predecessor)
                      
                      F-4Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2008
      (Successor) and 2007 (Successor)  and Consolidated Statements of
      Members’ Equity for the period from January 1, 2007 through January
      19, 2007 (Predecessor)
                      
                      F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 (Successor)
      and December 31, 2007 (Successor) and for the period from January 1, 2007
      through January 19, 2007 (Predecessor)
                      
                      F-6Notes
      to Consolidated Financial Statements
                      
                      F-7




(a)(2).  Financial
Statements Schedules:




Schedule II—Valuation
and Qualifying Accounts for fiscal years ended December 31, 2008 and 2007
(Successor), and the period from January 1, 2007 through January 19,
2007 (Predecessor).




Balance at
                    
                    
                    
                    
                    
                    
                    
                    
                    Balance atBeginning
                    
                    
                    
                    
                    
                    
                    
                    
                    End ofSuccessor
                    
                    of Period
                    
                    
                    Additions
                    
                    
                    Deductions
                    
                    
                    Period2008Allowance
      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
                    )2007Allowance
      for doubtful accounts
                    
                    $
                    -
                    
                    
                    $
                    (79,611
                    )
                    
                    $
                    14,611
                    
                    
                    $
                    (65,000
                    )Allowance
      for unrealizable deferred tax assets
                    
                    
                    
                    
                    
                    
                    (2,476,404
                    )
                    
                    
                    436,165
                    
                    
                    
                    (2,040,239
                    )





Balance at
                  
                  
                  
                  
                  
                  
                  
                  
                  Balance atBeginning
                  
                  
                  Additions
                  
                  
                  
                  
                  
                  End ofPredecessor
                  
                  of Period
                  
                  
                  at Cost
                  
                  
                  Deductions
                  
                  
                  PeriodJanuary 1, 2007-January 19,
      2007Allowance
      for doubtful accounts
                  
                  $
                  (75,000
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (75,000
                  )




43




(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
              
              Escrow
      Agreement (Balance Sheet Escrow) dated January 19, 2007 among
      Fortress America Acquisition Corporation, VTC, L.L.C., Vortech, L.L.C.,
      Thomas P. Rosato and Gerard J. Gallagher, Thomas P. Rosato as Members’
      Representative, and SunTrust Bank (previously filed with the Commission as
      Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
      January 25, 2007 and incorporated herein by
  reference)10.4
              
              Escrow
      Agreement (General Indemnity) among Fortress America Acquisition
      Corporation, VTC, L.L.C., Vortech, L.L.C., Thomas P. Rosato and Gerard J.
      Gallagher, Thomas P. Rosato as Members’ Representative, and SunTrust Bank
      (previously filed with the Commission as Exhibit 10.4 to the Company’s
      Current Report on Form 8-K filed on January 25, 2007 and incorporated
      herein by reference)10.5
              
              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)10.6
              
              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)




44




Exhibit
                  Number
                
                Description10.7‡
                
                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)10.8‡
                
                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)10.9‡
                
                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)10.10‡
                
                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)10.11
                
                Registration
      Rights Agreement among the Company and the Initial Stockholders
      (previously filed with the Commission as Exhibit 10.9 to the Company’s
      Annual Report on Form 10-KSB for the year ended December 31, 2005 and
      incorporated herein by
reference)


10.12‡
                      
                      Non-Employee
      Director Compensation Policy (previously filed with the Commission as
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
      May 21, 2007 and incorporated herein by reference)10.13
                      
                      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)10.14*
                      
                      Form
      of Restricted Stock Unit Agreement10.15‡
                      
                      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)10.16‡
                      
                      Prepayment
      Agreement, dated as of August 29, 2007, between Fortress International
      Group, Inc. and Thomas P. Rosato (previously filed with the Commission as
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August
      30, 2007 and incorporated herein by reference)10.17
                      
                      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)10.18†
                      
                      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)10.19
                      
                      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)21*
                      
                      Significant
      Subsidiaries of the Registrant23.1*
                      
                      Consent
      of Grant Thornton LLP regarding Fortress International Group, Inc.
      financial statements for the year ended December 31,
  2008.23.2*
                      
                      Consent
      of Grant Thornton LLP regarding Vortech L.L.C. and VTC L.L.C. financial
      statements for the period from December 31, 2007 and January 1, 2007
      through January 19, 2007.31.1*
                      
                      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.




45


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, 2009
                        By:
                        /s/ Thomas P.
  RosatoThomas
      P. RosatoChief
      Executive Officer(Authorized
      Officer and Principal Executive Officer)Date:  March
      31, 2009
                        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, 2009Thomas
      P. Rosato
                                                                                                        
                                                                                                        (Principal
      Executive Officer)/s/ Timothy C. Dec
                                                                                                        
                                                                                                        Chief
      Financial Officer
                                                                                                        
                                                                                                        March
      31, 2009Timothy
      C. Dec
                                                                                                        
                                                                                                        (Principal
      Financial Officer and Accounting Officer)/s/ Gerard J. Gallagher
                                                                                                        
                                                                                                        President
      and Director
                                                                                                        
                                                                                                        March
      31, 2009Gerard
      J. Gallagher/s/ Asa Hutchinson
                                                                                                        
                                                                                                        Director
                                                                                                        
                                                                                                        March
      31, 2009Asa
      Hutchinson/s/
      William L. Jews
                                                                                                        
                                                                                                        Director
                                                                                                        
                                                                                                        March
      31, 2009William
      L. Jews/s/ C. Thomas McMillen
                                                                                                        
                                                                                                        Vice-Chairman
      and Director
                                                                                                        
                                                                                                        March
      31, 2009C.
      Thomas McMillen/s/ David J. Mitchell
                                                                                                        
                                                                                                        Director
                                                                                                        
                                                                                                        March
      31, 2009David
      J. Mitchell/s/ John Morton, III
                                                                                                        
                                                                                                        Chairman
      and Director
                                                                                                        
                                                                                                        March
      31, 2009John
      Morton, III/s/ Donald L. Nickles
                                                                                                        
                                                                                                        Director
                                                                                                        
                                                                                                        March
      31, 2009Donald
      L. Nickles/s/ Harvey L. Weiss
                                                                                                        
                                                                                                        Vice
      - Chairman and Director
                                                                                                        
                                                                                                        March
      31, 2009Harvey
      L. Weiss




46